Perrigo Company plc

Good morning, ladies and gentlemen, and welcome to the Perigo third quarter 2024 financial results conference call. At this time, all lines are in a lesson-only mode. Following the presentation, we will conduct a questioning-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.

I would now like to turn the conference over to Bradley Joseph, VP, Global Investor Relations. Please go ahead.

Good morning and good afternoon. Welcome to Parago's third quarter 2024 earnings conference call.

I hope you all had a chance to review our press release issue today. A copy of the 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 Patrick Lockwood-Taylor and CFO Eduardo Becerra. 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 release issued earlier today. A few items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. Continuing operations include the HRA rare diseases business, which was classified as held for sale after the first quarter end and does 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 noted. See the appendix for additional details and reconciliations of all non-GAAP financial measures presented. And with that, I'm pleased to turn the call over to Patrick.

Thank you, Brad. Good morning, good afternoon, everyone. Thank you for joining today's call. I'd like to begin with an update on the advancements we have made towards building OnePerigo and the progress we have made towards our fiscal year expectations. Stepping back, OnePerigo is an operating platform designed to deliver a unified global operating rhythm built on speed, agility, reliability, and data-driven decisions. Main building blocks include one optimized organizational structure, one operating model and way of working, one unified enterprise technology network, one focused and scalable portfolio. Bringing all these pieces together will allow us to significantly advance our vision, provide the best self-care for everyone. During the third quarter, we have taken significant steps to strengthen our OneParaGo culture and brand building capabilities. by expanding our executive leadership team with the appointment of the new Chief Brand and Digital Officer, Dr. David Ball, in addition to appointing a permanent General Counsel, Charles Atkinson. Both David and Charles bring an immense amount of industry-specific experience and will be instrumental to Perigo achieving value-accretive, sustainable growth over the long term. I wish them both a warm welcome. Turning to our accretive initiatives, the team has executed Project Energize extremely well, achieving $95 million in gross savings year-to-date, partially offset by reinvestments of $16 million. As a reminder, we expect Project Energize to deliver $140 to $170 million in gross pre-taxed annualized savings, while reinvesting $40 to $60 million of these savings all by the end of 2020 sense. Early reinvestments have been focused on adding or repurposing key talent across the organization. In addition to the appointments of both David and Charles, we've reinvested in other areas such as global quality, IT, category management, and disruptive growth. These new leaders have added more than 200 years of combined consumer experience to the company. Our supply chain reinvention program is delivering gross savings of $32 million year-to-date, corresponding cash outflow of $18 million. This program in total has achieved $72 million in gross savings, corresponding cash outflow of $42 million, equating to an extremely solid ROI. The supply chain program has delivered growth margin expansion, unlocked capacity in constrained areas to pursue new business, lowered our standard production costs and increased US OTC service levels, which most recently achieved 92% across all US customers, up from 80% in the prior year quarter. The efficiencies gained from this program have partially offset lower production volumes, primarily in US OTC and nutrition. We have also made demonstrable progress to augment and strengthen our infant formula business, when net sales grew plus 3% versus the prior year quarter, plus 58% sequentially. More infant formula in a few moments. Next, we delivered third quarter gross margin of 41%, an increase of 160 basis points compared to the prior year, and plus 40 basis points sequentially. This strong third quarter expansion is driving year-to-date gross margin of expansion of about plus 90 basis points. Now to our earnings phasing, which remains heavily weighted towards the second half of the year due to the timing of recovery in infant formula and benefits from Project Energize. For the third quarter, we delivered EPS of 81 cents, an increase of plus 27% year-over-year and plus 53% sequentially. And we are reaffirming our 2024 adjusted EPS range of 250 to 265. Summary, we've made significant progress in 2024. We're delivering on our accretive initiatives, the infant formula business is recovering, and we've taken actions to simplify and consumerize our business. There is a lot more work to do. Now let's turn to our third quarter earnings highlights. Third quarter net sales decreased 3.2% year over year, while organic net sales declined 2.4%, which I will speak to on the next slide. Growth in operating margins expanded meaningfully versus prior year, plus 160 basis points and plus 340 basis points respectively. These factors led to an operating income growth of plus 21.3% and EPS growth of 26.6% to 81 cents as just shared. Now to organic net sales, which declined 2.4%, including an impact of minus 2.8 percentage points from lost distribution of lower-margin products in U.S. store brand, in line with our second quarter earnings pool discussion. Organic net sales from the rest of the business improved 0.4 percentage points driven by women's health and healthy lifestyle categories. Nutrition category had a minus 0.2 percentage points impact on organic sales, as lower sales of low-margin or electrolyte solutions more than offset growth in Infant Formula. Organic sales of our global OTC brands grow plus 2.1% versus the prior year, stemming from strong performance of Compi, Nasonex, BroncoStop, and Bronconolo. Overall, our brands continue