Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

Good morning, everyone. My name is John Mills, and I'm a Managing Partner at ICR. And it is my pleasure to welcome everyone to the 22nd Annual ICR consumer conference. I'd like to begin the morning by thanking all of our sponsors. Without them, we would not be able to bring what we certainly believe is one of the most unique consumer conferences. We're able to see a lot of different investors, sell-side analysts and investment banks. Just as a bit of housekeeping, so today and tomorrow, there'll be presentations and meetings for all public companies. And then on Wednesday, we will have a full day of private presentations and meetings as well. And with that, I will turn it over to Katie Turner, who will be introducing our very first company to kick the day off.

Great. Good morning, everyone, and thanks for joining us today at the ICR consumer conference. It's my pleasure to introduce our first presenter, and it's Perrigo Company, and they're going through a unique transformation from a pharmaceutical company to a consumer-focused company. And leading that transformation is Murray Kessler, President and CEO, and he's here today to walk you through the business. Murray?

Morning, everybody. Lots of energy there. Good morning, everybody. I know I'm back to the consumer conference -- in a consumer conference because we are going through a transformation from being covered by pharma and a lot of our shares held are by pharma investors to consumer conference, but Katie, when you come in here and it's a little Perrigo on the side and it's ICR, you're back to branding. Please read our forward-looking statements. I'll cover the business, the transformation we -- but -- all of the normal cautionary issues there. If you don't know Perrigo, Perrigo really is a consumer company. It's not changing it to be a consumer company. We are one. It's -- we are -- 80% of what we do every day, 80% of the company's revenues are already consumer. It's a combination of -- Perrigo's combination of 3 divisions. It's -- the core heart of our business is a U.S. consumer private label -- private labels' old language within the retail industry. I know in consumer conferences, you tend to use the word, but we're in the largest, if not the largest, one of the top 2 categories in all private label in the U.S., and our customers would kick me out the door if I told them we were a private label company. They think of their brands as either own brand or store brand and soon going towards and evolving towards exclusive brands, but they are branded marketers, and they make a lot of money with it. So it's -- for Perrigo, we are in this big category, the over-the-counter business, right? So when you're thinking aspirin and ibuprofen and acetaminophen, and you keep going down the list to the 14,000 other products literally that we make in that industry, most of the time, when you're walking or, let's call it, 70% of the time, because that's roughly our market share, that you're walking into CVS or Walgreens or Walmart or anywhere else, and you're buying a store brand, you're buying Perrigo. So much so that these brands are so big that they -- and have been growing for a very long time that we probably sell roughly 3x more ibuprofen than Advil, as an example. These are big brands, we make about 1 billion tablets a week. The formula and what makes us successful? So in our business, penetration levels are high and growing. We're about -- 30% of the dollars in our industry is store brand, and we're about 70% of that, and it varies by subsegments within it, but big business. And when it comes to volume, we're probably somewhere north of 50% to 60% of all the volume that is sold as store brand in the over-the-counter remedies area, okay? So that's one division, and that's about $2 billion. Next division, and let me step back one second, the other thing you need to know if you're not familiar with us, we have a unique formula relative to almost every other store brand category out there. And that is, we don't get into a business in our store brand business unless it meets sort of what we describe as the Perrigo formula, which is, it's got to be sold at a 30% discount against the national brand, one. It's got to deliver Perrigo a 30% margin. And the magic and the hard part is within those 2 things, the retailer has to make more money selling a Perrigo store brand product than they do selling the national brand. When we get all 3 of those things, the categories get very large, and that's how we screen to get into it. All right. Turning to the next one is our Consumer Self-Care International. We've owned that business for about 4 or 5 years. It's about $1.5 billion in revenues, and that's a consumer straight-up branded business, heavy emphasis on natural remedies. And it's a lot of local gems. We tend to have #1 -- or #2 brands in every country we're in, and we're in 35 countries, but they don't tend to be pan-European brands, okay? So a branded business, a private-label store branded business. And then 20%, which we have actually openly said as part of our transformation, we're looking to exit at some point. And we have separated is a very good and profitable Rx Pharmaceutical business, and it's a leading portfolio that -- and what makes it different, it's highly differentiated, it's topical products like Retin-A and other eye