Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

Good morning. I appreciate having the opportunity to share a brief overview of Perrigo. I'm Rich Sorota, Perrigo's President of Consumer Self-Care Americas, and I'm joined by Ray Silcock, our CFO. Please note our forward-looking statements. My goal this morning is to highlight who we are and have you leave with a better understanding of what makes our business so special and well positioned for continued growth. We have a simple vision that grounds everything we do. We make lives better by bringing quality, affordable self-care products that consumers trust everywhere they're sold. We do this by partnering with our leading retailers. And unlike anyone else, we give them customized solutions that provide their consumers access to quality affordable self-care products they need and can trust. Perrigo is a leading global consumer self-care company with more than $5 billion in net sales. I'm responsible for our self-care business in North America that accounts for more than 50% of our net sales. And the balance is made up by our European-branded OTC and generic prescription pharmaceutical business. In total, our worldwide consumer OTC business generates 80% of Perrigo's net sales. No other company has the breadth of quality, affordable, customized health care solutions we do with U.S. leadership positions in OTC, oral care and infant formula. Under our CEO, Murray Kessler's leadership, we're entering our second year of a 3-year goal to transform Perrigo into a leading consumer self-care company that consistently delivers 3% net sales, 5% adjusted operating income and 7% adjusted EPS growth. If you've been following Perrigo over the last 24 months, you're familiar with our transformational playbook. You've seen us reconfigure our portfolio and focus core self-care categories we can lean and win in. You've seen us invest in OTC, oral care and infant formula categories as we drive organizational effectiveness and build needed capacities, including winning with digital, omnichannel and e-commerce. We're continuing to partner with our retailers to increase the overall self-care basket as we innovate and grow self-care both organically and with M&A, partnerships and licenses. The need for quality affordable self-care has never been greater and will continue to grow as the cost of health care and insurance continues to rise. Americans want to stay out of the hospital and minimize visits to their doctor or dentist office, and that won't change post-COVID. Consumers are becoming more engaged in their health and wellness and are more trusting of retailers to deliver safe and effective offerings. Thus, self-care has become a big focus area for our retail partners. Pharmacists, in-store and online education are helping consumers advance their self-care needs as many can't afford to go to a doctor or a dentist regularly. Given our quality affordable self-care products, consumers can save a significant amount of money without lowering their high standards for safety, effectiveness versus national advertised brands. Our high-quality, affordable OTC, infant formula and oral care products work just as well as national brands. Our products must meet the same FDA requirements as national brands. And they do, but we do it while providing a much better value. Even before COVID-19 pandemic -- next slide, please. Yes. Thank you. Even before the COVID-19 pandemic, I was often asked about e-commerce and omnichannel growth as it was important and growing segment of our business. Now as you know, this past year, we've seen significant digital growth as many consumers were encouraged to go online or use store pickup services versus going into stores. Perrigo was and is exceptionally well positioned in this area as we've invested in digital and for many years. Yes. No other store brand competitor can match our scale and experience in this area, and we expect continued strong momentum in helping our retail partners win as they focus more on omnichannel growth. As you can see on this slide from McKinsey, consumers are adapting and changing their shopping behaviors and trying new brands as they look for quality, affordable products when and where they want them. This change in behavior favors to our brand and our business model. Perrigo is continuing to advance the scale insurgency behind unmatched self-care category, breadth, capabilities and partnerships. Only Perrigo can provide the customized self-care solutions our retail partners and the consumers are looking for. No one else has our ability to mass customize value -- with value and insurgent brand and deliver our quality, affordability and performance. Our retail partners are focusing on growing their brands and partnering with companies like Perrigo who are providing quality products that consistently increase confidence their consumers have in their store brands. It's a perfect match. Perrigo consistently delivers affordable, high-quality, efficacious product consumers like and trust. And as a result, they continue to come back for more store brands and insurgent branded products. Our industry scale is unmatched across store brand, insurgent brand or national brand competitors. Perrigo produces more than 75 billion doses for each consumers each year. That equates to nearly 60 doses of a liquid or pill for every consumer where Perrigo sells product, and that's every year. This chart highlights the magic of our business model. It's the true win, win, win. Our retailers win, their customers win, and Perrigo wins. Our store brand and value insurgent brands provide more retail profit both in terms of dollars and margin to our retail partners. Their customers pay less for equivalent and sometimes even more consumer-friendly product, and we continue to grow profitably and invest in our NBE, National Brand Equivalent; NBD National Brand Different; and NBB, National Brand Better products. Strengthening what we call our Perrigo Advantage is a top priority and supports our retail partners' initiative to grow their overall self-care basket. Given our scale and experience, we're able to innovate and close the performance gap that once existed versus national brands. When I worked at several large branded CPG companies, we often had a big performance gap versus store brand. In the categories we compete in, that's no longer the case. More and more consumers want the quality, affordable performing self-care product we provide our retailers, but they also want them when and where they want them. So digital e-commerce and store pickup are critical to future growth. Being able to service and support each of our retailers requires scale and experience that are both vital to our collective success. Just like what we've done in oral care with M&A, we're looking at strategically increasing our presence through acquisitions in OTC and nutrition. Our scale is perfectly suited for self-care bolt-ons. As we've proven repeatedly, we can add to our self-care offerings while servicing and helping our retailers grow their overall self-care basket. By continuing to invest in innovation, deliver better customer service and uncovering retail and consumer insights, we'll continue to help our retail partners grow and win. We're also focusing on increasing our gross margin by continuing to deliver our annual cost savings, improving our service, reducing scrap and obsolescence and launching margin-accretive new products while optimizing our overall self-care portfolio. You've heard me consistently talk about our retailers as partners. Because together, we can each help each other grow and transform self-care as we address specific consumer needs. Over the past few years, I've seen meaningful change in how many of our