Perrigo Company plc

Ladies and gentlemen, and welcome to the Perigo Q1 2025 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, May 7, 2025. I would now like to turn the conference over to Brad Joseph, VP Global Investor Relations. Please go ahead.

Good morning and good afternoon, everyone. Welcome to Parago's first quarter 2025 earnings conference call. I hope you all had a chance to review our press release issued today. A copy of the release and presentation for today's discussions are available within the investor section of the Paraguay.com website. Joining today's call are President and CEO Patrick Lockwood-Chowdhury and CFO Eduardo Becerra. I would like to remind everyone that during this presentation, participants will make certain forward-looking statements. Please refer to the slides for information regarding these statements, which are subject to important risks and uncertainties. We will reference adjusted financial measures that are non-GAAP and major. See the appendix to the earnings presentation for additional details and reconciliations of all GAAP to non-GAAP financial measures presented. A few quick items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. Second, organic growth excludes acquisitions, divestitures, exited product lines, and foreign currency fluctuations in both convertible periods. Patrick's discussion will focus solely on non-GAAP results, except as otherwise noted. And with that, I'm pleased to turn the call now over to Patrick.

Thank you, Brad. Good morning, good afternoon, everyone, and thank you for joining today's call. I'd like to begin with an update on our progress against our 3S plan to stabilize, streamline, and strengthen Parago. Over the past 12 months, efforts to stabilize key parts of our business have yielded positive results. In our America's Business Store Brand OTC, we've already secured new business awards and now largely offsetting the previously disclosed losses that began impacting our top line in the second half of 2024. We remain on track for these new awards to more than offset losses by the second quarter of this year. Additionally, consistent production of high-quality, reliable infant formula has led to continued recovery in store brand share. Notably, first quarter 2025 infant formula net sales increased by 19% compared to the same quarter last year. More on both of these topics when I discuss our Q1 results in a few minutes. Efforts to streamline our operations have yielded significant benefit. In the first quarter, these accretive initiatives continued to produce very positive results. The Supply Chain Reinvention Program delivered an additional $8 million in benefits, and Project Energize achieved an additional $20 million in annual savings, bringing the program's total annual run rate to $159 million. the high end of our previously disclosed range for Energize. Actions taken to improve service levels are also paying dividends, with global service levels now at 94%. I have to give recognition to our global operations team for their outstanding service achievement. We also remain excited about strengthening our foundation for growth. I'm pleased to share the synergistic relationship between our store brand business and OTC brands is yielding positive results. Our store brands generate substantial cash flow, enabling us to invest further into our OTC brands. This strategy is already paying off, as evidenced by our first quarter results. Excluding the prior year's benefit from OPL retailer stocking, our OTC brands achieved solid organic growth 5.9% year-over-year. This impressive performance was driven by strong sales of LL1, Nasernet, Equitin, and Compete. These results reinforce our business model and our strategy. Lastly, to create a more efficient and effective new product pipeline, we have recently enhanced our stage gate process for new product development, and we remain excited about our high-growth brand. which we are expecting to begin delivering significant benefit in the second half of next year. At the same time, we are navigating through an uncertain macroeconomic landscape. Dollar sales across the self-care categories we play in recently turned negative compared to the prior year and compared to their long-term growth rates of 3% or more, with contraction across most categories. This stems from more cautious consumer behavior due in part to inflation, tariffs, interest rates, and overall reduced consumer confidence. Although we believe that we are well positioned in the broader environment to account for these macroeconomic uncertainties, we feel it is prudent to widen our 2025 net sales projections. However, with the opportunities afforded by a unique business model and clear actions to offset tariff-related cost increases, we are reaffirming our adjusted EPS range and net leverage targets. Furthermore, we are reaffirming our mid-term 2027 targets provided recently at our investor debt. Stepping back, Perigo is the largest U.S. manufacturer of OTC self-care solutions by volume. We operate 11 manufacturing facilities across the U.S., enabling 85% of our OTC finished goods to be produced locally by sourcing the majority of materials and components domestically. Most importantly, all this work is performed by a highly agile and productive team of 5,000-plus dedicated U.S. employees. We will continue to look for opportunities to drive value from this large domestic asset base. Even though most of the products we sell in the U.S. are sourced domestically, given the global nature of consumer health supply chains, there are certain inputs for our business that are exposed to tariffs. As you know, the tariff landscape has been extremely fluid and our team has spent considerable time building mitigation plans for multiple scenarios. Based on what we know today, in 2025, we expect roughly 1% gross increase to our global cost of goods sold. On a full-year basis, this rises to approximately 5.5% of global COGS, all impacting our America's segment. Approximately 80% of the expected increase will impact our U.S. oral care category, as many of its inputs are currently sourced from China. The remaining 20% is expected to increase costs in our U.S. OTC business. We plan to offset these cost increases through strategic price actions, insourcing more manufacturing to our U.S. facilities where possible, and other actions, including identifying new supply routes. We're committed to protecting our P&L and also our balance sheet in this dynamic environment, which Eduardo will provide further details of. The uncertain macroeconomic environment also presents several opportunities for Perigo. Our unique business model with 100-plus molecules across 100% price point coverage, coupled with our significant U.S.