Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

So good afternoon to everybody. I'm Chris Schott from JPMorgan. And it's my pleasure to be introducing -- or good afternoon, I guess. It's my pleasure to be introducing Perrigo today. From Perrigo, we have the company's Chairman and CEO, Murray Kessler. So let me turn it over to Murray.

Good afternoon, everybody. Good afternoon, everybody. That's better. Well, I'm here to tell the Perrigo story, which I kind of unveiled for the first time -- and a few folks upfront here, I'd love -- there we go. Perfect. So a year ago, I came here and -- I guess, I'll do the appropriate caution for you to look at our forward-looking statements, and please read them. But if you remember, a year ago, I started to tell a story of the direction we wanted to transform Perrigo. And for those of you who aren't familiar with the Perrigo story, Perrigo is a $4.7 billion global leader in self-care. But we didn't talk about it that way a year ago, we talked about the company as a health care company that we were beginning a process of transforming to self-care. And in the -- last year, I did a longer description of what that is. This year, I'll leave it at health care as treating disease and self-care as treating, preventing and adding sort of the wellness in health care, and I will talk about that in a moment. As a company, we are primarily consumer sales. We are -- 80% of our net sales are Consumer Self-Care Americas and some are Consumer Self-Care International. And our Rx Pharmaceutical business is about 20% of the portfolio. The Rx business, we've talked about over the last year of exiting, it's a terrific business, it's a profitable business, and it's highly differentiated as we're the leading portfolio of generic extended topical products. But the driving force of the company is the consumer business, and we really have 2 very distinct businesses. In the U.S., we are the market leader in store brand or private label market share, primarily in the over-the-counter space and nutrition. And as you'll see in the last year since I was here last, have entered the oral care business. Fantastic businesses and growing categories with a lot of tailwinds that benefit from the trends of rising health care cost being offset by our products, which help you prevent going to the doctor in the first place. And even if you are in that OTC space already, private label business is about 30% cheaper. And what makes the magic of this company, the categories that we enter, we have to have a 30% discount relative to the national brand. We have to make a 30% margin ourselves. And real magic comes in that, in that formula, the retailer has to make more money selling one of our products than they do selling the national brand. And they do, and that's why they get behind us and continue to support us year after year. Our Consumer Self-Care International business is a branded business. Lots of local gems. So we tend to be #1 and #2 with the brands we have in the 35 countries that we compete, but there are very few that are pan-European as an example. So that's sort of who we are. The reason we went back and restarted this transformation process and repositioned ourselves from health care to self-care is that we were a company that had been growing for many years. And in the process of -- I mean, rapid growth, going from a $1.5 billion of sales to, around 2015, '16, hitting just over $5 billion in net sales. And then for the last 3 years, it's been a continual decline, not only in the sales but in the operating income of the company and in the stock price. So I was brought in. There were a couple of other CEOs in the interim. But this notion of getting the company growing again was critical to being -- making Perrigo back to being a winning company and a winning investment. So we introduced at this conference last year a self-care vision that said our future was to make lives better by bringing quality, affordable self-care products that consumers trust, everywhere they are sold. The critical element of that is it -- not just words on a page, but when we redefined ourselves from health care to self-care it created lots of growth opportunities for us, right? So before when you're dealing strictly in health care, everything has got to get approved by the FDA. It takes many years to do it. We become a servant to waiting for Rx-to-OTC switches as a source of our growth. When we redefine to self-care, then it -- and in wellness products, we can go into areas, as I'll show you, that don't require FDA approval. That are more wellness-driven. That we can come and ramp up our innovation program at a faster rate, open up bolt-on acquisition opportunities, et cetera. And we loved it because it took advantage of that private label powerhouse that I was talking about. Great trends for that going forward. Every year, we gain 30, 50, 75 basis points of private label as a share of the total market. And the demographics support us as well as sort of the biggest cohorts in millennials already believe that private label is of the same quality as national brands, and they trust them just as much. We expect no relief in rising health care expenditures. So again, pushing it. And then you see things like Google searches and the language around self-care in the last year exploding, including IRI a year ago, putting out a study, identifying it as a $450 billion market globally. So -- and then most importantly, from your perspective, as an investor, if we're ever to pull that fully off, it should unlock a lot of value. So we trade today, and it was -- we picked up a couple of turns this year, but we trade sort of at a blended multiple. Consumer companies, and remember, we're 80% consumer, our peers are trading at around 22x. The generic peer average is 6.5x, and Perrigo sits right in the middle. So the theory on our repositioning and the growth going forward is that we continue to drive the consumer business, deliver on the metrics of a great consumer company. We drive that multiple closer to the 22 and in fact, in part of doing that, we need to do some portfolio reconfiguration to make it happen. So we have been very aggressively implementing what is a 2- to 3-year transformation program we launched May 9 at our investor conference that had 7 key steps to it that we needed to reconfigure the Perrigo portfolio. We needed to gain back credibility, start achieving our base plans because there were components to it that were making us miss earnings