retail partners are winning and the unique role Perrigo can play helping them grow. It wasn't long ago when retailers had to rely on national brands to grow. National brands provided the category and product insights. They provided innovation and new news. But that's no longer the case. Today, Perrigo is providing a purpose-driven, one-stop shop for customized self-care solutions. We're collaborating with our retail partners to ensure the voice of their shopper is heard as we innovate together and utilize retailer-specific data to grow their self-care business while uncovering new white space opportunities and determining what business to lean into and what businesses to lean away from, a true partnership and a fundamentally different arrangement than one heavily reliant on national brands. Our retailers want to provide affordability and accessibility to their customers, but they also want quality innovation and many want customization. I've led many iconic brands and store brands over the past 3 decades and know that the national brands aren't willing to modify their brands to deliver the true customization and affordability that our leading retailers are looking for. We win by helping our retailers win. Together, we win by providing unique self-care baskets filled with store brand, value insurgent brands and national brands. Each of our customers will have a customized basket designed to meet the needs of their customers. In my prior roles at branded companies, each brand had a very specific and controlled brand equity. The brand was the priority not the retailer. At Perrigo, our retail partners are the priority, not our brands. We will use our assets to help our retailers grow their overall self-care basket. The role our retailer store brand and our insurgent brands play can and will differ. We use our innovation pipeline across our core self-care categories to support and grow our store brand and insurgent value brands as we continue our solution for each of our leading retailer partners. A few examples: Our store brand diclofenac OTC launch, which is a store brand equivalent to Voltaren; our exclusive REACH Clean World toothbrush launch at a leading retailer; and our up and coming -- sorry, our upcoming store brand hypoallergenic launch, which is a premium formula for colicky babies, which will save families 30% compared to the equivalent national brand. We're also working on transforming nicotine replacement therapy, NRT, and CBD categories. Now more to come on these categories in the future. Our most developed store brand category is OTC with 33 out of 100 consumers buying store brand. For oral care, only 13 out of 100 consumers are buying store brands; and infant formula, only 10 out of 100 are buying store brands. Huge opportunities given [ comparatable ] performance at a much better price. Innovation, education and insurgent brands will help oral care nutrition get closer to OTC store brand category share. We have a huge runway with NRT in science-based naturals, including CBD. Store brand penetration remains a huge opportunity for us across underpenetrated subcategories within core OTC and in nutrition and oral care categories. If these categories were to capture the same 33% penetration rate we currently hold in core OTC, then we would generate an additional $1 billion in sales to Perrigo. Innovation has been and will continue to be a big driver of our growth, as will digital. Consumers now expect to get their products where and when they want them. And those retailers who don't deliver on these needs will likely struggle with retaining customers. It's why we have and will continue to invest in digital. We're working to help our retailers win with digital and still have plenty of work to do. As more and more retailers realize they can't let national brands control and lead digital as their focus is their national brands and helping their national brands win. Our focus is having our retail partners grow their overall self-care basket by not buying an Oral-B toothbrush when, say, a Sonicare or a store brand brush works just as well or not purchasing Advil when ibuprofen or acetaminophen and another active would meet their needs or Enfamil when another infant formula meets the same regulatory requirements but at a much better value. Consumers should be able to buy the best health care products that meet their specific needs, not the national brands' needs, and we're working with our retail partners to make that happen. I'm a big believer in M&A, partnerships and licenses. While I was CEO of the oral care company, Ranir, we grew organically with bolt-on acquisitions. Perrigo has also been very successful in this area. We know how to acquire and integrate the right self-care assets at the right price. We've done this repeatedly in oral care where we bought assets we understood and had a clear path to incremental OI and net sales growth. I'm also a big fan of doing less with more, focusing our resources on our most critical initiatives, doing fewer and spending more on each. Our Infant Formula business is a great example. We have the right to win with Infant Formula, and we will by focusing on this business and ensuring we produce all the quality product we need to service our customers. We haven't appropriately invested to ensure we have the most state-of-the-art infant formula plants which are capable of meeting demand. That has changed. And with the support of our Board, we're investing more than $300 million in our Vermont campus to meet the growing consumer demand for our store brand and insurgent brand in infant formulas. We're improving efficiencies in service to our retail partners and enhancing capabilities to develop and launch innovative formulas. This new facility will replace our current one, which is nearing the end of its useful life. I'm also a big proponent of founder's mentality. And if you're not familiar with this concept, I'd encourage you to look it up online or read the book from bank consultants, Chris Zook and James Allen. Scott Huff, a former Walmart executive and member of our legacy Ranir Board, recommended I read Founder's Mentality, and it was a game changer for me. I believe the principles of Founder's Mentality played a key role in helping Ranir double in size. The principles have also been instrumental in Perrigo's growth over the past century. Along with Murray, our Board, our leadership team and our associates, Founder's Mentality is becoming part of our DNA. Our insurgent self-care mission, owner's mindset, customer obsession and resource leverage will help ensure we become scale insurgent and consistently deliver 3/5/7. We're thrilled to be the market leader in value self-care and see a very bright future for Perrigo as we work with our retail partners and leading institutions to transform self-care and deliver billions of quality, affordable self-care doses. We just announced this morning a partnership with Michigan State University that brings together premier industry and academic thought leaders who share the same passion for enhancing the health and well-being of society. And our focus will be on research and clinical outcomes, retail and pharmacy experiences, technology, products and sustainable packaging innovations. Our ability to meet the needs of our retail partners and their consumers is unrivaled in our industry. Our combined quality, customization, innovation, scale, affordability, product breadth and customer service will each play a critical role as we continue advancing the self-care needs of our consumers and society while consistently executing against our 3/5/7 goals. Thank you for your time and attention. And with that, I'd like to turn it over to Brad Joseph, our Head of Investor Relations for Q&A.

