Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

Good morning. Welcome to the Perrigo presentation at Raymond James 43rd Annual Institutional Investor Conference. Perrigo is the dominant name in the U.S. OTC store brand market. The company was founded 1887, by Charles and Luther Perrigo in Allegan, Michigan. The company still maintains its roots in Allegan, Michigan. Very pleased to be able to welcome the management team of Perrigo here today: Murray Kessler, the company's CEO; Ray Silcock, the company's Chief Financial Officer.

All right. Thanks, Elliot. Let me take a minute before the Q&A portion of it, just to give a little background for those of you who may not be as familiar with Perrigo. I joined Perrigo and a number of my team members like Ray, who I have worked together with her over 30 years and have done similar types of transformations at other companies and created a lot of value. But we always start with the same thing. I know a company that's got great underlying business, but for whatever reason, has gotten off track of its core strategy. So when I listened to the introduction that Elliot gives about 124 years of history and over-the-counter -- starting at over-the-counter consumer products about 10 or 15 years ago, the company got off track and got into the more pharmaceutical side of the business with generic pharma and took the company in the beginning to great heights, but then when the challenge of generics came, it became a big problem for the company, distracted it, caused a lot of lawsuits, took the eye off the ball of what the company was all about. So -- and caused some big tax overhangs and a lot of things that scared people away from the stock and had hurt the performance of the company. Last 3 years for us has been a lot of heavy lifting to transform Perrigo back to what it was and was so successful for over -- well over 100 years. And that was consumer, and I changed the definition from health care to self-care because we wanted to broaden from just treating illnesses to also getting into the business of preventing illnesses and promoting wellness, which opened up a lot of growth and product categories for us. Here we are fast forward 3 years later. We have done 13 transactions, 5 divestitures, 8 acquisitions and one of those is still pending, which is a very big acquisition of ours in HRA Pharma. We are now a pure-play consumer self-care company. We have returned the company to growth rates that are comparable to our consumer peers, and we believe those growth rates will be a lot higher in the next few years after the -- we close the HRA Pharma deal. We have invested in IT. We have invested in our -- in plant capacity. We've invested in talent and people. We've invested in business intelligence. We've invested in and are investing in our supply chain and the list goes on and on. If you look at the amount of things we've gotten done over the last 3 years, it's been really quite tremendous, and it's in all of our literature. What we also have done during, especially in the last year, has removed tremendous overhang from the company. So within a week or 2 of me joining the company, we got hit with a EUR 1.7 billion tax bill in Ireland, with interest and penalties could have been $3 billion and $800 million from the U.S. and the IRS, $400-something one in the U.S. from that. Ranitidine class action suits, [indiscernible] class action suits -- shareholder suits, DOJ, the investigation, almost all of that is gone now 3 years later. Irish is settled. We settled it. That -- what could have been $3 billion for about $225 million. And by the way, we won an arbitration where we won $400 million. So we were able to get out of that terrible threat for no cash to the company. The $400 million one has been reduced at max to $130 million, and it will end up a lot less than that. Ranitidine class actions gone. [indiscernible] are basically the ones that have come up, we have won all or settled for next to nothing. The shareholder suite was settled within insurance. So I mean bottom line, this is a very different company that we started with. And despite all that, our stock performance has been pathetic. And the reason for that is unfortunate, but it's temporary. And that is that the company that we run, and even though it's now reshaped and has this great and bright future, it got hit hard, like all consumer companies, by supply chain disruption last year. And so material price inflation, not enough truck drivers, all of that, just as we were sort of this reshaped company and then the second component beyond all of that -- the gross margin impact of all of that. So -- excuse me, the other big piece of it was the cough/cold business. So most people don't realize that 20% of our business was cough/cold. And last season, there was no cough/cold business. And for us, that is -- if we were a cruise line, you wouldn't be asking like what happened to your business? You'd say, "Well, the cruises aren't going out." Well, that's what happened for 20% of our business. And yet, we were able to grow the top line through it. So cough/cold is back. Our business is repositioned. The overhang is gone. We think we are a compelling investment. Elliot's a supporter, and I think he has done a lot of work and has been very supportive, but he also pushes us hard on margins, and that's the right place to be pushed. We have gotten hit hard in our gross margin line over the past 6 months because of supply chain disruption. It's our focus, and I'm guessing I'm going to get questions on it, but I'm just guessing. So that's us. It's an exciting time at Perrigo, and we're excited about our future.