to perform well. Now to Infant Formula. Job number one in infant formula was to recover and complete our self-remediation actions so that all our sites produce reliable, policy-assured infant formula. We have done this and are now achieving high attainment of quality production and packaging. Job number two in infant formula is focused on bringing back service levels across all retailers and contract customers. In addition to building safety stock to lessen any potential shock to this business. Our highest volume store brand SKUs are now back on shelf, and we are currently achieving approximately 85% in stock across our largest customers. Looking ahead, we expect all customers, including contract, to be in stock with our highest volume SKUs by year end. Now that the largest store brand customers have inventory, job number three for InfantFormula is sales activation. This entails driving demand creation to promote switching to store brand formula through online ads, promotions, and other activities. This work has recently begun, resulting in store brand volume share of non-wet powder increasing 160 basis points compared to the prior period as of the latest consumption data. The recent and short-lived consumption spike during the first week of October, likely due to Pantry loading from the Paw, Strike, and Hurricane Milton also contributed to the store brand share gains. Our contract customers recently began reintroducing SKUs, and we are leaning into support and optimize their business, including the launch of several new products. However, early volume share gains for these customers have been slower than the store brand share gains. While a lot of focus this year has been placed on infant formula, We're also driving consumer preferred innovation. Perigo is strategically positioned to leverage emerging trends and partner with retailers to drive growth in categories where we play. One trend worth highlighting is the increasing usage of GLP-1 medications, particularly for weight loss. This market is expected to grow from approximately 6 million users today to approximately 30 million users by 2030. GLP-1 users often experience multiple side effects, which can be managed with OTC products, creating an opportunity for Perigo and our retail partners. For example, a GLP-1 user may need multiple products to treat nausea, diarrhea, headache, constipation, and gas. By focusing on specific claims related to GLP-1 side effects, we can provide retailers with a one-stop hub of convenient and accessible OTC offerings that cater to consumers seeking relief. Retail activation of this innovative program is expected to begin later this quarter. This program is just one example of leveraging Perigo's scale and agility to quickly provide unique solutions for an emerging OTC trend. Stepping back, I've spent considerable time over the past 16 months assessing our organization, our portfolio, and the competitive landscape to ascertain where we play and how we want to win. This work has identified several attractive growth opportunities that have potential to be impactful in the long term. It has also uncovered additional initiatives necessary to rewire Perigo and set us on a path to achieve sustainable value-accretive growth. These initiatives are, one, stabilizing key areas of our business, two, streamlining our operations, and three, strengthening our foundation for the long term. Or, as we will refer to these initiatives, the 3S model. We will provide more detail on these initiatives during our investor day early next year, but as a brief overview. First, we recognize the importance of stabilizing key areas of our business, namely infant formula, US store brand, and core brand share growth in our international markets. Most of these stabilization efforts are well underway and delivering good results, including high attainment levels for quality production and packaging in infant formula, increasing service levels, better joint business planning with customers, and driving demand creation, which is a critical differentiator for our U.S. store brand business. Three, continued execution and achievement of our accretive initiatives. Second, we will position ourselves for long-term sustainable growth by further streamlining the operating model, systems, and manufacturing operations to a more simplified global model with one way of working. This will entail one focused and scaled global portfolio, prioritizing growth opportunities at the category level and implementing a blended brand strategy tailored to local markets. Finally, we will strengthen and operationalize the company by prioritizing free cash flow while continuing to deliver the balance sheet, concentrating innovation investments on bigger growth initiatives with the highest ROI and leveraging our successful innovation chassis across more brands, including store brands. Again, I'm looking forward to sharing details on our path forward at the investor event early next year.

In summary,

We're on track to deliver against our 2024 EPS commitments and expectations. We have made significant progress stabilizing core businesses. We have invested in world-class CPG capability and leadership, and we're executing with excellence against our accretive initiatives. I believe we are much better positioned for more reliable earning per share and revenue growth, and we're also advancing our work to consumerize, simplify, and scale OnePerigo. Investment in brand building capabilities are yielding early positive results, evidenced by solid OTC brand performance in the quarter, and we're significantly advancing our strategic work to fully realize long-term sustainable value-accretive growth. The 9,000 Perigo teams continue to provide significant value to consumers, customers, and society as a whole by delivering our important and necessary self-care solutions. The dedication to our purpose is truly remarkable. They embody the One Perigo ethos, and together we are committed to making life better through trusted health and wellness solutions accessible to all. With that, I will turn our call to our CFO, Eduardo Bezerra, to cover the financials. Eduardo.

