Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

[Audio Gap] on EPS growth. And we announced a vision in order to make that happen, which is one with purpose that is to make lives better by bringing quality affordable self-care products to consumers trust everywhere they were sold. And it really goes back to this fundamental belief that Perrigo for well over 100 years was my pure-play consumer self-care company that really pioneered the over-the-counter space and wellness products. But that over the last 5 or 10 years when the business hasn't performed the way it had for decades. was because it had -- it lost its way a bit. So the goal of focusing on consumer was to capitalize on what is a global trend towards self-care that we needed as part of that to exit the Rx and nonstrategic businesses to reduce volatility and which scared a lot of investors away from our business and basically just simplify the business model. We then said we would expand and take cash that we were generating into adjacent self-care segments and that we no longer viewed ourselves as just treating illness, but actually promoting wellness And that opened up a lot of categories to us and that I also assessed coming in that the company needed to upgrade a lot of technologies, bring in some talent build out its new product pipeline and build some additional capabilities. And then finally, as part of our business algorithm that we needed to tighten up on the cost and reduce overheads. Next slide. Again, I'm not going to dwell on this, but self-care, when we started talking about it a few years ago, a lot of analysts looked at me and they're like, well, what do you mean? What kind of products does that mean, et cetera? Today, it's talked about all the time, COVID even highlighted it more. But self-care trends, save government's money. They save consumers' money. We are -- we make products that provide value. That's a great place to be. And every metric basically says that's on trend. Next slide. This isn't even the comprehensive list. But when you look at what the team has pulled off in the last 2 years in this transformation that basically has us a full year ahead of schedule. It's remarkable. We've -- you can look at the number of transactions we've done on the last, we're selling our generic Rx business, which is close to $1.6 billion in proceeds, we'll get for that when that closes, and that's right on track. We just sold our Latin American operations where we made no money. We sold Rosemont, which was nonstrategic. We sold animal health, which was not strategic. We closed R&D operations. We bought a beautiful oral care business added that as a segment and then bolstered that with Dr. Fresh and Steripod We bought Prevacid. We bought European OTC skin care companies and invested in the future in CBD. Again, these are -- isn't even the complete comprehensive list, but a complete reconfiguration of our portfolio making us a pure-play consumer company, all the while building out our new product pipeline, launching hundreds of millions of dollars of new products, investing in our IT and infrastructure, swapping out or promoting people from within to upgrade our leadership team, more than half of our 300-plus global leaders, put in place project momentum, which is delivering over $100 million in cost savings, improved our service levels, which was a priority day 1 from a poor 70% up to in the 90s again, build out a successful e-commerce platform, build business intelligence capabilities. Another big component of what I said 2 years ago is that made investors nervous was the uncertainty in the business. And I won't run from it. We had billions of dollars of tax liabilities out there. And I shared on the last conference call that there's been a lot of progress on that and dialogue continues, and we're on a path to shareholder-friendly resolution, we believe on the major cases there. We also strengthened our cybersecurity. We went from sort of very inconsistent financial results to very predictable financial results at reduced volatility by divesting the businesses that were most volatile and strengthened governance with a real focus on ESG and diversity and inclusion. And basically, here, at the end of 2 years, we think everything has come together. We are now a focused CPG story. Certainty has been restored. We are growing again on the top line, as you'll see. We are going -- we have a little bump in the road right now because last year, consumers stacked and loaded their pantries, but we'll get through that shortly, and we're already seeing it in offtake. We have very favorable comps going into the second half, and we're going to have a couple of billion dollars in cash to invest. So it's been sort of 2.5 years getting to this point to -- and this is based on my history of doing a few of these transformations. I believe we're sort of at that pivotal point where we can start creating real value. Next slide. This just shows you that what the new Perrigo looks like, very diversified business and with defensible competitive advantages, we're much bigger than people realize. And if I can put a point of clarity, when people talk about us, we are both a branded company and a store-branded company. That is not everywhere. We are, for the most part, a store-branded company in the United States. And we are a branded company for the most part in Europe. And it's about a 60-40 split in our revenues with that. So when I say pure-play consumer, I'm not talking about making the U.S. branded. Our store brands are bigger in most cases than the branded players out there. We already sell triple acetaminophen that Tylenol cells. We sell double the ibuprofen that Advil sells. It's -- but it's understanding consumer insights, et cetera, and not being in the prescription business, okay, next slide. And while we are in the U.S. and 2/3 of our sales are still store brand, I think it's important to point out that we're not your typical store brand company. When most people are looking at investing, they're like, yes, store brand companies shouldn't get the same valuation they don't have the same margins. That's not really true with us. We have this magic formula that is very unique where we have -- we are able