Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

Welcome, everyone. This is Javier Escalante here at Evercore. I cover Household and Personal Care stocks with Robert Ottenstein. And today, we are hosting Perrigo, which is a company that doesn't ring the bell of most consumer analysts because it's now when the company is piloting very, very stronger strongly to consumer health. They had made a great deal of transformation in the portfolio, and it's a very interesting story. With us today is CEO, Murray Kessler; and CFO, Ray Silcock. And why don't we -- I believe we have a short presentation, and then we are going to basically go over the Q&A given that there is -- this company is very new to us, consumer analysts. So go ahead, Murray and Ray.

Thank you, Javier. It's a pleasure to be here and share for those of you who don't know the Perrigo story, a little bit of what we've been up to over the past couple of years, with Ray and I, 2 seasoned veterans of the consumer packaged goods world. We've both been doing this for a long time, 35 years or so together. So 2 years ago, though, we both joined Perrigo, brought in by the Board to transform Perrigo from a pure healthcare company to a consumer self-care company. Understand the difference being a healthcare company that was both prescription RX and consumer over-the-counter products that were designed to treat people with illnesses. And the evolution to consumer self care was to move away from the Rx business, which was not the heritage of -- and the history of what had made Perrigo successful and great. But what was, was 120 years of history going all the way back to Luther Perrigo, basically inventing the over-the-counter business for self-care products. So we changed our vision to go from quality affordable healthcare to making lives better by bringing quality affordable self-care products that consumers trust everywhere they were sold, to take advantage of tremendous change -- emphasis on wellness that the world was going through, exacerbated by COVID. But again, to take us from healthcare, treating illness to promoting wellness, treating illness, helping people live a healthier lifestyle, which opened up huge new areas for growth and reducing volatility. So capitalizing on self-care trends, exiting the prescription businesses to reduce volatility simplify our story, which ultimately would have put us into a consumer camp allowing for multiple expansion, allow us to get back into the M&A game with bolt-ons, too. And then there was a lot of cleanup to be done to be a great consumer company that we've done over the past years, investing in our new product pipeline, talent, systems, capability, capacity, as well as some nice cost control. Next slide. We talked about this, self-care trends. When we started talking about it a few years ago, it wasn't as front and center. Now it's out there, especially because of COVID big time. But it's -- the beauty of it is, it's on trend, but it also benefits everybody. It benefits our customers. It benefits us, it benefits the consumers who are able to treat themselves and save money, benefits governments, for every dollar spent and over-the-counter market, it saves $7 to -- this is just U.S. to the U.S. healthcare system. And it is sort of -- over the past few years, it's been the highest search item within Google. Next slide. This is what we've done. We set out to accomplish in 3 years. And for the most part, we've done it -- completely done in 2 years. But we have been busy from selling all the prescription businesses, buying into oral care, which is a great example of how our new vision at self-care allowed us to move away from treating illness to promoting health through great oral care. You can see that list of acquisitions and divestitures that got us to our pure-play consumer state we are today. We built a $0.5 billion new product pipeline. We have been launching the $150 million to $300 million a year and keeping that new product pipeline replenished. We've invested in IT and infrastructure, brought in talent, promoted people [indiscernible] within, are delivering $100 million cost savings, improved our service levels, build out our e-commerce platform and build out our business intelligence capabilities. Part of the complexity story with Perrigo is it has a pretty big overhang on it from tax issues and some litigation issues, also which came from that Rx pharma side of the business. And we are working our way through those and are -- believe that over the next year or so, we'll make meaningful progress. And we have strengthened our cybersecurity, delivered on our financial commitments, which weren't so good. The company wasn't so good out a few years back. Divested our most volatile business and strengthened our governance, ESG and diversity and inclusion. And I think the point being, if you don't know the Perrigo story, Ray and I've done 2 of these transformations before. We took UST from $3 billion to $13 billion. We -- he wasn't with me at Lorillard. Took Lorillard from $11 billion to eventually selling it at close to $30 billion. And we did that under the same structure where we took the first years, get it cleaned up, get