Thank you, Patrick, and hello, everybody. Looking at the third quarter financials, starting with the GAAP to non-GAAP summary. Primary adjustments to our third quarter non-GAAP P&L were, one, amortization expenses of $51 million, two, the removal of $31 million related to gains on exited businesses and product lines, three, unusual litigation of $25 million, and four, restructuring charges of $19 million, primarily related to our supply chain reinvention and project energized programs. Full details can be found in the non-gap reconciliation tables attached to today's press release. From this point forward, all financial results discussed will be on an adjusted basis unless otherwise noted. Turning to our third quarter and year-to-date P&L. Since Patrick covered Q3 net sales, I would like to highlight the meaningful Q3 year-over-year operating income growth of 21.3%, driven by the recovery and infant formula, including favorable production efficiencies, net favorable pricing across the enterprise, and benefits from Project Energize. Net sales year-to-date decreased 7.5%. Year-to-date organic sales were down 6.3%, including minus 3.7 percentage points from infant formula and minus 4.7 percentage points from lower first half seasonal demand for cough, cold, and allergy products, and SKU prioritization and non-loss-to-distribution in U.S. store grants. These impacts more than offset plus 2.2 percentage points of growth across the rest of the business. Year-to-date operating income increased 1.8% as net favorable pricing and benefits from accretive initiatives, more than offset a minus 10.4 percentage points impact from infant formula and minus 3.5 percentage points impact from exited businesses and product lines. Year-to-date EPS declined $0.09 due primarily to discrete tax benefits in the prior year of $0.11, inferring a $0.02 increase at a constant tax rate. Additionally, year-to-date EPS included a minus $0.26 impact from infant formula, highlighting EPS momentum underpinning the business, driven partially by management actions. The team continues to focus on achieving margin expansion. This expansion was driven by, number one, infant formula recovery, which drove operating margin expansion of more than 1,900 basis points in the nutrition category. Two, benefits from our accretive initiatives. Three, favorable mix within store brand and across the global portfolio. And fourth, operating margin expansion in the U.S. oral care business of 830 basis points due to pruning of the portfolio and cost optimization. I should also note that CSEI delivered a record quarterly operating margin in Q3. Great job done by the team in court. Switching to organic top-line performance by segment is starting with CSEI. Organic growth in the quarter was plus 1% driven by positive 3.5 percentage points from the upper respiratory, skin care, and women's health categories. Growth across these categories was driven by share gains in key brands, including BroncoStop, Compete, and LL1. This growth was partially offset by supply constraints in pain and sleep aids categories, and lower consumer demands for VMS products. In CSEA, organic net sales declined 4.4%, due primarily to minus 4.4 percentage points from the lost distribution in U.S. store brands we mentioned in previous quarter. Lower sales in the nutrition category of minus 0.4 percentage points offset by growth of positive 0.4 percentage points across the rest of the portfolio. Sales of US brands, including Nasonext and Privacy, in addition to the Opio, were significantly higher compared to the prior year. Turning to third quarter operating income, both segments delivered double-digit growth versus prior year. Record quarterly Operating income in CSEI included benefits from accretive initiatives, lower variable expenses, and favorable pricing. These drivers more than offset the impact of lower volumes and exited businesses and product lines. CSEI growth was driven by infant formula business recovery, benefits from accretive initiatives, and favorable store brand meet. These factors more than offset the lower volumes, including loss distribution and higher advertising and promotion investments, which supported the growth of our U.S. brands. Third quarter EPS of 81 cents increased 17 cents, or 26.6% versus prior year, driven by both business performance and accredited initiative. Q3 EPS also included a net impact of minus $0.03 from currency translation and exited businesses and product lines. Now, a bit of color on our three major initiatives and their projected cash outflows. Our supply chain program kicked off in 2022 and is expected to achieve $100 to $120 million in gross pre-tax annualized savings by the end of 2025. The cash costs to achieve these benefits were originally estimated at $160 million. Given our heavy scrutiny on every single dollar spent, we now expect to achieve the same benefits for $30 million less than originally projected. Our infant formula self-remediation