with products that deliver equal efficacy to be able to deliver a 30% on average discount to consumers who are buying the products, a 30% margin to our customers on average across the lines and a 30% margin on average to Perrigo. So That's the magic of the Perrigo business model, and it's very unlike many, many, many private label companies that are either dealing with inferior products or 4%, 5% margins. And why we believe we deserve valuation similar to other CPG companies as long as we perform. Next slide. This just shows you that since we have started this, we went from a flat business to one that is back to growing again, both organically and inorganically. Next slide. And this is the point that I was making that the first half of this year, really April and May were the crazy months a year ago where we were having orders 500% above normal. And then once we got to June for the rest of the year, it was quite a challenge because pantries were being slowly and methodically de loaded, and the second half of our business was challenged. And then we got into the cough/cold season where because of people isolating, literally, there was like no flu and almost no flu and a reduction in overall cough/cold category revenues in the 40% range. And The point that I made on my last conference call is we are past that loading point now. And the thing you want to see is the consumer offtake, consumers back in buying and growing again And I'm showing you this on the top chart that, that is a great leading indicator. We're still dealing with inventories from a year ago in the second quarter. But the leading indicator is that consumers are out buying again at levels above a year ago, which bodes well for us to have a very strong second half. Likewise, people ask, well, if you had cough, cold, will consumer behavior be changed forever? And we are already seeing an uptick in illness. And frankly, I see it on -- I saw this morning again on the new stations about the big uptake in kids and pediatric illnesses, which, we don't want kids getting sick. But if they do get sick, we want them using Perrigo products. So next slide. So now we've gotten revenue going. We've reconfigured the company. We think we have everything poised. The next job is to start growing earnings. We did that -- I mean the U.S. businesses last year, we're looking to have that model go forward. And in order to do that, the investment period is over for Perrigo. I've made those big investments, and that's held us back a little bit in the last few years, but it needed to be done. Now I need to see those investments pay off and the leverage come back through the P&L, which as we've had the volume growing at the level it is and project momentum cost savings, the leverage should deliver the 5 and the 7 pretty handily, and that's our goal, okay. Priority first 2 years was revenue. Priority now is profitable growth. And then finally, people ask all the time, well, how easy is it for somebody to come at you, but we think our We like to call it our 4D business model as an advantage to deliver long-term sustainable volume. But we are a very diversified portfolio that's helped us perform better than most with a tough cough/cold season, highly differentiated, extremely defensible and durable products. And when we talk about the Perrigo advantage or where I see core competency for Perrigo, we have regulatory expertise to be able to get to market almost in every case, first to file, first to market when -- relative to our peers. And in almost every product we sell, we provide tremendous value to consumers. We have built fast and ahead of most a very strong e-commerce business. We customize like no other. As you heard, there were 9,000 SKUs in the U.S., another few thousand, 4,000 or 5,000 in Europe. And we believe that retailers going forward are going to demand higher levels of customization even from branded products. And that gives us an opportunity and what I'll define or customers define as in surgeon brands that you're starting to see brands designed just for Target, just for Walmart, just for CBS, et cetera. And that's what we do every day, and we think that, that is an opportunity for us. And then finally -- and with that, I call it a high CQ, which is a complexity quotient. We're good at complexity. And then finally, we've proven our ability, Heck, we've done 10, 11 transactions here in the last 2 years, and we were -- we've done many before that we know how to buy and integrate and stay disciplined when we do so. Next slide. So Okay. Thank you, the economics of what I just told you, the business is set up. We are undervalued and our multiple trades at a discount versus our CPG peers. We did make progress with the announcement of the sale of Rx Our multiples come up, but still a long way to go. And the kicker is I've got a couple billion that we'll have at our disposal to bring in and then hopefully significantly accelerate those 3, 5, 7 numbers. The way we look at it, we will invest within our 5 areas of a growth. If it's a North American investment, it's probably private label contract back. If it's European, it's probably branded, not the other way around. Ultimately, revenue growth and margin accretion and delivering above our weighted average cost of capital are our evaluation tools to get through the funnel and -- but again, we remain very disciplined in doing so far, and we think our acquisitions to date speak for themselves. Next slide. So this is the last slide. And then back to you, Rupesh, as here, we sit here today with a significantly simplified story, a pure-play consumer company with a growth algorithm in line with CPG peers trading at higher multiples. Yes, there's a little bit of COVID impact, but it's clearly temporary. All the indications to the right way. We have a strong balance sheet. We'll have $2 billion in pro forma cash when Rx switches, Rx to OTC switches, there's some optionality there that we didn't expect. We think provides even further upside is getting written about a lot right now. We've got a very defendable model with our 4D business model. And I know the last worry is the uncertainty, and that's a priority. And I'm gaining confidence that we'll make a big dent in that this year.