Thanks, Rich. And everybody out there, please feel free to send in some of your questions. We've received a few, but anything that's on your mind would be wonderful.

Rich, I think the first couple of questions are surrounding e-commerce and are for you. Kind of, I think, some of the investors are trying to get their arms around the size of the business, potential for growth, market share and anything that we are doing at Perrigo that is different from any other store brand competitor.

Okay. Lots to that question. Let me start with digital e-commerce store pickup have been a priority for Perrigo the past few years, and we're continuing to invest in it heavily, and we're seeing it pay off. This past year, our OTC, which has the most penetration in e-commerce omnichannel, is approaching 10%. Our nutrition and oral care business are a few points behind that. All 3 of our businesses are growing dramatically, and we doubled our e-commerce business this past year and expect to continue to see that growth. We are doing differently. Scale matters. Breadth matters. So we're one of the few partners that can work with our retailers to help them really grow with e-commerce and store pickup. Many of our store brand competitors don't have the scale in assets, and many of the branded competition are very focused on their brands. So some of our retailers are doing better than others. Our objective is to work with all of our retailers to help them win in this critical space. And I do fundamentally believe more and more consumers will look to e-commerce, store pickup and digital to meet their self-care needs. And we're positioned well, but we're continuing to invest. It's one of our biggest incremental investments we're continuing to make.

Great. Next one for you, I think [ Rich ], as well is insurgent brands. What does insurgent brand really mean? And do you have -- you showed some examples, but what are you going to do with insurgent brands in the future? What's kind of the strategy around it?

Yes. I'd ask you to think about this as a customized solution for each of our retailers. And each of our retailers has different consumers and different needs. We want to play in the value area. We want to offer each of our retailers a unique portfolio of products that will help them win. And in some categories, retailers may benefit by not just having a store brand and a national brand, but they may be able to have an insurgent brand. I mean Plackers in oral care is a wonderful example. We're doing some really interesting stuff with REACH. We will announce shortly an insurgent brand that I am incredibly excited about, but it's very much about filling the overall self-care basket. That is what makes Perrigo unique. We have the array of offerings that allow us to meet the different needs of consumers who are getting more savvy and more knowledgeable and very much want value, and we can use store brand and insurgent brands to do that.