actions began in January of this year, following updated manufacturing guidelines introduced by FDA last year. The focus of this initiative is to ensure all infant formula sites are producing reliable, quality-assured infant formula. We now project a cash-out flow of approximately $25 million in 2024 related to these initiatives, which again, as good news, This outflow is below our original projection of $35 to $45 million. Finally, to Project Energize, our global investment and efficiency program to drive the next evolution of capabilities and organizational agility. We now project cash outflow for this program below our original estimate by approximately $5 million, another bit of good news, and we remain on track to deliver our previously stated benefits. In summary, these three actions are necessary to help stabilize key parts of our business, streamline our organization, and strengthen the company for the long term. Through a stringent approach to capital allocation, we now expect the total cash outlay from these three initiatives to be approximately $50 million lower than originally projected. Turning now to our recent refinancing. During the third quarter, we enhanced our debt structure by issuing $715 million notes and €350 million notes, both due in 2032. Both issuance were highly oversubscribed and well-received by fixed-income investors, resulting in lower coupon rates than the initial price tall. Proceeds from these notes were used to redeem our $700 million notes during March of 2026, which came off our balance sheet early in the fourth quarter, and to prepay $390 million of our existing term loan B. These refinancing actions will result in a lower weighted average interest rate after executing derivatives, while having no impact on our total long-term debt outstanding or credit rate. Cash on the balance sheet as of third quarter end was $1.5 billion, an increase of $921 million from the second quarter, including the $700 million applied to redeem the notes due in 2026. Cash inflows included $205 million of upfront proceeds from divesting the rare disease business, which closed in July. Approximately $1.1 billion in proceeds from the refinancing I just discussed, which closed in September, and third quarter operating cash flow of $42 million. Cash outflows for the quarter included $27 million of capital expenditures, $38 million returned to shareholders through dividends, translate to a current dividend yield above 4%, and the prepayment of approximately $390 million on our term loan fee. On October 2nd, after the third quarter ended, we completed our refinancing activities by fully redeeming our $700 million notes due in 2026. Deducting these amounts from the third quarter end balance implies a pro forma cash balance of approximately $764 million at the end of the third quarter. Next, Four-quarter operating cash flow is expected to be sizable, as this is typically the largest cash generation quarter due to natural phasing. Separately, in the second quarter of this year, we settled and paid a $97 million shareholder lawsuit. This quarter, we received $70 million from insurance coverage related to this settlement. We believe we are entitled to recover at least the remaining $80 million of the shareholder settlement, and will continue to vigorously pursue recovery during the fourth quarter. These factors are expected to translate into meaningful fourth quarter operating cash flow conversion. Lastly, we intend to fully repay $400 million of Perigo notes when due in December 2024 with cash on hand, resulting in end-of-year net leverage of approximately four times down from 4.5 times at the end of the third quarter. Taking all these moving parts into account, we continue to plan for year-end cash on the balance sheet of between $500 to $550 million, assuming insurance recovery of the remaining shareholders settled. Turning quickly to guidance, our 2024 outlook remains largely unchanged. While we expect organic and all-win net sales towards the lower end of their respective outlook ranges, adjusted gross margin between 39% to 40% and meaningful year-over-year adjusted operating margin expansion. In addition, we now expect full-year adjusted effective tax rate of 19% to 20%, slightly lower than before. And finally, we are reaffirming our EPS outlook of between $2.50 to $2.65. In closing, the team has taken swift action to offset known and unknown headwinds, achieving year-to-date operating income growth compared to the prior year. We remain on track to deliver significant benefits from our creative initiatives at a lower cash cost than originally planned. We bolster our balance sheet by refinancing $1.1 billion of debt and expect to lower our total debt outstanding and interest expenses in 2025. Looking ahead, we'll continue to focus on free cash flow generation and invest in our business for the long term. Thank you for your ongoing support as we further our journey to fulfill our vision as OneBerry.