ointments and the like. But again, that's not where we're going. Step back a year, I joined October last year, I had spent many years. I started my career at Clorox and then Campbell Soup Company, and then I went over to tobacco. And I ran U.S. Tobacco, and we went from a $3 billion market cap with my CFO, who's still my CFO today. So we've been together some 30-plus years. But anyway, we went from about a $3 billion company to a $12 billion. Sold it to Altria for $12 billion. And then we went to Lorillard and -- I went to Lorillard. And went from about $12 billion and sold it at $29 billion. Retired. Came back out of retirement to do this. I've been about here a year. And I joined this company because I like what I see relative to the consumer turnarounds I've done before. Has all the same characteristics. Good brands. Good industry, like I just told you about, but something happened that it started to go south. So what you see here is from 2008 to 2015, a rapidly growing revenue company growing from $1.5 billion up to almost $5 billion in revenues, and then things start to unwind over the last 3 or 4 years. Not the brands, but a number of things started to happen, primarily what -- the company's got a big, big eyes and big appetite to go around the world and launched a -- bought this big international division, inverted the company and did a lot of investment around the world, but its growth engine and what has always driven the stock price is sort of the core U.S. business. That's what -- when that thing is healthy and growing, we're making the most money and driving the most value, and that gotten neglected over the last 4 years. So the growth came out of the U.S. and it sort of got a little bit stagnant and we attributed that to 4 reasons. The innovation stream had slowed up, there became -- the innovation stream slowed up. There were less switches from behind the counter to in front of the counter as a second reason. And the third reason, Perrigo, historically, in the U.S., did a lot of these smaller bolt-on acquisitions, they stopped doing that in favor of international expansion. And then without those 3, price competition came up some more. So like those other companies I just told you about, in each case, my team went in with the great people within the companies, but we redefined the category we were in always, ramp up innovation and sort of get out the uncertainty in the company and start to grow and build value again. So that was the challenge here. And the definition in this particular case was redefining Perrigo from a health care company to a consumer self-care company. So think a company that is -- was focused on treating disease and remedies for when you needed them to a company that would also add wellness and prevent disease and prevent sickness. And you'll see that come to life here in a few minutes. We -- when you start looking at what the dynamics that made that seem like a very good opportunity to us when we analyzed it is, all of the company's core competencies and the way consumer preferences were going, we're setting it up. Whether it's an insurance company or governments, everyone is trying to deal with rising health care cost, and there is no end in sight to rising health care costs. So as a global effort to push for self-care and combined with millennials who are getting a lot of their information online on what they need to do and resist going to a doctor, who also happen to be the ones who most favor private label, millennials, 83% understand it's the same quality. 85% of consumers trust a private-label brand in this category as much as the national brand. And those numbers have been growing year after year after year combined with continued rising headquarters and the emergence of what IRI would say in a report that came out a few -- just about a year ago that the global self-care market is now estimated at $450 billion, and that 88% of individual see self-care as an important part of their life, all the way back to meditation and health and exercise but trying to prevent going to doctors. And 250% increases in Google searches. And I could give you about 100 other statistics that said, self-care was a place for Perrigo to carve out a niche as a consumer company that it could be different and owned and use that to leverage growth and then ultimately reposition the company, which we would then believe presents a very good investment opportunity for a rerate on the stock. Okay. So the overall big picture was, focus on that 80% of sales. When you can, and the timing is right, it's sell-off or spin-off the generic pharma division, which we have spent the last year getting ready to do. It's not a great market at the moment. In order to trade like a normal CPG company, which is already 80% of our sales that have 10 turns on us relative to P/E because our stock is being dragged down by the generic peer average, okay? Does that make sense? Everyone gets where I'm going with it, whether I can do it or not, you'll decide and whether you invest or not, but that's the idea. We've put a very systematic approach to making that happen. And we said, because of the magnitude of it, it is a 2- to 3-year journey. And within that, we said there were 7 major steps, reconfigure the portfolio, exit the nonself-care businesses around the world. We needed -- the company had missed its base plans and its estimates in The Street