Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

All right. Thanks, everybody, for joining us for our next session. I'm Randall Stanicky, the pharmaceuticals analyst here at RBC Capital Markets. And our next company presenting is Perrigo. And with us is the CEO, Murray Kessler, who is in his second year at Perrigo as CEO, and we also have Ray Silcock, who's the company's CFO. And so what I want to do is just -- first, guys, thanks for joining us. We really appreciate having you as part of our conference here.

And Murray, just to kick off, I think you can probably agree. I've not been afraid to push back on the story. And what we've been looking for, we've discussed that. But the business started to improve. You've been making changes. We've seen metrics starting to improve. And you add that to the setup as we enter the COVID-19 pandemic positioning. And we see the business picking up some share and opportunity near term but also coming out the other end with -- as we come out in recession with a better-positioned outlook than many. So with that said, and we did -- we upgraded the stock back in mid-March and are -- it's one of our top defensive names here. But with that said, let me start with this. You said on the last call that you would be raising guidance, if not for being prudent to capture some of the risk from further supply chain disruptions. And so maybe I'll throw this one out to both you and Ray. One, have you seen any disruptions since that last update? And Ray or Murray, how are you thinking about the business from some of the trends that you've been seeing near term? A big theme at this conference has been companies highlighting some improving outlook near term has been opening up.

Well, the -- first off, good morning, Randall, and thanks for having Perrigo on. And I appreciate the recognition, one, in your upgrade, but mostly in your recognition that we're making progress on our transformation. We announced it just about a year ago, a couple of weeks over a year ago. And a year ago, and for the first year, we were very focused on revenue. And then we've made a lot of investments that were set up for long term that have, in fact, positioned the company, not only to handle this crisis but to be very well positioned for a new normal world, whether it's e-commerce, et cetera. I didn't say just what you said on the call that -- but under normal circumstances, I would be raising guidance. And that's because a lot of things have broken our way. And frankly, a lot of things broke our way from when we finished the quarter to just days in front of the earnings call. So we had Voltaren Gel switch from Rx to OTC. We had our albuterol product, which is a big item, get approved. We had continued momentum on the business ahead of our 3% organic growth targets that had been accelerating before COVID and had been -- literally got -- from the time we announced it, got stronger in the second -- in the third quarter last year, fourth quarter really accelerated. And that continued in January and February and then we got the surge. We've done a couple of bolt-on acquisitions that weren't included in our original guidance. Albuterol wasn't included in our original guidance. But it just wouldn't have been prudent to update, given the level of uncertainty. We know we had a surge in March. How much of that we retain, we'll see. I told you at the end of -- on our April call that we had another good month in April and that we hadn't seen much of a tail-off and that our business facilities were running 7 days a week, 24 hours a day, flat out. And that thanks to our heroic employees, they were able to keep our plants. Even with a lot of scared people and higher absenteeism, and in some cases, illnesses, we were able to keep 80%-plus productivity in the plants in all facilities worldwide, all shifts. And that's still true today. The absenteeism is coming down. But there's still a lot of uncertainty. As things open up, it presents opportunity because some of our businesses were negatively affected by store traffic. We're carried by our core OTC business, which has incredibly benefited from all of this. So there's still a lot to understand, but we're digging in every day and we're getting more of a handle on it. And I will say the one level of confidence that I really have is in our ability as a leadership team to calmly and in a measured manner to handle when illnesses do occur and how to work with customers and sort of work in this new normal world already. So we're feeling good about it. And we, most importantly, are glad we don't have to rework our entire strategy. It was well timed for when we did it, and we're bullish. So that's where we are. I think we're in a fortunate spot, and we're glad to have been able to help society.

The demand was high and you were in a situation, I think you said something to the effect of being able to -- you were producing everything that was coming in or you're -- you had limited capacity because demand was so high. So effectively, all the orders you're focusing on. Is that still the case?

