Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

Good morning, everybody. Thank you so much for coming in. We're happy to have Perrigo with us today and for those of you who are unfamiliar with Perrigo, we use their product every day as consumers. Perrigo is a major player in the branded and the private label self-care space. They make products generic Ibuprofen, allergy meds, even dental floss. Anything you really use in your daily lives, they likely make. And today, we have with us the CEO, Patrick Lockwood-Taylor, who just recently joined the team about 2 months ago. And then we have Eduardo Bezerra, the CFO. And then as well we have Brad Joseph from investor relations in the crowd. So thank you both, for being here and Patrick I would like to start with you. Before we really get into more details, you just joined Perrigo a couple of months ago. You came over from Bayer, can you tell us initially what excited you about the Perrigo opportunity and why you wanted to come over to Perrigo.

Very good. What excited me about Perrigo. So I've known Perrigo and competed against Perrigo for about 15 years, both in Bayer and as the Head of Consumer Health in Procter & Gamble. And we've always respected them, high integrity, very successful in the store brand business, very high shares, good competitor. And then I watched them over the last sort of decade as they sort of moved into generic Rx businesses and other things. And then obviously, more recently, as they reposition themselves. I think, very sensibly back into eminently more profitable self-care business. And they're a unique model. I mean, tremendous amount of scale and their manufacturing, their innovation, and as a blended business, as you rightly said, both store brands and national brands, Prevacid, Opill to come and others, they can create a very unique model, if they can really unlock this potential synergy between the store brand business and national brand business. So whilst they position themselves in self-care, there's now a lot of work to be done to become a world-class self-care company and a transformational opportunity is interesting.

Great. Thanks. So the company has gone through a pretty big transformation kind of going from the health care side to more the self-care consumer side. Now that, that transformation is kind of complete. What's next on the agenda? Are you adjusting the products you play in? Maybe touch on some of that? And what are your goals for the company?

Yes. obviously, with our investor community ahead of us. First commitment is our 2025 growth algorithm, which we have recently reconfirmed and I'm confident in, continue with our deleveraging route, which I'm also confident in, and then as we -- so really through 2025, I think there is clear line of sight to the commitments that we've previously articulated. As we look beyond that, I think there's a number of things to do. Firstly, the theme you're going to hear me refer to consistently is to consumerize the company. We've got to build our brand building, our digital capabilities, our ability to precisely target consumers -- convert consumers, so there is a lot of capability to build out. I think the next area for us, we have to get clearer, and we owe the investment community, the organization, the Board a compelling long-term growth story, right, that leads to sustainable growth and is clearly value created. So that work is now underway, and we'll be able to share that in a few months. And I think the last is we're essentially a conglomerate made up of a large number of acquisitions, different organizations, operating systems, and that's inefficient. So moving to one Perrigo strategy, structure, operating model is also a critical aspect for us. So a lot of work done, but a lot of work to do, to operationalize and better monetize those assets.

Great. And so you have confirmed your 2025 outlook and touch on that a little bit. But Eduardo, this outlook includes both mid-single-digit net sales growth, gross margin, 40%, mid-teens adjusted operating margin. That's up about 11% in 2022. What gives you confidence in these targets and what makes you comfortable here?

Good morning, everybody. So I think, first of all, it's we need to deliver on our commitments, right? So we had 3 quarters of delivering on our commitment, starting at the end of last year. So as we look into the second half of 2023. There are some things that I believe is going to position us to achieve the short-term objective of our 2025 targets, right? So we're talking about the Nutrition business, right? So given all the new guidelines from the FDA and the impact of that into our production schedules, et cetera. We are forced to increase prices so we took significant price increases that is starting to benefit us in the second half of this year. So that's number one. The second piece there is we continue to grow our HRA brand that we acquired last year. So now in the second half of the year, they become inorganic, and we continue to see positive growth in those brands mainly in Europe. And the third one, with the recent approval of Opill, we're going to have the first sell-in positioning of products that will help also offset some of the incremental cost that we have to build the brands, as Patrick mentioned, we see that as an opportunity for long term. And so I'm very confident that with these actions that we put in place we're going to be able to deliver on our commitments for the second half of the year.

Great. And speaking of pricing, you touched a little bit on that. Can you talk about where you are with pricing actions? That's obviously a very topical thing in the consumer space right now. So I'd love to hear about how Perrigo is tackling it.