and everything for a number of years. So in order to get credibility, we needed to get realistic numbers out there and deliver on them. Third, we needed to get -- ramp up the innovation program. One of those key 3 I said that drove growth. And accelerate that. Fourth, we needed to do -- if we were going to truly be and -- competitive as a consumer company, we needed to make significant investments in skills and talent. And I'll talk about that reconfiguration in a minute, but things as simple as business intelligence at a level that competes with the best CPG companies as we've done in the past because our customers demanded that there was -- even though we're a private label company, we're very cost-effective in certain areas with all the growth and going globally and all that, there was a lot of cost that needed to come out of the system, and we believe that we could pay for our investments by reducing cost. Then we needed to prudently deploy capital. And we needed to start getting the business growing again and deliver superior shareholder returns and eliminate some of the baggage in the stock from some of the uncertainty that exists from a few years back. Priority number one right now for me, and we believe it is the highest scarlet with valuation for a CPG company is revenue growth. Solid organic revenue growth is our number one job. And we're making some investments. And then we believe the operating income and EPS will shortly follow. So going around that wheel now, number one, we've done a lot -- I told you, we didn't sell the major Rx division this year, but we said we will when the time is right, and it has been separated from the business. From everything, from incentive plans to IT systems to management teams, we don't milk it, but it is run separately. We then -- we had a number -- we generate a lot of cash. We had a lot of cash. We've gone on an investment effort within the U.S. We spend about $1 billion investing in our core U.S. business this year. We bought Ranir. That one alone was a $750 million investment. And again, pre the change in vision, right? Pre the change in vision, you wouldn't have gotten into the oral care business because that wasn't treating anything. It's preventing. And now it fit nicely into our new consumer self-care vision. It's the largest private label oral care company in the world, from selling billions of flossers and automatic toothbrushes and the like. Again, a fantastic, fantastic business that is growing. So this is the start of demonstrating our desire to get back into bolt-on acquisitions. And we only buy, in our own criteria, if it's going to help revenue growth. We want to buy it at a great price, and we want it to be accretive because I'm trying to drive up the organic revenue growth number, not just get the first year of the bolt-ons. So Ranir was a high-single digit, low double-digit grower. So it made a lot of sense for us. We also bought Prevacid from GSK this year. We sold our animal health division to PetIQ. And last week, we bought a small antibacterial company to protect your toothbrush called Steripod, a small but rapidly growing business. On the base plan, delivering on those base plans, we ramped up and delivered and launched this year $170 million of new products, had dramatic e-commerce growth. We had a -- when I joined the company, we had service issues in the U.S. that have all been returned to 90-plus service levels and got the dialogue back to where it needed to be on our businesses. Over the -- through the first 9 months of the year, we were getting 2% organic growth, and our Rx business was growing 6%. And I'll show you in a second, then it got better when we added the acquisition to that. Making great progress on repeatable growth platforms. Let me tell you, in our world, a lot of private-label companies, including Perrigo, were what would be considered an NBE company. That is National Brand Equivalent. We were fast copiers. And now where we are trying to get to as consumer 2.0, and being a not a national brand company, that's not where we're going. But we want to be national brand better or national brand different. So not just NBE, an NBB or NBD. And with that means we have to have all the same consumer skill sets and everything's involved with it. So what's he talking about up there? How about nicotine cessation? Nicotine cessation is a big category. In that particular category, we have very high penetration. So we are -- 70% of the entire nicotine cessation market is private label, not national brands. So Nicorette is the smaller brand in the category, not the big brand. They are not -- and with the 70%, we're almost 100% of that 70%. I can't, and we can't rely, on them to do the innovation in the category. And we're limited because of the national brand on what we can do with the nicotine but that doesn't stop us from being a typical consumer company that might put liquid centers that might put better flavors that might put more convenient packaging that -- all of the typical things that you might see for somebody who was marketing a gum. So that's a big push. NBE to NBB and putting the structure in. Brought part of my team from the past and consolidated R&D globally. A hell of -- just an amazing innovator, and we've ramped up 50 new innovation programs to put $500 million of new products into the pipeline. The oral health -- the purchase of Ranir not