Perrigo Company plc

Good day and welcome to the Perigo second quarter 2023 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, Vice President, Investor Relations. Please go ahead.

Good morning and welcome to Parago's second quarter 2023 earnings conference call. I hope you all had a chance to review our release 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. For the first time, I would like to introduce and welcome Perigo's newly appointed president and CEO, Patrick Lockwood-Taylor, to the call. Patrick, on behalf of shareholders, we are thrilled to have you at Perigo. Your consumer self-care experience and expertise will bring a fresh perspective and help inspire the organization to achieve even greater heights. Again, welcome. Also joining the call this morning is Perigo CFO, Eduardo Bezerra. 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 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, exited product lines, 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, Patrick'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 present. And with that, I'd like to turn the call over to Patrick.

Thank you for the warm welcome, Brad, and thank you, everybody, for joining us this morning. I'm nearly 40 days into my Perigo tenure, and I greatly appreciate the warm welcome I have received from my Perigo colleagues. Their pride and excitement for our business comes through in every interaction, and I'm very energized to join them in the next phase of Perigo's growth. I also want to recognize and thank Murray Kessler, our outgoing CEO, for his leadership in positioning Perigo as a major player in global self-care. I'd like to start the call today by sharing what excites me most about the opportunities of Perigo and also provide thoughts on our framework for building long-term sustainable growth. I've actually followed Perigo for several years now and have always believed this is a truly unique business. It's well positioned in the right industry with numerous strengths, and let me highlight a few of those. It has tremendous manufacturing scale in the US, with the ability to produce over 50 billion doses every year across a wide range of formats, including tablets, liquid, sprays, lozenges, and creams, to name but a few. This manufacturing capability translates into nearly 1,600 doses produced every second of every day. That's incredible consumer reach. As a global company, Perigo has strong customer relationships with the top U.S. retailers in addition to strong pharmacy relationships across Europe with over 100,000 direct pharmacist partners. Perigo embodies a solid focus on cash and cash flow mindsets which helps generate an annual cash conversion ratio of approximately 100%, driven by several actions including prioritization, simplification, standardization, and pricing. Finally, Perigo has a strong innovation engine and ability to fast-follow across nearly every major OTC category. In fact, Perigo has more approved OTC anders than any other company. Our fast followability is exemplified by the launches of store brand equivalents to Voltaren Pain Relief Gel and Advil Dual Action Tablets, both of which were launched the day after the national brand exclusivity expired. This innovation and speed to market enables our retail partners to truly differentiate their brands on the shelf. Another exciting example of our innovation is Opel, which I will discuss further in a few minutes. There has been a lot of work accomplished over the past five years to position Perigo as a leading company in the consumer self-care space, but there is still an awful lot of work to do to consistently win and to fully capitalize on our assets and our opportunities. There are a few thoughts on the building blocks that will drive sustainable growth. First is to continue to refine where we are going to play. Perigo has made great progress defining where to play within branded self-care. Yes, store brands are indeed branded self-care, but this will continue to evolve. Within consumer self-care, Perigo participates in attractive segments that are set to benefit from favorable tailwinds. Aging world populations, a heightened focus on self-care treatment, and ever more cost burden shifting to consumers is set to drive attractive category growth. Next is to define how we're going to win. It is early in my tenure, but I can tell you Perigo has a lot of tools to differentiate from competition and to win with consumers, including e-commerce leadership and an extensive portfolio with deep category insights and world-class manufacturing, innovation, and scale. It is our job to better leverage these tools to win consistently with consumers in a differentiated and impactful way. Then, understanding how we can further leverage our existing capabilities. in addition to new capabilities that we might need in order to sharpen our approach to drive further differentiation. Our supply chain reinvention project is a good example of this, and this is on track to drive down costs, to increase efficiencies, and to better leverage our manufacturing scale. Going forward, we will look to accelerate additional capabilities, including brand building and more meaningful consumer-driven innovation so that we might differentiate our products at shelf. Finally, to optimize the Perigo operating model and to perform better as one Perigo. While there has already been a lot of progress here, for example, our supply chain reinvention program, we have more to do to harmonize our global operating model. We will sync to one operational drumbeat with common systems, structures, and KPIs so that we can deliver our products to consumers in the most efficient, value-creating way. Now, a brief update on our accretive initiatives. First is the progress we continue to make on our supply chain reinvention program. The Perigo work system is being rolled out across our manufacturing footprint. This foundational technology is enabling the work systems that have already been installed in 35% of our line and are generating very meaningful, actionable data. And as part of our winning portfolio focus, we optimized production of higher margin SKUs, which drove 40 of the 260 basis point year-over-year gross margin uplift within our America's business. We also continued to