Okay. Thank you, Murray, for that great overview. So I'll now dive into some of my questions. So great progress by you and your team on the Perrigo transformation over the past few years. So this is now your third turnaround in UST and Lorillard. How do you look at where Perrigo is today compared to those turnarounds?

They are not by accident, I pick situations that are the same, right? So in every case, it's a great company, great bones. Those aren't wrong. Some issue, either there was a little big menthol issue at Lorillard. There was an antitrust issue at UST. There's the tax issue. Here, In all 3 cases, it gives you cover to get the work done for the first few years. In all 3 cases, it takes a couple of years. And then in the first 2 cases, as we got to write about we're here, all of the value creation So going from $3 billion to $12 billion in value at U.S. tobacco happened from year 3, 4 to year 7. And all of the value creation at Lorillard of going from $11 billion to $30 billion happened from year 3 to year 5 or 6. And so I think it's all falling into place like the others and There's a big value creation opportunity in front of us.

Okay. Great. What do you think is left to complete the transformation at this point?

Well, there's always going to be lots of work and implementation and continuous improvement. But to me, as an investor, I just -- I need to get -- able to provide a little more clarity on us getting rid of the overhang. I'm feeling good about it, but I don't -- and I think just the fact that people now know we're talking and the dialogues going on, you've seen some improvement in the stock over the past 1.5 months since we started talking about it. But big items close the Rx deal. That's massively strategic, put those proceeds to work, reduce the overhang. Those would be the 3.

Okay. Great. And then Perrigo has positioned itself as a consumer-focused self-care company? What do you believe makes you unique versus other competitors in the space?

Well, let's start with the U.S. because that's sort of the big money engine within the company. We are, in my opinion, the only big company that has a sole goal of making people well and providing self-care. Now let me explain myself because everybody is going to say they do the same thing. But if I'm the brand -- if I'm at the company that is selling Tylenol, and I am the brand manager on Tylenol, I want you to use Tylenol. If I am on the brand manager and the company that's premier -- one of the premier brands as Advil, I want you to use ibuprofen and Advil. And those companies, they make a certain amount. Our assortment and breadth, as you said in your opening statement is so wide. We are the only company and the brands that we supply are the only ones that don't care whether you buy acetaminophen or ibuprofen. We don't care which products you buy. We make them all. We just want you to be well. And that is an advantage of the store brands and why store brands are so big is the national branded products are by FDA rules limited to sort of narrow definitions, where Walmart is a quite brand or CVS Health brand can offer everything. So anyway, that breadth of assortment is huge for us and allows us to work with retailers truly just to help make lives better.

And in your mind, in leaving the overhangs aside for now, what commercial aspects or milestones should investors be focused on? And what should they be excited about when following the Perrigo story?

Well, fair enough to leave the overhang aside though, but I'm sure they want to see progress on that as well. But to me, Murray, you're telling a great story, but the first half numbers are tough because of the comparisons a year ago. So I want to see -- coming out of the third quarter, I want to see strong growth. I want to -- have weak comps to a year ago. So I want to see those numbers growing again. I want to see the illness numbers, they don't have to get all the way back to '19. I mean, it was like 0 last year, right? So a 50% recovery is a huge year-over-year increase, but I want to see those statistics and numbers start coming. And then if we're going to be profitable. Murray had told us that come this year, we would start to see some gross margin expansion and margin expansion. I'd want to see that through the second half as well. Now I hope everyone watching, If they went or had any observation of what we said 2 years ago, I believe we have delivered on every single line item in that strategic plan a few years back. And we'll deliver on these as well. But that's what I'd be watching for. And if you're waiting for the complete overhang resolution, the only thing I'd caution you on, you may be too late, you -- because when that happens, there could be a massive bump to the stock as well, and you want to be ahead of that.

So now I wanted to shift gears and focus on your longer-term guidance and outlook for the balance of the year. So your goal of achieving a sustainable 3, 5, 7 growth algorithm, 3% top line, 5% operating income and 7% EPS growth. What are the key drivers that need to be in place to make this happen?

No, look, the plan is built on delivering top line growth and cost control, which gives us leverage to the P&L. But we don't need a strong cough/cold season, but we do need -- we wouldn't make these numbers if it was the same cough cold season next year as this year. So we assume about a 50% recovery despite the fact that many industry experts are suggesting not only a full recovery, but it could even be stronger than that. But I are on the side of caution with it, but that's probably the biggest thing I need to see is that rebound in cough/cold come back and the second half. Our plans are going to look, Rupesh, back-loaded because so much was front-loaded last year for abnormal consumer behavior reasons because of COVID. But it's not backloaded when you look at 2019 or 2018 or 2017, we're -- we've got big cough/cold and illness things, and that happens during the winter.