That was an invitation to push. I take it. Before I do that, so go back to the transformation last year, you completed the big 3, the divestiture, the Rx business, completion of the sale of the -- elimination of the tax overhang. But there's been a lot of movement in addition to that, both in terms of offensive, defensive maneuver in terms of restructuring, new revenue initiatives, any 1 or 2 items that you think are kind of -- especially interesting with that maybe people haven't focused on as much kind of given that...?

Well, we got -- I've set up 5 areas on the top line of core areas for growth. And I'm still new to sort of the slowness of the FDA on approving new products and all of that. And -- but 2 areas: nutrition. We put a lot of energy against on our infant formula business, found ways to expand capacity, sign deals, launch new products. And I don't think it's gotten much pressed because it was critiqued a lot, but nutrition has come roaring back. And it is growing. It's gained 3, 4 share points in the last 6 months or 7 months. So I'm excited about that. Our NRT business, we have great new products. I just need the FDA to approve some of those. Another one, I'm not sure the world has fully understood yet by the multiples that we trade at, the significance of how big HRA Pharma is for Perrigo. So I mean, that deal, when that comes in, that's a scale acquisition for us. So we're at $2.06 we just announced for '21 on EPS. So that is -- you're adding $1 of that over the -- to the next year, so 30-something percent increase. So if you do the math, we're -- I've been out there $3.57, $3.57, $3.57 we're going to be a heck of a lot higher than $3.57 for the next few years. So that's another example.

Okay.

You want me to keep going. We've got amazing business intelligence we just put in that no private label company in America has now that we can tear apart and see our shares down to the SKU level that's never been done before it's been grouped.

Are you going to share that data with us or...?

No. And -- but I'll share in an investor conference this summer or late summer.

Okay. Well, let's go back to the Nutrition business for just a second because that, at 1 point in time, was expected to be a huge growth driver for the company and the international opportunity, which is expected to be enormous. It didn't really materialize, kind of got pushed in the background in terms of the company's categories, nobody's talked about it, but you have seen these share gains. How much of that is offensive driven by some of the company's initiatives versus what's happening in the market with respect to several competitors, or one competitor?

Well, I'm talking since last summer. So I think the recall -- that's a relatively new issues. I don't even think I've seen the first IRI number yet to see what impact that had. And we'll be careful not to claim too much credit because some of that will clearly go back. But what I'm referring to is a concerted share gain starting last August. We -- on a contract pack side and this counts -- we count these towards our share. We developed the brand, we had packet a 100%. So a new direct-to-consumer brand. Bobby is going gang busters as Perrigo develop that formula with them, and that's going incredibly well. We launched hypoallergenic. We signed a co-pack or a volume capacity deal with a competitor, but that is supplying us with product and -- that we couldn't do ourselves. So that opened up our ability to promote again. So a lot of good things happening there. We also launched into the electrolyte category, and I think we were CVS Product of the Year. So lots of good things happening in the nutrition business now.

One another specific question on a category, not 1 that we historically have been all that excited about, but that's VMS category, big category, actually was surprised to see the most recent growth rates in that category, much higher than I would have expected. But within your portfolio, it's a relatively small share. So I'm not sure what has sort of reignited growth in that space, if it's just kind of part of a general health...

Within the Perrigo portfolio you're talking or the total VMS category?

Within the total VMS.