quarter-after-quarter-after-quarter, and we needed to make the strategic investments and fix a lot of things within the business, so we could have a vital core business. We needed to invest in new areas of growth and repeatable growth platforms that wouldn't just be onetime wonders. There was a number of things that needed to be fixed organizationally. From a talent standpoint process -- standpoint, great people, but most of them are doing a lot of manual label in -- manual labor in areas that should have been automated. We believe that there is a significant opportunity to reduce cost to help pay for those investments. And then we talked a lot about how we would be spending our money in the near-term future, so that we could deliver consistent results, and all the while removing some of the uncertainty out of the business that if you follow us closely that exists with some tax issues we have from years ago that have surfaced over the last year or so. So -- and if we do all that right, we generate a lot of money. We get a lot of credibility. The stock price starts to go up, and we have the investments to do it all over again. And that's the way we've been operating. So on a quick 1-year scorecard, and I'm just going to work my way around that wheel. From a portfolio reconfiguration, with the definition of self-care, we paid $750 million and bought the world's largest private label oral care company, literally 20 miles down the road. It's been a fantastic acquisition for us and opens up -- and this is -- in all of these, when we buy, we are buying revenue accretive because we believe job -- first job is get revenues growing again. So Ranir is a double-digit top line grower. We get the benefit of the short-term add-on. But more importantly, it raises our organic growth levels. We bought Prevacid towards the end of the year from GSK. Last week, we bought Steripod, an antibacterial toothbrush cover. And we exited our PetIQ animal health business. And we positioned for sale or spin our Rx division, but did not go through with actually selling it yet given the multiples in that industry today. But we have at least fully separated it and there is no distraction between those 2 businesses. They're both well-funded, they're both great businesses, but they're run separately. In terms of the base businesses, through 3 quarters, our OTC adjusted growth was up 2%, our Rx was growing 6%, our e-commerce business was up 50%, we launched $170 million in new products. And one of the reasons we were struggling in prior years was we had service issues, and we returned our service levels back up to greater than 90%. On the repeatable growth platforms, we've hit that in a number of different ways very aggressively. The one that's less obvious to you sitting here today as we have evolved and are positioning ourselves for the future to no longer operate under an NBE platform. NBE in a private label world means national brand equivalent. We wait for all of the innovation that come from the national brand and then copy it as fast as we can and be the first one to do that. To what we are doing now is instilling and bringing more consumer expertise, insights and everything else that goes with it, so that we can evolve to an NBB platform, a national brand better or an NBD platform, national brand different. So think in terms of the examples here, we are not the NDA holder on the nicotine -- on nicotine for the nicotine cessation category, but that doesn't mean we can't be national brand better with packaging, liquid inserts, flavors and the likes. And so we are launching products today in all the various categories that aren't -- don't even necessarily exist from the national brand, but they're based on what consumers want. Because in a lot of categories, we are the market leader. If you follow us, as an example, we sell 3x more ibuprofen than Advil. We're bigger than most categories than national brand. In the nicotine cessation category, we are the category leader by far. We can't rely on the national brand. We also ramped up innovation. I brought in a long-time partner of mine who ran the innovation programs for me at past companies. And we've put $500 million of new products with 50 new innovation programs into the product pipeline with the purchase of Ranir oral health. We have a whole new platform for both domestic and international growth, and we continue to work hard. We announced that we have developed a partner in vaping. We think the world needs an FDA-approved vaping partner in cessation that can make -- take advantage of what is a very big market. And from my old job, cessation products are still tiny. And in the world of CBD, I've talked about that in the past, and we're making good progress, and I hope to be able to share some of those in the not-too-distant future. On making investments to drive the organization, we've either promoted or brought in or changed out 40% of the key leadership roles in the company. We've globalized key central functions to help ramp up the new product program, but we've globalized R&D, in finance and quality organizations. We're making significant investments to automate and make our organization more efficient and smarter, putting in a global business intelligence system, should be in place in March so that we have -- we can look at anywhere in the world, the size of our business, the causal measures, to do more sophisticated analysis. And this is blurred on purpose, but we formed a transformation office that has 40 major initiatives underway and tracking in the transformation. We identified between $125 million in cost savings that we've gotten about $10 million or $15 million so far this year, and we expect about $30 million a year for the next 3 years to help fund some of those investments. And these are -- this is all in the operating expense lines for the most part, but coming from external cost reduction and process improvements. Moving on to capital allocation. Between cash flow from operations, and we generally convert about 100% of the cash we earn each year. But we also had a royalty stream that if certain milestones were achieved, we were -- $250 million this year from that, plus, we sold the animal health business. All of that generated an additional $730 million of cash. We had a lot of cash on hand. We used that to invest $50 million in tablet capacity. We were out, and we couldn't keep up with demand anymore. That's pretty well done. And a year ago, I said we were going to spend about $200 million on infant formula, but