Overall in the portfolio, we've been like in the first half, about 5% increase on prices, right? So that doesn't take into account these price adjustments that we're doing in the Nutrition business that we're going to see the benefit in the second half. But -- and we know that we are much below our -- the national brands. So one of the key things that under Patrick's leadership, we're pushing the teams to really revisit some of those assumptions and what we can do to really drive further pricing in the different categories, mainly in the OTC [indiscernible].

Awesome. And another thing that's been very topical right now, obviously, is [indiscernible], and what's going on with the macro environment? How that's impacting various businesses? I do think Perrigo is very uniquely positioned to potentially benefit from a recessionary environment. So can you talk about how you're positioned both Eduardo and Patrick, how Perrigo is positioned in a tougher macro backdrop, having the store brand products? Walmart discussed this a little bit yesterday, too, of the store brand is starting to see greater uptake. So just discuss how that's benefiting the company and how you're positioned here?

Yes, I'd say a couple of things and then Eduardo. I mean our brand, store brand business, is split 50-50. So as consumers trade up, we gain as consumers potentially trade down to better value store brands we gain as well. There has been some interaction, okay? But I think the amount of volume shift from national brand to store brand is less than people expected. So there is good opportunity to continue to trade consumers up and to move them to higher price points. And that's work that we're very much focused on. And we give them better products that perform better at better value than they currently buy either if they're in store brand or if they're in national growth.

Yes. Just to complement to what Patrick mentioned is, when you look into the data, and compare national brand with store brands, you don't see much because of the price differential on the actions the national brands do versus store brands. But from a volume standpoint, we're seeing a small increase going on there. And if deflation really start to play in a recessionary environment, we are very well positioned with our manufacturing footprint to serve our customers. So it's very important now we're getting ready for the cough and cold season. So last year because all the disruptions in supply chain there were a lot of challenges to be able to really be ready for the season. This year, we're in a much better position because we're able to field back inventories, our service levels have increased significantly as compared to last year. And so we do expect to be a normal cough and cold season, and that should benefit us in the second half of the year as well. And so that's where our store brand consumers really change their behavior and trade further down, I think we're going to be in a very good position to have our products ready for that.

Maybe discuss some supply chain bottlenecks you faced last year. And are you -- is everything fully improved? Are there still some things that have some improvement to go? Just talk about where you're sitting now versus last year.

We're in a much better position as compared to last year. So last year, there were different disruptions. So either on our Oral Care business because of disruption of product coming from China, that was one that has been stabilized, normalized. So our service levels are very high. We're in a very good position there. Also, we had competition in terms of labor that was impacting our ability to really get our products out. The actions that we took in the second half of last year had a major benefit, and we're seeing that into our throughput and output on our facilities. So those short-term impacts that we saw in the last, those impacts over the last couple of years because of COVID and the reflection of that, I think we are in a much better position. The key thing is we believe there's still room for improvement, and that's part of our supply chain reinvention. And we believe there is an opportunity through that to grow our operating margin between 100 and 300 basis points. mainly by improving our portfolio automation of our facilities as well as how to improve our planning process with our customers. So a lot going on. It's a journey that we have communicated in our Investor Day, and we'll continue to make progress.

Great. And on the nutrition side of the business, there's been a lot of increased regulation around infant formula can you just discuss for the crowd who may not be familiar, some of the challenges you faced with that regulation and what kind of costs you faced as you've navigated that?

Yes. So after the Abbott recall last year, the FDA introduced what they call the national strategy, which was basically a series of guidelines but effectively requirements, that all manufacturers change their manufacturing processes, there's the sanitation protocols, their environmental monitoring, their cleaning protocols, et cetera. And it was a significant [burden] cost, but well underway. Then they issued very recently a warning letter to 3 manufacturers, us included. There were no safety concerns. Nothing really could change but it was a reaffirmation of the changes they wanted to see. Now we've invested in those very precisely and are very confident that we will fully abide by that. And the FDA also said encourage parents to continue using infant formulas for the babies and infants. So it was a surprise. It went to all manufacturers and we are very confident we are fully implementing the intent of the national strategy.

Great. Now shifting to Opill and for those of you who aren't familiar, Perrigo just did recently get FDA approval for over-the-counter oral contraceptive Opill. Can you just discuss -- I mean, you've spent a lot of time on your investor calls talking about the market size and the opportunity this means for Perrigo. Can you talk about kind of the market opportunity you have with Opill?, the timing of the launch and just kind of like where you see the overall brand going?