Total VMS categories have -- it's benefited from COVID. It's the essence of the strategy I'm trying to communicate to the world is we don't want to treat illness. We want to -- we want to promote self-care, which includes preventing illness and promoting wellness. So sleep has been a major, major component. We have a good-sized VMS business in Europe. And in the markets we have it like Davitamon and some of the other products we have, have gone gangbusters, whether it's melatonin or it's other categories like that. We have bets out there with our partnership with Kazmira on CBD that I think could be a big supplement as well at different times, but any kind of immune support through the whole COVID took off, and we're very big businesses. So I mean I -- for the most part, I would say it's just sort of was a crash acceleration of the importance of wellness to the world.

Okay. Maybe we could spend a little bit of time just talking in more detail about the HRA acquisition. Enormous deal for the company, very important to not only growth of the business going forward, but certainly, in terms of the immediate financial benefit and, hopefully, the valuation level. Maybe just spend a couple of minutes sort of talking about the key products within that portfolio and then what some of the longer-term opportunities could be in terms of additional new product...

Sure. This is sort of the perfect deal for us for many reasons, right? You look at sort of some of the critiques on the company, it's -- we like your European business. You've done okay with it, but it's not really scale and can you get the margins, et cetera? When you bring in HRA Pharma, which is primarily a branded international business, and where we're business. We will be, after HRA Pharma, basically a 50% branded company and 50% private label company. But where we're private label, we're almost all private label, and where we're branded, we're almost all branded. But this is a very high gross margin business, with a complete overlap on our business, that means significant synergies in the deal. So it was a high valuation, but not -- when you look at the synergized number, it goes right back in the line. I think we didn't count all the synergies. We were very conservative to focus on the ones we were certain we could get, and that excludes any revenue synergies, which I think there'll be plenty of given our medicated technology in German with the ACO brand and some of our other brands and using their vantage technology and The Derma, which is a brand that's a skin care name, and there's just many opportunities. But if you don't know it, they are -- where we had a regional string of pearls, we are buying Compeed, which is a bandage category, #1, high market shares growing, growing double digits every year for years since HRA Pharma took it over, full of innovation and opportunity expand. They have their eyesight set on the U.S. and others. The Derma is -- has historically been primarily a scar treatment brand in the U.S. Again, global expansion is on their agenda with that. And then if you're familiar in the United States with Plan B, outside of the United States, they have a brand called ellaOne, which is basically #1 everywhere in the world other than the U.S. On their agenda for growth, they are very good at switches. So besides globalization, which they're excited about, they also have some very exciting switches in the pipeline. The biggest one, which would be in the United States a few years out and it was just written up in the Wall Street Journal is the first birth control pill sold over the counter and is very, very far along the process and has gotten approval in the last 6 months in the U.K. So it's -- we believe that will happen, and that's upside to the plan. So after this, we had $300 million, $400 million, $400 million in sales. We add to a company, Perrigo today is making a little over $600 million of EBITDA, with synergies, it's going to be $150 million to $200 million of EBITDA. It will change the complexion of our international business. We'll become the #1 and #3 brand driving our total company into the top 5 in Europe and it will also provide attractive margins. So -- and it's accretive to margins. It's accretive to sales, it's accretive to growth rates. It's lots of synergies and it's got great, great people that will even take our skill set higher. So all good things.

Are they also pursuing ellaOne emergency OTC product in the U.S.?

They are, but they're not as optimistic in the short term for that, which is interesting since Plan B has already been approved. But it's a controversial product. ellaOne is superior to Plan B. ellaOne -- Plan B has got, I think, 3 day -- you have to take the emergency contraceptive, must be taken within 3 days. And ellaOne, I think it's within 5 days. So there is an advantage. Perrigo owns the -- has the ANDA for Plan B in the U.S., but it's not a great private label product because our customers aren't excited to get into a controversial category. I can't wait to let their women's health team and give them an approved product, right? Because it doesn't have to be private label and see what they can do with it. So I think we can get to market faster there using that. And Plan B is one of the top SKUs in OTC and the fastest growing, and we have a -- they have almost 100% market share. So it's -- that's another opportunity that's not in our deal model. There's lots of opportunities for growth in Perrigo everywhere you look.