-based manufacturing, provides us an advantage to deliver our essential self-care solutions to more customers and consumers. Firstly, consumer confidence in the U.S. is at a 12-year low, and in Europe it's at the lowest level in 18 months. These weakening consumer expectations present significant opportunities for share gains for our mid-tier and store brands due to their value advantage in the marketplace. For example, total U.S. OTC store brand volume gained 50 basis points over the last four weeks as consumers are quickly adjusting their buying patterns. We will continue to closely monitor changes in consumer behavior and leverage demand generation activities to further capitalize on this trend. And secondly, with our vast U.S. manufacturing footprint across OTC, infant formula, and oral care, we have ample opportunity to win additional new volumes through contract manufacturing efforts. Now turning to our first course of financial highlights. Organic net sales declined 0.4%, which includes high-end net sales in the nutrition category. driven by the recovery and infant formula, in addition to the upper respiratory category, offset by the impact of previously disclosed loss distribution of low-margin products in US store brands, which is not expected to be a sales headwind going forward, and the prior year retail stocking of approximately $15 million. Importantly, excluding the loss distribution and prior year OPIL sell-in, organic net sales grew 1.8% versus prior year period. Gross margin expanded 440 basis points year over year to 41%, driven by business recovery and infant formula. Operating margins of the quarter meaningfully expanded by 550 basis points, driven by gross margin flow-through and benefits from Project Energize. First quarter EPS grew by a robust 107% year over year to $0.60 per share. Thinking a bit further into organic net sales, both brand and store brand offerings in the upper respiratory category performed well, despite the impact of known loss distribution in U.S. store brand business. This category benefited from higher incidences of COC-COL in the US compared to the prior year, and improved supply of the Physiomare brand in Europe. Pain and sleep pain was also impacted by known lost US distribution, partially offset by higher incidences of COC-COL in the US, and improved supply of the Sopradine brand in Europe. Digestive health was impacted by lower category consumption, but proton pump inhibitors used mainly for heartburn, which more than offset U.S. store brand share gains. And an expected decline in VMS, where we deprioritized several SKUs in Europe. Lastly, as I just mentioned, our OTC brands grew solidly year over year. One year ago, we made a strategic pivot in U.S. store brand, which was highlighted at our February investor day. This pivot focused on improving forecast accuracy and customer service levels, in addition to share gain from store-bound competitors, primarily through new business awards. I'm pleased to report that we're making significant progress with these efforts. Our service levels have improved, as I mentioned earlier, and new business awards remain on track for a positive contribution this year. Over the last three quarters, net business awards and losses have been a headwind to top-line growth as we executed the pivot. We expect this trend to reverse in quarter two this year, as already secured new business wins ramp up, expecting to improve America's net sales growth in the second half of the year. Turning now to infant formula. Our quality production metrics across the network have dramatically improved, and key customer SKUs at shelf have been fully restored. Factors enable first quarter infant formula net sales growth of plus 19% year-over-year. Infant formula industry dynamics continue to evolve, however, due to flat to declining U.S. birth rates, currently available manufacturing capacity, and foreign manufacturers gaining share. These factors have caused many domestic brands to recently increase marketing and promotions as they compete for volume share. these short-term pricing actions have temporarily reduced the price gap between national brands and store brands, slowing the pace of our store brand share recovery. We believe maintaining appropriate price gaps in this business is essential to store brands' value proposition with consumers and customers. So, with this backdrop, we're engaging customers to close this short-term price gap. Additionally, Spring shelf resets across several retail customers are expected to enhance our shelf placement and the number of store brand formula facings. At the same time, we're also reintroducing nearly 60 national brand equivalent SKUs in the second half of this year. We believe these actions will continue to accelerate store brand share gains in 2025. However, we are tempering our expectations for the year. In closing, we are steadfast on advancing our 3S plan to stabilize, streamline, and strengthen Perigo to provide the best self-care to everyone. We delivered strong first quarter results, led by recovery in the infant formula business and solid organic growth in our global OTC brands. While we are operating in an uncertain macro environment, with consumer, customer, industry, and geopolitical risks. We're taking appropriate measures to mitigate these factors. Encouragingly, we believe Perigo's unique business model provides opportunities for growth in this uncertain environment as we continue to advance our vision to provide the best self-care for everyone. Let me now turn the call over to Perigo's CFO, Eduardo Bezerra. Eduardo.