it right, work your way through the overhang and then a lot of value gets created. I believe we're at that inflection point now on Perrigo. It's been restored to pure-play CPG company with growth commitments in line with the top-tier CPG companies. We're going into a period of time post COVID, which as we get into the second half of this year, first half of next year, very easy comps. And with the sale of our Rx division, we'll be sitting on a couple of billion dollars of cash that as we layer that back in with smart bolt-on mergers and acquisitions, it should help to significantly add market cap to the company. So that's the transformation. Next slide. As -- again, so what that leave us with after all of that transformation is a $4 billion global CPG self-care leader in the U.S., primarily store brand in Europe, primarily branded OTC and multiple categories with world-class regulatory, a partner of choice, unmatched scale with over 13,000 SKUs, and an amazing assortment of products. Next slide. Unlike if there's any of you who don't know us, [indiscernible] private label, they have lower margins, and that doesn't deserve the multiple. We're different. We have a magic formula. We deliver 30 basic formulas, a 30% savings on average to consumers, a 30% profit margin to our customers, meaning they make more money selling our store brands than they do selling the national brands and a 30% profit to Perrigo, very unique in the private label world. Next slide. And through all of the things I told you, we have restored growth back to the company. We're projecting a 6% compound annual growth rate or -- and you can see the organic growth and the impact of inorganic, 3% is our organic target. Next slide. I don't want to dwell on this if you don't know our company as well, but the -- this was just explaining that last year the first -- we were one of those companies that when COVID came, we're over half the U.S. supply of acetaminophen, we're over half the U.S. supply of a number of products that were in great demand during the beginning. So there were huge consumer pantry loads, not really that different than you might have seen in paper towels and sanitizer and things like that. We're working our way through those, but it's created some ugly comps in the first half of this year. But going forward for the next year, they'll be sensational to know that they're going to happen though, we needed to see consumer offtake growing before we saw in factory shipments. We're seeing that now, that's the chart on the top. And with everybody locked down around the world, a big part of our business, cough cold got hurt last year. We needed to see projections that illnesses were going to start back on the rise at a normal level as the world opened up, and we're seeing that as well. Next slide. So with revenue growing, a new pure-play consumer company, with lots of expansion, a lot of investment, the investment period needs to be over, and now the focus of the company is on adjusted operating growth, which gets us to our 3% organic revenue growth, 5% operating income growth, 7% EPS growth algorithm, and that's the stage that we're in now, right? Basically, the work's been done, time to deliver. Next slide. And I like saying that the -- we've worked hard to sort of get back to the core company and the volatility out of it. And that the volatility was all -- for the most part, almost 100% of it was in the generic Rx business we exited. Great businesses, but not what we're good at. And there has been relatively little volatility, if you look over the last decades on the core Perrigo business, and that's because it's a very diversified company, a very differentiated company, very defensible with durable products that leverage the Perrigo advantage. And our advantage, even though you might not have heard of us, is our strength in regulatory. The fact that we sell primarily value products, which is a nice place to be with strength in e-commerce, strength in our ability to customize versus the big national players, a high CQ, which I'll call our complexity quotient, that's what we do well. We manage complexity well and a strong proficiency at M&A, whereas we've been as acquisitive as almost any CPG company out there over the extended period of time, not just the last couple of years. Next slide. We will be acquisitive going forward. I don't need to say anymore than our goal is to put that $2 billion to work. That's a big value creator opportunity, but it has to be done with discipline. Anything we buy has to be revenue accretive, margin accretive, and meet our goals on return on invested capital and exceed our weighted average cost of capital. And we've got $2 billion to go to work with. We're not going to make the U.S. branded play, and we're not going to make Europe a private label play. We have strength in both. If you see us acquire in Europe, it's likely branded. If you see us acquire in the U.S., it is likely value or private label or store brand. Next slide. So that's our story, Javier, where Perrigo is. Now Perrigo transformed, a growing, pure-play consumer self-care company with a lot of upside optionality for all the reasons that I just said.