we were able to be smarter about the design of upgrading that facility to meet demand there, and we're investing $100 million there. So from a capital standpoint, we had historically spent about $100 million. We are now running at about double that rate and will for a couple of years until we get the organization modernized to the standards we need it to be. We used $810 million for those acquisitions I spoke about. We also took -- and increased our dividend by 11% and raised our dividend for, I think, the 11th or 12th consecutive year. And we refinanced our term debt at a cheaper rate. So are we starting to make a difference? I think if you looked at our stock price today and yesterday, I think we were up 13% or 14% in the last 24 hours, and that's because we started to share some of the results. This was the first part of that, which we talked about yesterday that the revenue growth is indeed accelerating. And not just the total company from the purchase of Ranir, but also the organic. We went from kind of flat on an organic basis on our consumer businesses to up 3%. We've met or beat consensus every quarter for the last 4 quarters. Our stock increased 36% in 2019, and we are working hard on fighting the areas, the tax issues that have caused uncertainty on the stock. But the real fun news was, we just got in, in the last week, our fourth quarter results. And on a purely consumption-driven basis, so remember, we had gone organically from kind of 0.3 to 0.5 to 3, and we had grown from a couple of percent to 10. When you looked at the addition of Ranir, organically in the quarter, Consumer Americas, including Ranir, grew 19%. Those are big numbers on a big division. Organically, the business was up 11% in the fourth quarter. On the international front, up 11%, including Ranir. Organically, on an international front, up 4%. And when you add it all together, Perrigo adjusted net sales growth was up 13%. So it's not like it just happened in this quarter, and we've been answering and we'll do in the Q&A -- answer more questions. But this has been building all year long. It was across all divisions, good solid growth, and you see it in the takeaway on the consumer businesses and the measures that we're able to use to read that, specifically, the IRI databases and all that around the world. So I don't talk about a lot of that going forward. What I'd like to talk about is what does that mean in total? Well, most people who are evaluating the Perrigo stock, it rides on the beginning of the transformation, whether it's working or not. Is it credible that Perrigo can go from 1.5% to 2% growth organically to 3%? That's sort of the base foundation of it. And yes, you have some bolt-on acquisitions, Murray, but will the -- is the 3% a possibility? And we think that based on the way the trends that are going -- and in fact, in this first year, organically, on a constant currency basis, we did hit that 3% very early on in our transformation, 6% on a total basis, getting us from that $4.7 billion I showed you on the first slide to the $4.8 billion here. So my confidence a year later, as a new CEO is -- is growing that with great people and a lot of energy and some new talent injected and the innovation ramping up. That job number one, my first promise of getting more credible, delivering and getting the revenue growth going, is starting to prove itself out, and we'd much rather prove it with the numbers than talk. So I'm feeling good about that. And then we still have some investments to make. But ultimately, in order to be rerated to that consumer multiple, we believe we've got to perform along the peers. In May 9, I announced that algorithm as 3% revenue, 5% OI and 7% adjusted EPS. So 3%, 5%, 7%. And the current CPG estimates [ 20 to 22 or 2%]. We're sticking with our 3%, and then you can -- see the build. We were declining 1% total consumer. It's gone from 0 to 9 to 16 to -- against that 2 average. We think the 3 is a real attainable number. And we're still -- on the EPS and operating income line, we're starting to turn that as well. That will be a little bit of a slower turn because of the investments we're making. But we're on a 2- to 3-year journey. One -- first year down, and I think we are proud that we accomplished a lot. I will tell you, it's not just good enough on what we accomplish. We take a lot of pride in not just what we accomplish, but how we accomplish it. And there is a major effort that is always underway at Perrigo to do things the right way, including sustainability. And once again, we made significant progress with decreases in gashouse emissions and recycling. And we give back to the communities we're in, and we focus on safety and rewarding our employees and encouraging them to be better educated with academic scholarships, and I'm proud of the work that gets done in this area. And I'm proud of the work that our big partners, the biggest customers in the country work with us every day because this is top of their list as well, so that we are building sustained -- remember, we are -- we go hand-in-hand with the Walmarts and the Targets and all those big customers who will also want to make sure that they are responsible in delivering sustainable packaging and all that. So those are major initiatives as well. So in summary, we believe Perrigo is a compelling investment. It's starting to gain traction. And many people talk to us about execution is the key point. We agree. We think we have a great strategy, and we think that we are executing on it. We have a unique business model that takes advantage of consumer trends towards self-care, which, if you haven't heard me say self-care, self-care is -- I believe is the future and big. We have favorable trends that drive that movement. We have a diversified portfolio. We're -- again, 80% of our portfolio was consumer and 60-40 private label branded. But it's both, and it's a global business. The drivers aren't changing and those tailwinds for the growth of the category should remain. We are investing to make this a great company and that every component of it is great, from the computer systems, to the plants, to the people and the support for the people within the organization. We have strong cash flow conversion, generally near 100%. We're working hard to reduce those tax uncertainties, and we believe there is significant multiple upside. So I'm going to head over to the breakout room, and I hope if you have questions, you'll join me. But thank you for your interest in Perrigo.