So we are not yet able to keep up with all of our orders is the case. We are not able to -- we -- for those who haven't heard me speak before, we prioritize the products that society needed most first as well as, of course, employee safety. So it was hard to justify certain products -- and we categorize them to A products, B products, C products. It was hard to justify asking somebody to come into a plant and -- for what they perceived as risking their life to make something like Minoxidil, right, to grow here. On the other hand, cold and cough medicines and electrolytes and albuterol inhalers and acetaminophen, which was in tremendous demand as -- we could justify, but we couldn't make all SKUs of that. So we are still in a position right now where we haven't close to caught up. So think about it in terms of what consumers buy but also think about store shelves, think about our customers' warehouses, think about our inventories. We came into this whole event with the full system with proper inventories. Today, the store shelves or in-stocks are back up over 90%. We're starting to produce some of those other SKUs. But on some of those core SKUs, we're still 200%, 300% above normal orders or more. So it's -- and we're trying to catch up and then also build our own inventory. So we're properly positioned if this -- we have to go again here in the fall. But our manufacturing team is going to be working hard all year.

Murray, one of the core attributes of the story that makes it really interesting right now is that again demand for your business is there. And you just walked through that. There's no question you guys are seeing high demand. And we could talk through e-commerce as well because that's another big driver for you. But coming out the other end also, we saw this with the financial crisis. We saw Perrigo and store brand private-label products pick up market share. And you could argue that if we see unemployment ramp, we see people looking to save money and buy lower-priced things, we could see a similar dynamic again coming out of the pandemic and into recession and potentially economic recovery. What are you guys seeing so far internally? And as you talk to folks internally about the past and what you've seen, how are you thinking about the market share for Perrigo between now and the next 18 months?

Yes. I won't give you a projection looking forward because it's my first time going through it. But you're right, that's exactly what we do. We go to the people that have been here for years and years and look at history of not only our categories but other private-label categories, especially OTC. And historically, we've gained 100 basis points of market share in a recessionary period. And that's when it comes on slowly, right? And then over time, you still need somebody to make a choice. Here, we had a little extra added benefit, Randall, that we'll see how it plays out. But something unique this time is because of the demand surge was so high, we got a lot more trial during this period of time of national brand exclusive buyers, who went to the shelves when the national brand was empty, who then were willing to try our products and then see that what you already know that these are exactly the same, the FDA requires them to be exactly the same and in a very horrible unemployment situation and deep recession and sustained recession. And we -- our products sell for the exact same thing for 30% to 40% less in most cases. And again, that's different than a lot of other private-label categories than when I was on the national branded side, where they were trying to imitate with foods and all that. But we always believed we had product preference and consumer preference. Here, by law, they have to work exactly the same.

I mean we saw that back in '09 and 2010, right? And it was a little bit of we need to save money. We're going to try this store brand product that people say it's the same. But when you try it and you realize it's the same thing, it's a learned behavior. And often people don't go back. So you see a share gain gap up that's sticky. And presumably, the opportunity is here as well. I guess the question I have for you is, is there anything that Perrigo can do to help accelerate that? Is there a promo? Are there things internally that you can be doing right now to encourage that behavior?

Yes. I think the biggest opportunity for us is -- this is my personal opinion and it's a unique and different question. But I think the opportunity is the e-commerce and digital. Our investment -- and whether people fully understand it or not, is we are the actual support system behind the customers on brands in these categories. And they want to sell their brands. So we've hired dozens and dozens of people, putting the technology capabilities. We build the websites. We do the advertising. We do the marketing. We help with the algorithms. We help with the comments and the reviews. All of that is done from Perrigo, which gives one competitive advantage. But it lets us tell that story more than can be done at shelf. We don't advertise on television. But here, we can communicate with consumers when they're going in to buy something and compare and save and look at the differences. And hopefully, the reviews all support all that. That it's -- somebody can study it a little more. So for me, that's an area for us to double down on.

And just to be clear, because this is a question that comes up a lot, there's a misconception by some that your margins on e-commerce are lower than Amazon is pricing you. Amazon is only one of many customers in e-commerce. And you and I have talked about this before, from a profitability perspective, I don't think -- I think you recall -- or I recall you saying there's not a material difference, right? So as the e-commerce portion of the business ramps up, it's not going to have a major impact on your margins. Or is that not right?