Let me start, Murray, this is great, from point of familiarity, right? I've been covering Colgate and Procter and Unilever at times that have important oral care businesses. And it is interesting that you among both future acquisitions and also the past, you opted to jump in, in oral care. [Indiscernible] is highly contested. Some areas are of low growth. So could you tell us what you bring to the table, what makes oral care attractive? And -- that would be great.

Well, listen, we almost never go head-to-head with the national brands, right? We operate in our world of store brand and customization and flexibility and Ranir has been a wild success for -- I mean it's probably the best acquisition I've ever been involved with in my career in terms of fit for Perrigo. But it is a -- probably about 12% of that oral care market has been growing high single digits for many, many years. And some of the players you just mentioned are our customers in some instances. So we pack for them. We don't go head-to-head with the toothpaste and the mouthwashes and things like that. But we're the leader in dental flossers and we make REACH toothbrushes, which is a value toothbrush and Dr. Fresh. And almost every -- we're the leading player in the U.S. for almost every [ sonic ] private label store brand, toothbrush or any of the automatic toothbrushes and replacement heads. And again, brands like Plackers are huge. So -- and lots of room to innovate, lots of room to acquire. We added Dr. Fresh after Ranir. We added REACH after we bought Ranir. We added Steripod after we acquired. So it's a big category, lots of room for us to continue to grow and it's probably our fastest-growing segment right now.

It's interesting that you actually, in some cases, produce some of these more kind of like, I wouldn't say toothbrush -- but yes I guess, toothbrush kind of segments for the branded guys. So moving into kind of -- because private Label within oral care is not as important as the other categories that you mentioned like paper towels and things like that. Typically, the branded guys spend a ton of money and the consumer seems to be -- seems to gravitate toward branded options as opposed to private label. So this high single-digit growth that you are talking about, does it have to do simply because you are becoming a more important supplier to say Proctor or Johnson & Johnson or is it that private label [indiscernible] categories where you compete, you manufacture is gaining share from the branded side?

Well, let's talk about our core business. In our core over-the-counter business, we gained about 1/3 of a share point of penetration versus natural brands every year. So over the last decade, that's been about 3 share points, that we've gone from about a 30 to 33 in revenue. I think it would shock you to know how big we are on a volume share basis. So we sell probably 3x more Tylenol than Thailand. We're over half the U.S. supply on acetaminophen. We probably outsell them 3 to 1. We probably outsell on Advil 2, 2.5 to 1 on ibuprofen. We're probably 70% of the nicotine replacement market in terms of volume. They sell at higher prices, but Perrigo is a big player. Well, why is that versus so many other categories? Well, in many private label categories, and I've been in consumer my whole life, my whole professional life, usually, there is a significant difference in the quality of the products. That can't occur here. We have to go through the FDA. It has to be exact. It has to have the exact same efficacy as proven by clinical trials and all biomarkers and everything else that it works exactly the same. So when you're going in there, consumers are rational. It's not like a food product, where some people are like, it's not quite as good, or I don't trust it as much. This is FDA approved stuff that -- I mean, if you are not buying our products, you're just throwing money away for your ego. You are -- it is -- you can save on -- you can go in and buy acetaminophen for a 500 -- a Walmart or anywhere else, 500 tabs relative for half the price of 100 on Tylenol. And consumers figure that out over time. So the fact that the value is so tremendous and it is exactly the same product that has been through the FDA, I think, makes it very unique.

And one of the things that is interesting in this section that interplays between private label and consumer, e-commerce, right? In some -- why don't you just talk about e-commerce for these categories in particular?

Well, e-commerce both our strength and our -- and it has the potential to be a weakness if we don't -- if we're not careful, but we will be careful. So we invested in e-commerce before any of our store brand competitors. And as a result of that, we were very well prepared for COVID. And I'd like to take credit for it, but I don't deserve any credit for it. The company had already started that investment. So -- and there's a lot to be learned. So what does e-commerce mean? Besides everyone thinking of Amazon, that's a separate animal, and we have great margins with them, and that's fine. What e-commerce means is, for us, we have big teams of people that are doing all the content, the promotion analysis. When you go in and you select something and it says, should you buy it or not buy it, and what's the -- and again, it's a product that is in the stores, maybe only 30% of that in a supermarket makes it on to their e-commerce site, which are the right SKUs, et cetera, our teams do all those analytics and help support our customers for it, and that's given us great advantage. So we have a very, very high market share among store brand in e-commerce. The downside is we have a lower share relative to brick-and-mortar versus the national brand because we rely on that price comparison. We rely on the consumer walking up to the shelf, about to buy the national brand, being right next to it, 30%, 40% less our product and saying, you know what, I'm going to give that a try. So in the beginning, it's not a problem with places like Amazon because they're so sophisticated. They give you all those comparisons, and they show you Amazon's choice. And -- so no issue there as we've grown -- something like 12% of our total volume is now e-commerce. But in the beginning, the Walmarts, the Targets, the supermarkets were all relying on the Instacarts of the world and they are shipped in those kind of places. And they -- you put in what you want, that's what you get. As everybody is investing in their sites and becoming more sophisticated, then we can work with the content. And when you order something, you can show the price comparisons and suggestions, et cetera. And so that's been a lot of the work in the last 6 months.