With that, I'll turn back to you, Brad. Thanks Eduardo. Operator, can you please open the call for questions?

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. If you wish to cancel your request, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question is from Susan Anderson from Canaccord. Your line is now open.

Hi. Good morning. Nice job on the quarter. I guess maybe just on the infant nutrition business, good to see that getting back on track. How should we think about the ramp in fourth quarter and then also for 2025? Should we expect kind of the normal run rate of sales there? And then just in terms of the improvement in the margins, the 1,900 basis points, I guess, is that, should we expect that to continue as we kind of look forward at that level, I guess? Thanks.

Okay. Hi, Susan. Morning. Eduardo here. So, firstly, or first, yeah, can you hear me well?

Yep, I can hear you.

Okay, perfect. So, again, so as we look into infant form line, the fourth quarter, right, so we continue to expect as we shared in the beginning of the year right so first half would be impacted and then we would see a recovery and a ramp up going on there so the store brand is really going pretty well on track third quarter the focus was really recovering our you know share in distributors and so we were able to reposition product in five of our largest customers and then in the Last quarter, we expect to expand that to our full retailer. And so that's what we have in our plan to continue to see growth there. The key question mark, it's really our contract business, right? So as you saw on our note, you know, we grew our store brand share by 160 basis points, while in total 40 basis points. So there's still Given the dynamics going on, mainly on the branded side, we're watching closely what is going to happen with our contract business, right? So that's an important aspect. Related to, and then looking forward to 2025, right? So we continue to see, you know, recovery of our store brand market share, right? So, and we expect to, you know, continue to see that strong progress throughout the year. And we're going to continue to watch closely what happened with the contract business, right? So as you know pretty well, there is a new player in the branded business that is taking significant share on that segment. And so we're watching closely how the dynamics is going to play in the branded share. Last but not least, as you were asking about, you know, the improvement on the margin side, right? Remember last year, you know, we saw significant low margin in 2023, right? So we expected the level of margins that we're getting this year, you know, in terms of gross margin to continue to evolve. Again, highly dependent on the contract business and how that's going to play out. But we continue to expect, you know, significant progress both in gross margin and operating margin to continue. in 2025 as we addressed most of the issues that we found in the first half of 2024.

Okay, great. Thanks for all the details. And then maybe if I could add one more just on OPIL, if you could talk about obviously some nice growth there, but I guess how it's trending versus your expectations, how the new customer acquisition is going and the marketing around the product. And then Maybe just any thoughts around, you know, expectations for OPIL for next year. Thanks.

Yeah. Hi, Susan. This is Patrick. Can you hear me okay?

Yeah. Hi, Patrick.

All right. So OPIL, you know, it continues to gain momentum. It's almost a three-share now of all contraceptives over the last four weeks. And we are, as you rightly say, seeing week-on-week sequential growth. Awareness has grown very well over this quarter. Trial is good and repeat rates, well over 40%, is actually benchmark. So we're pleased with it. We're not delighted with it. We still think that there is upside to it. It's a new category in OTC, and so there's a lot of learning to be done, a lot of optimization. We need to improve in-store visibility. We'd like to see more display that can generate significant awareness. We're also continuing to learn who are our key user groups. We seem to have three key user groups, and we're doing the research to understand why they use, how to convert them faster, and how to really focus our marketing on growing share with those three user groups. So good work to be done to make it even bigger, and we expect, yes, to see continued growth going into 2025.

And Susan, just to add to what Patrick said, you know, while we do not expect OPL to be accretive to EPS, we're seeing it being accretive on our gross margin, you know, both in 24 and we continue in 25, okay?

Yeah. Okay, great. And do you expect it to be accretive Yes, in 2025. So remember, as we said, March 1st. towards the end of the year, right?

So we said since the beginning that we didn't expect in the first 18 months it to be accretive. So as we continue to rationalize our A&P to drive, you know, the margin, because remember, very important to us, given the three-year exclusivity period, that we really get the opioid brand in the hands of consumers, you know, and so we're maximizing that opportunity so that when we come back with the, the store brand product, we're going to be able to capture the most value in that category.

Yeah. Okay, great. Thanks so much for all the details.

Good luck the rest of the year.

Thanks, Susan.

Thank you. Your next question is from Keith Zivas from Zephyrs. Your line is now open.

Hey, thank you. Good morning. Maybe just starting with the restructuring programs and I guess the cash outflows are coming in better than expected and maybe adding some context on how that kind of changes your priority list for investing or some investments then being pulled forward and if so, what areas of the organization would that be in?

Well, Keith, Eduardo here.

So we continue as we prioritize our investments, right? So we still have you know, some investments that we expect to do in the organization, right? So as Patrick highlighted, to really build and strengthen our business, making sure that our R&D and A&P, you know, are matching a similar level of the branded companies. So that's one key area that we're looking there as well. And how do we continue to drive efficiencies in our operations, right? So we continue to invest in our systems, et cetera, as part of our one-paragon strategy to really, you know, standardize and unify that so that we can get those benefits of project energized, supply chain reinvention to continue to last for the long term.

So these are some of the key areas that we're continuing to focus to reinvest.

Got it. Thank you. That's helpful.

Um, maybe secondly, then on just adding to your comments around the seasonal nature of the cough cold season and really just your exposure to the drug and pharmacy channel. Um, what are you guys seeing there? I know there's some unique pressures in the U S, um, with some key customers of yours. And so, um, any context on the potential impact one from a seasonal nature and cough cold trends in the U S and then secondly, just, um, what you're hearing from some of those key customers in that channel and how that might impact your thoughts on the USOTC business.