It is right. It's not going to have any impact on margins. They're about almost identical, including Amazon. So I mean it's -- yes, margin is not an issue for us on our e-commerce business.

Okay. Let's pivot to the CSCA business in general. One of the big focuses for you coming over here was how do we drive top line back up and turn the margin trends around? And they're related, right? New products drive higher margins. One of the things that you've focused on is bolt-on deals. You've done a couple, Ranir being a notable one. What -- how do you think about the next 12 to 18 months? Are there more Ranirs out there, more deals, as you think about moving outside of that core tangential of that CSCA business? And what does the current pandemic do to your business development strategy, if anything?

Well, fortunately, our guidance, we don't ever build in potential deals, we update when those happen. So we had already closed on the Dr. Fresh deal. We had closed on a smaller one in Steripod right after the beginning of the year, and we still have 6 months of Ranir and all that. So we look at it both organically and on a bolt-on standpoint. We had a robust pipeline. There are more that we're still working on. I would not be telling you the truth to say that we hadn't slowed down, we did. As we started this crisis, Ray wanted to make sure we were in a good cash position. We didn't have the ability to do due diligence and get into the plants and facilities. And I didn't want to nor did he want to pay multiples that were pre-COVID on a business that we had no idea what it would look like coming out of it. So fortunately, we've done a lot of M&A activity in the last 6 months or so. We have a robust pipeline. But I think the big opportunity is -- and there's plenty of them. Within our categories of focus, there's plenty of opportunities, Randall. But the big thing for us is to sort of assess, will there be an opportunity to be a little bit of a value shopper, where perhaps some companies who didn't fare as well as us need cash or multiples are a bit lower and we can seize on that opportunity? Because, Ray, I don't know if you want to add anything, but talk about cash and things like that and buying power or...

Yes. We -- at the beginning of the crisis, we took $100 million of our revolver as a precautionary measure. So we ended the quarter with a little over $500 million in cash on our balance sheet. And we feel pretty comfortable about our cash position. We spent $100 million of that to finalize the deal and close on the deal with Dr. Fresh. But we feel pretty comfortable. We've got another $900 million on our revolver, which expires March of 2023. And although our overall indebtedness at $3.5 billion is heavier than we'd like, we're targeting to get down to $2.5 billion. Our cash position and liquidity remain strong. Our cash collections are good. We watch them carefully. We've not experienced any disruptions at all in the United States and just some minor deferrals in Europe. And we continue to pay our suppliers on a timely basis. In fact, we've got a in-house payable team that we've allowed to go back into our offices in Allegan because they can work more easily from the office than they can from home. And we're making sure that we continue to get an adequate supply of the critical materials and components. So I think we're very comfortable right now with our cash position and with our balance sheet.

Yes, Ray, that's helpful. The segue to that would be, look, the Perrigo story resonates really well with investors. It's a really nice story in this challenging, unfortunate situation that we're all in to be able to provide consumers products they need and help them save money, right? The one challenge for some investors is, okay, well, there is some tax liability that's sitting out there on the IRS and Irish side and fairly large when you add them up. We've done work. We've talked to tax experts, and it's a little less scary once I think you do so. But I guess, Murray, I'd send it back to you. You had -- the Irish hike work or the Irish tax liability is the bigger portion of that. You had a hearing that was going to be in April. Unfortunately, the pandemic pushed that out. Do you have an update there? And how are you thinking about resolving that liability?

Well, you know the way I think about it. I think about it is if we were to go through the entire system -- so if we were to lose and actually pay cash, I believe that's a 5- to 10-year process. So the opportunities in the judicial review, which is challenging their right to even bring this audit after -- based on years of prior audits and our ability to -- our legitimate expectations to rely on what they had done in the past, which is an Irish law. So we could win there or we could appeal there. And if we didn't win there, we could go into tax appeals court and then fight the challenge of whether it was IP or a capital gain and whether the rates are right and work all those down. And so there's kind of only opportunities. You could have negative headline news. But in terms of paying anything -- or once things get going, maybe there will be an opportunity for a reasonable discussion to make it go away. The bad news for us was that April 27 got pushed out and we didn't know when it was going to push out. I found out yesterday, so I can say this because this is an FDA call, that, that hearing is now rescheduled and begins on June 3. So it's not a massive delay. So I thought it could have been pushed out until the end of the year. And instead, it's just about a 6-week delay. So it's back on, and we're looking forward to our day in court.