only presents the opportunity for bringing accretive growth in, but it gives us the opportunity to expand that with their capabilities throughout Europe. They were already about 30% of their sales in Europe, but we have 1,200 salespeople in Europe calling on every pharmacy. They didn't -- lots of expansion and then like the Steripod acquisition. And then, finally, we're working on some longer-term breakthrough, things like, you see up there, things that are pretty controversial, I mean, nicotine vaping and CBD. We wouldn't go in the way everybody else does there. We would go in a Perrigo way, which would be a sort of a health care company, pharma's original background where we work with the FDA, which they're begging for somebody to do to come and help solve some of these problems. So all very, very exciting, but those are longer-term opportunities. The other one is making investments. We've changed 40% of the leadership team. We've centralized key functions. We've formed a transformation office. We're spending tens of millions dollars in investments in technology, like business intelligence as a good example to be able to have state-of-the-art ability to analyze business and consumer trends, et cetera. We identified over $100 million in cost savings, of which we expect about $30 million a year for the next 3 years. We've already got about $10 million or $15 million this year. And they're really -- both from external and business process optimization that we're able to find those, and I'm confident in this. On the capital element, I'm almost through the wheel now, 6 out of 7. On the capital allocation front, through cash from operations, some cash from Tysabri and the sale of Animal Health, we had about $730 million coming on top of it. We've reconfigured that into acquisitions, which we used $810 million for. We raised our quarterly dividend by 11%, which we've done every year for the last 11 or 12 years, and we've refinanced our term debt at a better rate. Bottom line is, things are starting to go the right direction. We're still early in our transformation, but I'm happy to report that what was a stagnant business in the third quarter grew up -- grew over 10%. Organic growth started to accelerate up over 3%, and that every quarter of the year we either -- well, every quarter of this year, we exceeded expectations, in my first quarter, fourth quarter last year we met. So we're starting to gain credibility because we weren't so good in that area. From the beginning of the year to the end of the year, our stock price was up 36%. And on the areas of overhang surrounding tax liabilities, which is one of the areas we need to clean up, we have filed all the legal briefs in all of the cases and are confident in our position. So if we are going to get considered as a CPG company, ultimately, though, we've got a long way to go in terms of the financial metrics of the company. From '17, '18, sales growth was slowing. As I said, in the first half of this year, it was 0. In the third quarter, it's 9%. We'll be shortly reporting fourth quarter, and we'll see what that does to the number, but it's heading in the right direction. I like to talk 3%, 5%, 7%. My IR person changes these numbers depending on what he sees what the actual CPG average estimates are, which is right now 2%. But our goal for going forward on our sort of business algorithm is 3%, 5%, 7% is what I want you to be thinking about, with priority to get 3%, first. Good, solid, consistent 3% growth first and then bring up the operating income when we're done with our investments and the corresponding EPS. So we're on that journey, but it is heading in the right direction. And I want you to know, while we're on that journey, we take a lot of pride in doing things the right way, and you can expect Perrigo to continue to do that in basically every area of sustainability. We are making progress year after year after year and donating and being responsible citizens in the communities that we operate with our 10,000-plus employees. So to summarize, we believe Perrigo is a compelling investment, it's a unique business model designed to take advantage of strong consumer tailwinds towards self-care. And those trends -- those are favorable market trends that we expect to continue. And we've got a diversified store brand and branded consumer platform, all self-care, all around the world, like I said, in multiple geographies. We have established growth drivers that we had let slip, but that pipeline has been put back. [Audio Gap] line of M&A, we're constantly evaluating and a full pipeline of innovation. We are investing to do things and make Perrigo -- and do it the right way. We're investing for the long term for -- to make real value creation with a great company. We convert almost 100% of the cash we generate each year. We do have some tax uncertainties that we're aware of, if you follow our story closely, they are out there, but we are working hard to reduce that risk and eliminate that risk. It'll just take a little bit of time. And we believe there's significant multiple upside. So that's the Perrigo story. Now Katie, help me out here, you guys -- this is -- I'm running -- this is -- it's just at about 0. But I think there's another 4 or 5 minutes or no? Or I only have 0? If there's anybody who has a question, I will be happy to take a question. Thank you for your interest in Perrigo.