Well, it's that time, let's talk margins. We put on a note on Friday. I just, for some reason, needed to in -- convince myself that this is sort of a normal course order for the company, and we've seen this happen historically on several occasions. It goes both ways. I mean -- but there have been these occasional very large swings in the company's gross margin line. It's tied to cough/cold. It's tied to higher or lower incidents and production volumes and the like. So the first question is, as a company, how -- is there some way that you can get in front of that in terms of your production processes, planning processes so that you're not looking at 300, 350-basis-point swings, positive or negative, in a particular quarter?

I think there is -- so Murray has got a new project, but he's probably going to share some top line to move on, but we'll release more details in an investor meeting later in the year. But we are working very hard to improve our entire supply chain and manufacturing environment to reduce our costs, and we think there's a big opportunity.

To be fair, it was a global disruption that -- this was not, in any shape or form, a Perrigo issue. This was the freight from China and stacking at the -- not being able to get into L.A. into the docks on our oral care business or massive material price inflation and inflation the highest in 40 years and no truck drivers and inability to -- even if you could find a truck driver when you -- in the third quarter, if you showed up at a customer, they didn't have people to unload it -- was nothing any of us have ever seen before. And I benchmarked Perrigo's performance during that time against Clorox, P&G, Colgate, everybody, and we did -- we were not hit any harder or better. Like we were -- that's what happened to everybody. A lot of those branded players were able to price faster to get it out of it. We've actually done quite well, and our customers have been good partners there. And -- but we're slower with it because we have to go in and present and they're contracted, and we don't want to lose business. So we have to walk through the issues and why it benefits both companies. But we'll -- we do have a significant amount of pricing that is going to be flowing through the P&L shortly. So that aside, I don't -- maybe your analysis showed 400-point swings, but I don't think the history was that kind of swing that -- but we have had meaningful swings. And in the meaningful swings, that all starts with the complexity of our portfolio, a desire for Perrigo to always say yes to our customers, which means if -- the national brand -- if Advil launches 1 SKU, that's 500 SKUs for us. And then trying to plan that and forecast it accurately, which we haven't done as where you can get way off base very quickly. And there are meaningful ways to very quickly -- to address that, and that's the good news out of the pandemic because you know what, it was a pain before, but we could always cover it elsewhere. So you sort of accepted mediocrity while you were focusing on reconfiguring the company. And this was so big that it forced us to really challenge the entire global system. You've got HRA coming in, you have Omega that was put together with dozens of acquisitions. You have numerous acquisitions within Perrigo, never all fully integrated, never fully having shared services, never fully having the financial and enterprise systems to do it. And so we have already -- we're knee-deep into a -- I'm not going to call it a transformation because we just completed our transformation, but I'll call it a supply chain reinvention, where we are optimizing the supply chain. And I think, when I -- this summer or the end of the summer when I come forward with the next phase of the Perrigo strategy, that will be a very big opportunity. And part of that will be reducing that volatility, which saves you absorption, saves you throw away, write-offs, obsolete inventory all over the -- it's big numbers.

Right. What -- I guess what I'm trying to get at is investors understand the concept of absorption, but again, it does seem to -- it has occasionally kind of popped up in the company's numbers and it's been a big swing factor in terms of margins. Is that just an inherent background risk in company...

It doesn't need to be. But it's what I'm talking about. It's demand planning. If I go to the factory and I say they have to order months in advance. If we go in and say, here's the cough/cold season, that's going to be down last year 10% and they staff for it, they order the materials. They build inventories months in advance and then the cough/cold season doesn't come. All those overheads, everything has been allocated, it's been built in.