So basically -- this is an interesting point. So basically, to the extent that these categories were going through this third party was [ Instacart, ] you guys didn't have visibility to interact with the consumer and now because I can buy through target.com because they fix their logistics and they have pickup in the store and they can ship from the store, so this is something that is an opportunity to do because now you can gain share within Target or through Target with e-commerce OTC, if you will.

Exactly. And Target is a great example, Javier because they were actually one of the first. So we're -- so our business -- e-commerce business is very strong with them. And then other people are now playing catch up because no one was going in the stores. They were fast on their feet. Now the world's responded. Everybody is building out and doing different kinds of partnerships. And I'm glad we invested a lot of money in the manpower and software we have to support all that.

And Murray, I -- the category is very complex, right? Because it has all different kind of specialties and segments and the competitor base is different. And I get that the branded guys give you some sort of a price umbrella for you guys to basically bag and also follow as these guys increase prices. But I'm not familiar with many of these categories. So basically, how is the price environment, say, for branded, say, Tylenol, all these kind of like medications. Do they take price increases every year? Do they -- how that -- how's the pricing architecture? And how it works for you to basically be able to price as well?

Well, okay, so it's been a weakness of our, it's not a strength of ours. So it is -- this is a category that -- OTC does not take a lot of price increases. So I came out of tobacco originally that was our bread and butter.

I am thinking Gillette.

So OTC doesn't. What they do and the national brands are very clever at it, and we like them to be clever at it is they innovate, so they'll take a regular cap and make it a gel cap maybe, and then bring that in at a higher price, and it's a consumer preferred form, so they get pricing through consumers trading up, and then we follow, right? So we do get pricing through that. Where we have a disadvantage is if we're not innovating enough, if we're not providing enough -- good enough service that we have a clear-cut advantage then our customers are going to say, you're not giving me enough differentiated value. I'm just going to go whoever gives it to me for the lowest price. But Perrigo's name is not on the bottle, Equate's name is on the bottle, CVS's name is on the bottle. So over the past 4 or 5 years, company always, for years and years, had about -- if the categories are growing 3%, would have 4% volume growth and -- 4% to 5% volume growth, 1% to 2% price erosion each year to net 3% revenue growth, right? That had grown before I got there, and it was taking the growth -- revenue growth out of the company. And that is because our service levels have started to slip as we were distracted by Rx and the volatility of Rx, and not making the investments we needed to do. So that 1% to 2% price erosion grew. We weren't innovating at the same level. Now, 2.5 years later, we are innovating at a higher level. Our service levels have come up. Our e-commerce support is much higher. The Perrigo advantage is back, and that price erosion has declined to a much smaller number. So it's still there. But this year, the first quarter, I reported it was less than 1%.

And I would love to squeeze more questions. So let me see if I can squeeze a couple. So essentially, is this -- are these switches between -- from Rx to over-the-counter something that is important to you? And if so, is there something that may be in the FDA pipeline that is of interest to you? Or that's not an avenue of growth?

Well, historically, it's what gives the big broader OTC category the big bumps is when you get a whole new line of like steroidal allergy medicines like Flonase, et cetera, [indiscernible] or in digestive PPI inhibitors when you get things like the Prevacids of the world and omeprazole and Lansoprazole and whether it shows up as Nexium, et cetera, the branded side, those innovations are always new sources of growth for OTC. They had slowed up. They have started back again. I didn't -- when we put together our transformation plan, part of the idea was broadening the wellness is we couldn't count on those still coming. So we needed to give ourself avenues like oral care that didn't rely on that. Now we're starting to say, "Hey, wait a minute, Voltaren just got approved. Dual action, where you combine products together. Advil just got acetaminophen and ibuprofen combo products approved, that's exciting. Tamiflu is working its way through the system. Cialis is working its way through the system. Oral contraceptives in England, women's birth control pills just got approved by the MHRA. It's further out, but you've got things that -- other types of products for like -- for your heart and all that, that are out there, yes, the statins, thank you, Ray, that represent big opportunities. So we've got one that we're leading the way next year with Nasonex. So I think those are exciting upsides going forward. But any one of those categories breaks and it's a huge run for a while. And it is a priority. In congressional hearings, Woodcock said, she -- that was a top priority for her to make that -- those pathways more efficient.

Murray, another thing that basically may be more familiar to the audience and give an angle I saw that you guys did this licensing deal with Clorox with the Burt's Bees brand into, I believe, infant nutrition. It may be something else as well. So is there is more opportunities for that when these Clorox joint venture or royalty agreement? How does it work? When that's -- when we're going to see it on the shelf?