Great. One came through on M&A. And I think this one's specific to Americas. It wasn't clear. But with regard to M&A, are there any other categories that you are considering? Or are you looking to add on in categories you are currently in today?

Yes. As I mentioned, I'm a big fan of focus. So we have 5 key platforms of growth that we believe we can win in and we'll focus on. So if you look at OTC, nutrition, oral care, NRT and naturals, those are spaces we're very interested. There's tremendous runway there and tremendous opportunities for M&A, for partnerships and licenses. So that's our focus. Again, it does go back to, though, helping our retail partners grow their overall self-care basket. So if we can acquire assets or have partnerships or licensing arrangements that will help do that, we'll be very interested in pursuing it.

One here on consumer demand and pantry loading early in 2020. And do you believe that this is kind of normalized through? Has the pantry loaded? Basically, has it worked itself through the system? Or do you believe there's still a lot of products still sitting in medicine cabinets at home?

Yes. The simple broad answer is yes. I mean we had a very big spike in OTC. We have seen that kind of go away. So the general answer would be yes. The one area that, actually, post the COVID bump that we have to watch carefully is cough/cold. Cough/cold incidence is down dramatically. More people have flu shots. People are social distancing. So that is the area that we have some pantry loading right now and need to watch it carefully. But to the initial answer to your question, we don't see the initial COVID as still being there. We think we've got through most of it.

Yes. Rich, so maybe it makes sense to take a second and talk about cough/cold versus last year. Seemed like it was a good season [ well ] last year or strong season, I guess, is the way to say it. And to your words here, it seems that we're seeing a little bit of a weaker season, if not a weak season. And so what does that mean for Perrigo? How should the investment community think about the spread between quarters. They've heard difference between fourth quarter and first quarter. And if you can kind of elucidate or give some [ thoughts on ].

Yes. Yes. Well, first and foremost, I've said this a lot, we are a very broad and diversified business. So cough/cold represents less than 10% of our business. And it actually spans over 4 quarters from a shipment standpoint. So Brad, you're correct, a year ago, a very strong cough/cold season. This year, very, very weak cough/cold season. The incidence is down dramatically. So we expect that we will have a soft -- very soft cough/cold Q1. We expected it in Q4. It was pretty much exactly what we predicted. It got a little bit softer at the very end of December, and we're continuing to see that happen. And it really is not a surprise just because the incident of flu is down so dramatically. But as I started with, it's not a significant material part of our business. We will have a softer cough/cold season in Q1 of this year. We had a softer Q4 last year. We do think that 2021 will be a little bit more like 2019, where Q1 is softer and Q4 will be stronger.

Yes. And Rich, just to follow up on that. So how, in your mind, would or could that impact the stated goals of the 3/5 that you talked about a lot during this presentation? Is there...

Yes. It would be -- ye. As I said, it's -- I don't want to say it's immaterial, but the cough/cold decline will not affect our 3/5 objective. So...

Great. There's one here for you, Ray, that came through on capital allocation. The question was to the form of -- so you got plenty of cash on the balance sheet. You said you're going to buy back some stock here in the last quarter. What are kind of your priorities with cash and the cash flow that the company is generating?

Yes. Thanks, Brad. Well, I -- as we've consistently said, our priorities are to maintain our current investment-grade bond rating. Our priorities are to continue to make our dividend payments. So the status quo, we planned also on -- we did buy a small amount of the stock back in the fourth quarter primarily to rebalance our employee option and other share awards. And as we go forward into 2021, we're looking at bolt-on acquisitions. We continue to do that. And we plan to make a few, or 1 or 2, bolt-on acquisitions. But we've also got a pretty strong balance sheet right now. And we had $820 million of cash on our balance sheet at the end of Q3. And so we expect to continue to maintain a strong cash position and be in a position to cover any of the needs of the company in the coming years.

Yes. Thanks, Ray. And another one, I think, for you, Ray, is any update on the tax items, particularly anything in Ireland?

Well, I think generally known that will be our first part of the judicial review and going down to the judicial pathway on the Irish tax matter. We failed in the first pass at that, and we're continuing to look at it. It's likely that we'll end up at this point in the tax court. And we would -- we've made no secret of the fact that it would be -- we would prefer to talk to the Irish tax authorities about this matter. And -- but if not, if that doesn't work, then we will continue to -- we believe we have a very defensible position. And it's important to note that the judicial review did not address the substance of the tax issue, the calculation, the validity, et cetera. It merely went to the -- it was a merely, but it went to the heart of whether the Irish tax authorities had the right to come to us in this fashion with this request or whether that violated our legitimate expectations. The judge decided it did not violate our legitimate expectations, but the ruling had nothing to do with the validity or otherwise of the tax demand. And we will -- we do feel we're well defended there as well. And we feel that we will be able to be heard in court on that if it goes to the tax court. But we would be -- it would be good if the tax authorities would come to the table. Obviously, that would be a way to solve this matter more expeditiously. If it were to go to tax court, it could be many years of appeals before it was finally resolved.