And then what happens is it goes into our inventory, the variances wind up in our inventory because our costs -- our standard costs are out of date because inflation -- and so all of that's -- we're working through that now and we are...

It's not -- it's -- you can address it. It's fixable to some extent. If you put it up time intentions.

It's definitely fixable. We have been working on the whole costing system. And we think we can fix that.

It took a lot of investment in technology. We're not done yet in order to get -- you have to be -- have to be able to forecast at the SKU level, which Perrigo didn't do. It forecasted how many ibuprofen tablets do I need? How many [ set of medicine ] tablets do I need? Not how many do I need for Walmart in a 150 bottle and 250 and 300. If you get all those wrong below it, it doesn't matter if you have enough. So the accuracy wasn't there. We now have the technology and are building SKU-level forecast. We got -- we're not -- we have a long way to go, but COVID hit right on top of it. And it's not normal for 20% of the business to go away. That's an anomaly.

Yes. Understood. Maybe last couple of minutes here, we could spend a little bit of time on the new product pipeline. You've rebuilt it after kind of a long lull in terms of new launches. Still not a lot of detail, of course, and what resides in that. But just curious how you're thinking about the new product contribution to the story over the next couple of years outside of acquisition? Historically, you've always been dependent upon switches as kind of a source of new products. Fewer of those today. Just curious how you're thinking about moving a little bit more on offense and becoming more of a category creator versus just relying on something that's kind of prebuilt from big pharma as a source of eventual growth?

Yes. But it's a different world, right? So -- we've also -- we'll be starting to talk about doing a freshness, and I've been in consumer packaged goods my whole career. And Perrigo is launching as many items as any business I've ever worked on. But it's not -- the pharma world looks for the blockbuster drug that's completely brand new and new to the business. That's not the nuts and bolts of consumer packaged goods marketing. Consumer packaged goods marketing is new and improved and it's better efficacy and it's an easier open bottle and it's a new flavor. And you're doing good if you launch $100 million, if you get $20 million of that incremental. So I purposely talk less about the specific numbers because all I really care about is what's going to be incremental to the business, right? And how much cannibalization is there going to be. But I mean, if you look, we're in the process of launching out a natural line of Burt's Bees children's products. We launched Hypoallergenic midyear last year, which will benefit the coming year. In Nutrition, we had the contract pack deal, which we did the innovation on the rollout of Bobby, and I think that's got -- that team is -- and Laura, that's our president, has a ton of running room. We launched the Probify, a prebiotic line across Europe. We have XLS Pro 7 that is launching, which we've just gotten back clinical trials that on a natural product that we've been able to prove as much weight loss as the #1 weight loss drug in the world, and that launch is coming where Omeprazole, mini capsules, the national brand doesn't have capsules. The national brand only has compressed pills, and we will be leading the way in introducing that. Different flavors of our MiraLAX equivalent products that are coming to market and in our new line of Dr. Fresh and with licenses on Sonic. And I'm just doing that -- we were launching NASONEX this year in markets which will be the -- our first company's switch. And so I mean I'm just off the cuff giving you those products. But what really matters is not -- is there a $100 million and you add it? It just doesn't work like that on consumer business. We need to report out, here's what we launched. Here's how much in there, here's what we got incremental, what they've contributed to the growth of the company. Bottom line is, despite losing 20% of our business, we put out a goal of 3% growth, and we have grown 3% even losing 20% of our business, which means we would have beat that -- the heck out of that number. Going forward, I think organic growth will be high single digits this year. New products will play a big role as will a very successful e-commerce business, which is now 10% of our business, and then we'll be furthering in HRA. I mean we're going to have double-digit top line growth and double-digit bottom line growth. But what I need to give anybody who invests in this company so they can have security in the future is return the company to growth in margin. So second half, we get back to growth in margins. finish next year stable and start growing from there. And then I think there's tremendous value to unlock.

Okay. Thank you very much. Please join us in the breakover room.

Thanks. Thank you, Elliot.