realize synergies from acquisitions, which are tracking slightly ahead of expectation through the second quarter. The HRA distributor transitions are already providing meaningful cost savings and margin expansion. As you know, the 2023 unfavorable EPS impact of 16 to 18 cents from the distributor transitions is not expected to repeat in 2024. All these initiatives contributed to another quarter of consistent year-over-year results, with total perigone net sales growth of more than 6%, growth margin expansion of 220 basis points, an 18% operating income growth, a 47% EPS growth. Importantly, we ended the quarter with a very solid cash position. Other notable highlights from quarter two include strong organic net sales growth of 7% in our international business, where we continue to hold share in growing markets and categories. This growth was broad-based, which included cough cold, antiparasites, insect repellent, and skin care offerings. In the US, more consumers are choosing store brands as compared to national brands, evidenced by store brand volume share growth of 70 basis points over the last 13 weeks. As expected, Perigo's share of total store brand was lower over the same 13 weeks due to planned SKU prioritization actions during the quarter, which Again, enhanced gross margin. Excitingly, last month, the FDA approved Opal, the first ever daily oral contraceptive available OTC in the US. It was a momentous day for our organization and one that comes at a pivotal time in the women's health space. I'd like to once again congratulate the entire women's healthcare team who have worked for nearly a decade to achieve this milestone. This approval highlights Perigo's strong innovation that I just mentioned, and Opel will be an important part of the building blocks of our long-term sustainable growth. This switch will define a new category within women's health and break down traditional barriers for the 64 million women that make up the total addressable market in the U.S. Uptake has the potential to be broad across consumers, who are not insured, are new to the category, using less effective methods, or choose to switch from the prescription to the OTC product. I've worked on a number of prescription to OTC switches in my career, and this is the most exciting. Switches can be a very effective pathway to brand building, as they typically garner strong retailer support, drive net new growth, and in the case of Opel, open up an entirely new category in the OTC space. Retailers are also excited about this upcoming product launch. As you may have seen from news reports, two leading drug chain stores have disclosed that they expect to offer Opil. We have made this decision to fund pre-launch investments for Opil, coinciding with an expected retailer channel fill late this year. We continue to expect Opil on retailer shelves in early 2024. This is a meaningful opportunity for our USOTC business. and we plan to invest judiciously and with intent to smartly maximize reach of the Opel brand. As with any branded launch, we do not expect the product to be accreted to earnings for the first 12 to 24 months. In addition to Opel, I also want to provide early thoughts on our infant formula business. We recently completed the Gateway facility and Good Start brand acquisition, and that integration remains on track. In the second quarter, this acquisition contributed $44 million of net sales in our nutrition category, which was partly offset by $5 million from a discontinued product line and $5 million of lower net sales from pediatric drinks. Within the nutrition business, net sales of our legacy infant formula products were up 6 million, or 6%, despite lapping a strong comparison in the prior year due to a national brand supply issue. More on that in a moment. Second quarter gross margin in nutrition expanded 730 basis points compared to the prior year, and nearly 1,200 basis points sequentially. This is a solid business. As for the prior year national brand supply issue that I just mentioned, Perigo stepped up to supply as much infant formula to parents as possible by running our facilities 24-7 and prioritizing our highest volume SKUs. to reduce production complexity, therefore achieving more than 115% infant formula output, a truly heroic effort by the team. Looking at the current landscape for infant formula, the market is normalizing as the impacted national brand has returned with many of its SKUs. Additionally, recent changes to FDA guidelines are impacting the entire industry, resulting in lower manufacturing volumes, higher production costs, and higher risk of scrap. Reassuringly, there is more demand for our store brand formula than we can supply. We have not lost any distribution and we have used pricing actions to offset higher costs. We are now working to reintroduce SKUs that were deprioritized last year and to restock all customer shelves. But given the impact of the new regulations, this will take time. The healthy growth of our youngest consumer is our utmost priority. Our team is working relentlessly to ensure families have the nutritionally equivalent store brand formula that they need at the lowest price on the shelf. I'd like to conclude by reinforcing a few essential points to achieving Perigo's full potential. Perigo is well positioned in the self-care industry and has a number of tools to differentiate against competition. I know how hard my colleagues have worked to make that happen. Our job now is to put these pieces together and to continuously innovate in everything we do to better serve consumers. People at Perigo are very talented and very driven. They're focused on the right priorities, including cash flow generation and deleveraging. Our 2025 growth algorithm, shared in February, remains on track and I'm focused on plans to optimize and unlock our full potential and accelerate and sustain top performance. As you may expect, I'm working with our global businesses to assess our market positioning and our long-term plans, and work is already underway on winning initiatives. I look forward to sharpening my thinking as I continue getting to know the organization and team, and then sharing more details in due course. With that, I'd like to thank you all, and we'll now turn it over to our CFO, Eduardo.