So if cough/cold is just, say, back to 50% this year, then you could have a multiyear tailwind for cough/cold to normalize them for your business?

Yes. I think that's right. And I think I think you could have a benefit in the first quarter of the following year to, depending on what retailers do, right, we have to see like Are they cautious in bringing in their regular inventories? And are they playing -- or do they do -- do they treat it as normal? Or do they -- like I said, do they get a little cautious and then it's a normal season and they're playing catch-up. And then we have to -- then you have a real strong first quarter. So we'll see how it plays out. But I think a lot of these categories, it's not just cough/cold. That's the one that's big enough that's visible. And -- but if you look at like our sun care products, people weren't vacationing to the same way. In our oral care business, we have a very big travel component to it. And all the little kits and things like that, that people take on when they travel, that was hit. We have a big parasite business for kids with head lice. And when they weren't going to school, they weren't getting those things. So I think there's a lot of things over the next year that will bounce back to normal. And listen, I'm one consumer. But I was in the airport last weekend, and maybe because I'm in Florida, and we're a little bit ahead of people in terms of reopening, but it was jammed. I mean it's -- people are going back to normal fast.

Yes. I echo your thoughts. I've seen the same thing. It feels like everywhere. So another financial question. So over the long term, can Perrigo increase its operating margin, which I think is around 13% or so more in line with leading consumer companies where during the high teens, probably low 20s range today?

Well, I'm going to answer the first part of it, and then I'm going to turn it over to our CFO on more specifics. But that was the -- in the original -- again, if you go back, we said, hey, once we reconfigured this with some stranded costs, et cetera, we're going to drop back from our sort of SI, DLE range to 13% with project momentum over the few years. We'll get back to the 16% range. And then internally, we have goals to get back to the DLE. So it not only can we, we expect to and that is our plan. But You take the hit at first and then you do a lot of the reconfigurations and all being implemented beautifully, but we expect a lot of cost savings this year or next year. as part of project momentum and reconfiguring the business. Ray, you want to add anything to that margin story?

No, I think you expressed it just right, Murray. I mean the project momentum cost savings are being realized. And as we come through into '22, we would definitely expect to see them reflect in our margin structure.

Okay. Great. And then you've historically talked about a $4 EPS goal comprised of all consumer earnings. Is this still your attention -- is this still your intention? And is there any time frame we should be thinking on achieving this target?

Well, yes, I mean, listen, I gave you the guidance target, right? So it's not hard to model. If I'm basing that on saying, hey, I want to get that ought to be growing at 7%, right? And then I've got $2 billion, and you can put in whatever assumption you want to, things are a little more expensive right now. There's a lot of private equity money out there. You put in whatever you want, put in 12x, 15x, 18x EBITDA, an average a range of it, whatever you want, add that back in, then grow that at 7%, doesn't take you long to get to $4. So you'll sort of methodically be going up the $0.20 on the core business, right? But you've got a couple of billion dollars in. And is that going to happen in 1 big purchase? Or is it going to happen in 3. It's going to happen in bigger chunks than it's more Ranir like chunks than some of the littler ones we did when I didn't have that cash. So -- but assuming that kind of average over the next couple of years. Yes, over the next few years, you ought to be getting back there. And the multiple ought to expand with that. That means you're going to deliver a lot more than 3, 5, 7. That means you ought to be at an average of between 20 and 25 times in terms of EPS in the multiple and at $4, that means that there ought to be big upside on the stock. And then Ray and I can retire and somebody [indiscernible] do a great job making sure all the shares will still own or keep growing.

That sounds very attractive. So another, I guess, one more financial question. Operating cash flow was below the normal run rate for you in Q1. How do you expect cash flow to look like for the balance of the year?

Yes. I think we'll meet our goal. We always like to Yes. We're still targeting 100% cash conversion.

Yes. And because of the cost point is when we had some inventory build, we didn't sell through as much as we expected at [indiscernible] at the end of last year. So ...

We expected a bad cough/cold season. We didn't expect no coal. So the answer is we chewed up some cash in the first quarter primarily through inventory.

But it's long on -- they've got a long probably sell them before the end So the calendar year that we'll be back on track with cash flow based on our projections coming into the third quarter.