Well, right now, we're launching the Burt's Bees infant formula to be followed in the fall. And it's already selling to customers by Burt's Bees line of cough cold products for kids that is all natural products, honey based, plant based. So that will be the next wave. And that's a great example as well of how we're trying to leverage growth broader than just sort of the old traditional FDA development medicine. We have a $300 million, $400 million a year business in Europe. When I joined the company, I'm like we have all these great products over there, how come we're not selling any of them over here. Unbelievable medicated skincare products, #1 in the Nordic regions. Why are they not here. Unbelievable plant-based weight loss products in Europe with a major line, why is that not over here? Unbelievable cold and cough products that are all cold drugs, tremendous [indiscernible] PHYSIOMER and incredible saline type natural solutions, why is none of that here. So those are just all opportunities that are filling our pipeline and are starting to come to market as well. When I joined Perrigo, I was like, "I came out of tobacco, and I thought to myself, do, I really got to look for growth. My pleasant unusual surprise that I didn't expect is to see how much growth opportunity there is in this area, that wasn't the challenge. Challenge was tax situation overhang, complexity of Rx and all -- dealing through all those issues. But one thing that Perrigo has day 1 and always has is tremendous, tremendous growth opportunities.

Murray, you taking into the subject that I was afraid that you wouldn't be able to touch, which is the whole Europe acquisition and the difference that Europe is branded. So it was just an opportunity that, that business turn out to be branded, and therefore, you feel that -- does it have to do anything with the composition of the trade that you feel that you have the heft, let's say, or the muscle to have a defensible branded product in Europe? And if so, I mean the next question to that would be, if there is any opportunity given your strong relationship with the trade in the U.S. to bring some of these brands and sell them here. I heard that it was skincare. Skincare is such a strong category in the U.S. So if you can talk about first why branded in Europe and then do these brands fit in the U.S. somehow?

Okay. Well, the first answer is, before I joined Perrigo, we bought a very successful company Omega. It's had a lot of cleanup and challenges and transformation that we had to go through on our own, but it's 40%, something like that of the company's sales and with talented consumer branded professionals. In self-care, which is still our expertise, it is like the U.S., even though it's not private label, it requires an ability to handle complexity. And that's because there -- across Europe, there aren't the Walgreens and the CVSs. They're not even legal in most countries across there. They're all individual pharmacies still. And many of those countries don't even allow you to own more than 1 or 2 of them. So you need a sales force and an ability to go and handle and sell through individual pharmacies. And because of that, there's less pan-European brands and more regional strength. That -- in a way, it plays to our core competency that our ability to handle complexity. So we may have skincare 5 different names in different countries, even though underneath it, it's the same product. It's not different than the U.S. private label business, and they do a beautiful job with the branding. I think we've done a poor job historically in leveraging those brands and bringing them to the U.S. Whether they come in as a brand or they come in as a private label product, we're doing some of both, right? So today, Plackers is in different parts of Europe that we took from the U.S. over there. Other of the products like some of these natural products I'm talking about are coming from Europe and coming to the U.S. now, and it's finally starting to really happen. But there are different business models, price value business. There are some big segments over there, and we have a meaningful price value business in the U.K. and Germany, but they tend to operate at deep -- not the same margins that we do in the U.S. I mean you can buy ibuprofen for like 15p or whatever it in the U.K., right? It's like free.

Murray, it seems like we are about to end. I hope that this has been enough to poke investors' interest as it did with me in trying to figure out how you guys fit in the broader picture that we have in our head. Anything that you want to say as -- to remark as we finish, and it's been a pleasure, anyway.

Yes, it's a pleasure for me, too, but I'm just warming up Javier, I need more time. I just -- listen, it's a great company. It was -- we did not have a story simple enough for a consumer investor before we do now. We're a pure-play company. The volatility is out, we'll close our RX transaction. Think of us at a midpoint right now targeting $2.60 a share. You grow that 7%. You add -- yes, you put that $2 billion to work, you get that closer over the next couple of years to $4. You get that multiple up in the -- where it belongs in a consumer peer group in their 20 to 25 range, and you're doubling the stock price. It's going to be a fun ride come on board.

It sounds pretty good. So a very nice talking to you guys, and thank you for coming today at Evercore conference.

All right. Thanks for having us.

Bye.

Bye.