And I think the last one I see here for you, Ray, again is any update on Rx separation -- separating out the generic pharma business from the consumer business?

Well, as we've always made clear in various public forum, we are -- we continue to want to sell or separate from the Rx business. We feel it is a separate business, not part of our core consumer portfolio, and we are continuing to make -- to try to progress that agenda. We -- as we've said before, our issue has been finding value for our shareholders. The business was to separate from our Consumer business and different and more volatile. It does provide a significant amount of cash. And we don't think it will be in the best interest of our shareholders to divest it without being thoughtful about the value that will come from that. But we do -- so we continue to look at it. And so far, we've not found the right opportunity.

Great. Just a reminder, if there's any other subjects or specific questions that people on the line would like to have further insight into, please send us a message. And then there's a couple here, I think, left for you, Rich, which interesting question is, were you able to increase your competitive position during the pandemic given you prioritize some of the essential products that you talked about? Did you build goodwill with retailers more than you already had?

Yes. Look, it was a very tough spring. So we had to make some really important calls on prioritization to make sure that we get the right product in market. And so if it was an A and B prioritization that would be desirable for our retail partners, if it was C or D, it wasn't. So we have had good conversations and tough conversations. But I think our retail partners are trying to do the same thing. How do we get what our customers need and want? So I do believe that as it relates to our work on digital, our work on innovation and really trying to leverage our scale to service our customers, we are seen as a company that does very well in that area. But we always have our opportunities to be even stronger partners with our retailers, and it's an important part of our success. It truly is retail partnership. And the spike in demand was very challenging for our supply chain. I am very proud of all of our associates that ensured that every one of our factories kept running, all lines kept running, all shifts kept running. It's a real testament to the commitment our associates have and continue to have as we work to make sure we get our retail partners the product they need when and where they want it.

Yes, hear, hear. And then lastly, you mentioned innovation, which, of course, is a big part of the Americas story. What are you most excited about? Any switch opportunities? Anything you want to leave the investment community with from your chair about how you're looking at innovation? Kind of an open-ended question here for you, Rich, to pontificate a little bit, but -- and I think that's the genesis of this last question.

Yes. Well, let's start with switches. I mean, Voltaren, very successful launch and us having the ability to provide a better value, has proven to be very beneficial and will continue to be going into 2021 and beyond. NASONEX is something we're very excited about. We also have -- if you think of Advil Dual Action, there's a long list of opportunities. I know I'm biased, but I believe no one does it better than Perrigo. And we're so committed to offering the quality and value of these products. So I do believe there'll be growth in that short term, Voltaren and NASONEX. I think there are other products like the Advil Dual Action. So on that particular part, on innovation in general, self-care is just so important as it relates to providing affordability and wellness. So there's -- NRT is a really important category. And CBD, really important categories. I think both of those are important and critical for our retailers to win from a self-care standpoint. And I think there's a lot of exciting things on infant formula. I am really pleased. I have a couple of kids. One of my kids had colic. And I would do everything I could do to reduce those screams. I couldn't be prouder of our team to launch a hypoallergenic product. So consumers that are resource constrained, finally, are able to have a product that delivers and helps their babies. So that's a perfect poster child of what we are, is really providing incredible quality product that really does service critical needs. And there are many opportunities there. But infant formula, we're going to see some really meaningful and material growth. We're going to launch something new shortly that we'll talk to you about. But the hypoallergenic launch has been in development for a while. It meets a very critical need and couldn't be happier that we're going to be launching that this spring.

Well, that's great. Those are the questions that have come through. So with that, maybe we step away and say thank you to Rich, to Ray, to the investment community for all your great questions and feel free to follow up with us. Perrigo is an interesting story that's out there. This is the second time we've done the ICR Conference. And you'll see us continue to push and discuss our consumer businesses, which are really the bread and butter and the backbone of what Perrigo is and looking to produce the 3% revenue growth, 5% adjusted operating income growth and getting our way to that 7% adjusted EPS growth. So thank you, again, everybody, for your time. Thanks, Rich. Thanks, Ray. And please reach out to Lindsay and/or me with any thoughts or questions so we can help you with in the future. Thanks, again, everybody.

Thank you.

Thanks, Brad.