Okay. Okay. So it sounds like you guys will be on target for the full year. Okay. That's helpful. Next, I have a few questions on your M&A strategy and your capital allocation priorities. So congratulations on announcing the sale of the generic pharma business. As I know a lot of the consumer folks, including we are waiting for this inflection point. After the transaction closes, you'll have about $2 billion of cash on hand, and you've been very clear that M&A is a top priority. What size of acquisitions are you looking at? And how competitive is the M&A environment with competition for private equity today?

Yes. I mean I kind of alluded to that it's multiples are up. So we're disciplined anyway But we're going to even have to be more disciplined, right? We will -- I tried to show that panel because I don't want people to be confused. I don't want them to think I'm going out there trying to convert the U.S. store brand people, the business to branded, that's not the case. Although we will have branded components that are hybrid brands, they are in surgeon brands that are -- another name like Amazon, we developed the name basic care for them as an example, and that's a branded product for Amazon. And we can do the same thing with -- I think Target has hundreds of insurgent brands at this point that start there exclusively and then go out. So from an M&A standpoint, I gave you the definition of probably store brand contract back in our wheelhouse in the U.S. European would be more branded, all of them would be within those 5 strategic categories. My preference is bigger. I would like to [indiscernible], but not transformational. I'm not trying to do merge with another $5 billion company. I'm still saying the same thing bolt-on that I said when we bought Ranir. But since Ranir, they've been more like $100 million, and Ranir was $750 million. Now I'd like it to be either $2 billion or [$300 million] , [$600 million] or $1 billion, $2 billion, but in that range, but it will depend what shows itself in, and we think is -- adds to the story and helps grow the business. revenue accretion is critical to value creation out of M&A. So it's got to be accretive to our story. It's got to replace as much of the EBITDA that we sold out, but from Rx. But as you see in our stock, we got no credit for that. And hopefully, we'll get a lot of credit in what we bring back in.

Okay. Great. And then if you do not find an acquisition, was to say by the end of 2020 or even sooner, would you reassess your capital allocation priorities and maybe look at whether stock buybacks, debt reduction, special dividends, et cetera?

Yes, of course. Yes. I mean, we'll be looking at all of those all the time. And that doesn't say Just because M&As are higher highest priority doesn't mean we won't reduce some debt or we won't -- we're looking at that entire equation, right? All the time, we run a strong balance sheet. But ...

We look at our capital allocation regularly to make sure that we're doing the right things. And definitely, if we didn't find any M&A, any acquisition [indiscernible] met our guidelines, we would definitely consider other [indiscernible].

Okay. That's helpful. And then maybe just one last question to wrap up. And this is Murray right, since I've met you guys the first time, I mean, this has been one of the more topical flushes out there. So tax assessments that are currently an overhang out the company, how confident are you that the Irish $1.6 billion assessment can be settled this year? And then using your magic crystal ball, how long do you think it'll take to put the U.S. assessment, shareholder losses, et cetera, behind the company?

Well, there -- on the one hand, I'm really optimistic. On the other hand, I get frustrated because the sort of governments, they go a little slowly and the response. Good news is, we are talking. And in the Irish case in my experience on cases like this, and we believe we have a very strong case that the way we file those taxes was correctly and the assessment should be 0. But on the other hand, it is weighed heavily in the stock and if I can do it in a shareholder-friendly way. And we are having dialogue. We're continuing to have dialogue, but the actual assessment by the Tax Appeals Commission is November. So the closer it gets, the more pressure, the more each side sees their argument. And listen, I'm not in a position to be specific on it, but I will tell you that $1.6 billion number is not even real anymore. It's just not like there are assumptions, and that's not with anybody giving anything. I mean the classic example is the Tysabri, right? We had a contingent payment that never came. It didn't hit. It got closed, but you're not going to pay -- when they do the final assessment, there's no taxes doing something you didn't get. So I hope to be able to -- as this thing progresses, be able to share more numbers and at least get people into a comfort level that sort of their worst case of, it's [$1.65 billion], and there's interest and then there's penalties, which were prior fraud. And those just aren't realistic, and that's what's hitting the stock. It's way overdone. So how confident I am, I think we'll -- it's hard to say, but I feel confident that we will make progress. Dialogues happening, arguments are strong. I believe we'll make progress on it this year, shareholder suits. They tend to take time. But we have some other cases out there that I expect will make meaningful progress. And then hopefully, like my tobacco experience, it was always -- there was a lot of it out there. But as we started to win and demonstrated that we had a competency for it, people put it in its proper perspective. And Right now, we haven't demonstrated that with Perrigo. Once we do that, I think it will become a secondary investment criteria or third.

Okay. Great. Best of luck on resolving the overhead. So thank you, Murray and Ray, for joining us today.

Thank you.