That's -- just to step back. I mean that's new and that's a lot earlier than we were expecting in terms of when it would be rescheduled. So what that's going to do then is that's going to put a huge potential event -- positive event on the calendar because the Irish court, if they come back and rule in your favor with respect to legitimate expectations, my understanding is that entire liability is gone for the most part. Is that the right way to think about it?

It is. And if it goes the other way, we're no worse off. But we think we have a darn good argument because they did [ start ] sort of an expectation. So yes, you're right. That is the potential for a major positive event or a continuation. And again, it would also -- that's when action starts happening, Randall. So I'm pleased to bring you sort of some breaking news here today that it is back on the calendar.

Yes. No, that's great. That's a great update. And my understanding from talking to tax experts is that this will be highly covered by the Irish tax press. And so there could be some indication coming out of the hearing of which way that the court is leaning. But regardless, a decision doesn't take too long to follow. So we should have potentially visibility at some point in 2020 on that.

Yes. I mean -- and listen, we want to get on with this. It is the only real big negative overhang for the company. The rest of it is -- our transformation is proceeding beautifully. Year 1 was about revenue. Year 2 is getting the investment and infrastructure done so that the margins are where they need to be and long-term algorithm is in place. And we'd like to make substantial progress in reducing uncertainty. So it's -- yes, it's so far, so good. And obviously, we're still in uncertain times. I'm talking about the tax uncertainty.

Yes. And the experts we've spoken to indicate that on the Irish tax -- sorry, the IRS tax side, which is a smaller component, this is -- these are fairly common and very, very often usually settled. And so there's potentially an opportunity for that to get dealt with as well, if I'm not mistaken.

No. I think you have accurate information. And one of the big IRS or the biggest of the IRS ones is actually a jurisdictional issue because it's between -- which violates a treaty between Ireland and the U.S. So they would have to settle that. I mean, as far as I've been told and I understand, that couldn't be incremental, so yes. And bottom line is I'm happy that we're getting back at it in June, and it's a fair question. And I don't like anything that distracts us from talking about our transformation and growth strategy. And so far, so good.

So we're up on time and 25 minutes goes really quickly. But maybe just to recap, the tax information hearing, that's new. So that's clearly a near-term event that we're focused on. You're continuing to watch for the lack of supply disruption to be able to continue to supply the market. We'll get an update, I assume, on how things are and outlook on the second quarter call. You've got some opportunities on the CSCA side, Voltaren Gel and some others there that will probably have better visibility around for the rest of this year. What else should we be thinking about in terms of data points or events for Perrigo for this year?

Well, I think that the incrementality of what some people like to describe is pantry load, understanding whether 20% of it is pantry load or 80% could have a significant impact, right? I don't believe we're going to give all of it back by any means. So those are the things that if I can get confidence in no business interruption and we can see how much of that sticks, which could be a fair amount, then we can be having reasonable discussions of what's proper guidance going forward. And then I also -- it's all not rosy. It's -- we do have businesses like sun care and weight loss that were affected on by store traffic. And seeing how quickly those rebound are also important and also whether there's a second spike in the fall that starts this thing all over again. So a lot of moving pieces. But on balance, I feel good about the year, and there's more upside than downside. But most importantly, we're a company that, which you have already pointed out to the world, that is very well positioned with our 3 core drivers of self-care, value and e-commerce in a new normal world that we think we're set up pretty good.

That's a great place to end. I really do appreciate you guys being part of our conference. So thank you, Murray, Ray and Brad for joining. And for everybody on the line, thanks for joining, and we'll talk to you guys soon.

Thank you, Randall.

Thanks, Randall.