Yes. So it's very exciting. It's very important, and we're very proud to have got that switch. This will dramatically improve access for women for oral contraception without the need for prescription, appointment, et cetera, and significantly help with unplanned pregnancy. Okay. So It's very good. We will start shipping the product towards the end of Quarter 4 to be on shelf by January of next year. We are deep into the consumer modeling. How do we most effectively drive awareness and trial? What is that investment profile? There is no doubt for a major new brand launch that it will be dilutive the first 12 to 24 months, that's very standard for any brand launch. Market size, target population is about 64 million, okay. And we need to confirm through the modeling we're doing at the moment, what is -- how quickly can you reach and what is the speed of the conversion and what are the mechanics to actually convert. That is new learning because it's a new category, and we're modeling that now. We will complete that, and that will give us an idea of potential market size, rate of market conversion, cost to do so, and size of potential market on a going basis. So you're going to have to give us a bit more time. The other question we always get asked is what's the shelf price? We, of course, don't control the shelf price. That's at the sole discretion of retailers, but we think this will be a solid value proposition and a real game changer, and we're the first to do it. I think the brand is O, okay? The particular architecture we're talking about now is the pill, and we want to create a mega brand that offers willing support throughout their sexual journey. And so we will build out that architecture as part of this switch over time.

Awesome. Well, we're looking forward to it. And can you maybe discuss some of the retail partners that have been established for Opill and where we could find it on the shelf?

Yes. Actually, the retail support, and I was with Sam's and Walmart, last week and with Dollar General later today and have met a number of our other retail partners. The support for this is blockbuster as we call it support. So you will see display, you will see all sorts of incentives, you'll see multiple placements and it will be in the women's sexual health section within the stores, and it will be multiple SKUs, multiple facings and very, very visible. Also including is the sort of retail media, the retail sort of digital and their e-commerce tools that they have, which are very sophisticated. So this will be the full blown mega brand launch. And I actually very pleasantly surprised and pleased with the amount of retail support we've been able to garner for this.

Yes. Wonderful. Well, we're very excited, and it is very instrumental for the broader health care and consumer space. So very excited for that. Turning to a different topic. Yesterday, you did announce a new EVP and President of the Americas division, Catherine Schmelter. Can you talk a little bit about what made you want to choose to leave the group and where you see that side of the business going with her now on board?

Yes, excellent. So yes, my first major appointment, an extremely important one. Eduardo also interviewed her, so I'll let him add some commentary in a moment. But as we look at the opportunities. So I've talked about we want to drive disproportionately our branded business. Our store brand business is our scale asset base to enable, hopefully, more success with our branded business. It's very rare to find people who have run both store brand businesses and national brand businesses she has, in TreeHouse. It's very rare to find people we've more so been able to synergize that relationship create incremental value where she has. As we go forward, we will be looking at our global portfolio. We want a global portfolio. That's more scalable, more profitable, faster growth rate, and we want more global brands. So she has also done as a Chief Transformation Officer of Treehouse, significant global portfolio adjustment. So if we look at the critical jobs to do to accelerate growth for her, she's done that work and done it extremely well. So it's a very rare skill set, she also happens to be culturally a great fit is from the Midwest. Very happy to live in Grand Rapids. So it ticks a lot of boxes. But mainly, it's the work we've got to do to accelerate versus her skill set.

And it's great because her experience through general mills, Kraft and TreeHouse and she was the Chief Transformation Officer, leading a lot of the changes in the profile of the company there. I think it fits like a glove on this whole portfolio work and how do we consumerize the company. That's really the skill set that we need to take it for.

Great. And then just a few minutes left. Lastly, a little about to touch on catching debt. Those are obviously very important things for investors looking at a company. So how should we think about your cash levels going forward and your plans for use of cash?

Yes. So that's a priority that we also laid out in our Investor Day, right? So one of the concerns that we had and we talked to investors last year, is okay, we put all these transformation together, now we need to put that to work and monetize all those assets. And at the same time, how do we really reduce our leverage. So this year, we're seeing progress on our EBITDA growth. So we're able to reduce from 5.5x to 5.1x adjusted EBITDA. And then our objective by end of 2025 is to get around 3x. So as part of that to one of our key elements is to pay the majority of our $700 million debt that we have maturing at the end of next year. And so for that, we count on the whole business cash generation, but also some divestiture on known strategic assets that came through those different acquisitions, and those actions are on track. So we feel confident that we're going to be able to meet these [commit].

Great. Well, that takes us up to time. Thank you so much, Patrick, and Eduardo for being here today and sharing more about the Perrigo story, and we're really looking forward to what's to come.

Thank you very much.

Thank you, everybody.