Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

All right. Well, good afternoon, everyone. Welcome back to the UBS Consumer and Global Retail Conference. Thanks for sticking it out till 4. I think we've got an exciting story here to end the day. My name is Bryan Adams, and we've got Patrick Lockwood-Taylor, CEO of Perrigo. And we've got Eduardo Bezerra, CFO, here with us today. Definitely a name that's undergone a lot of transformation over the years. I think it's an exciting story here to end the day. It's really been an effort over the last couple of years to transform the portfolio into more of a pure-play self-care company. So we're going to hear a lot more about that today. First, my favorite part, I am required to read a quick legal disclaimer. So as a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view on this call today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call. So all right. With that, let's get started. I think it would be helpful to start off to give some quick context to folks in the crowd who might be a little bit less familiar with the name. The portfolio has undergone a lot of transformation over the years. I know a lot of that was before you got here, Patrick. But you guys got rid of the generic Rx business, you've invested more in infant formula and we'll obviously get more into that later, as I'm sure everyone here is waiting for.

But just as you think about how you're able to compete in your core categories as the portfolio is positioned today, I think it would just be helpful to kind of hear about how you see the lay of the land and maybe bring in that one Perrigo model that you guys have spoken to on the call that I think a lot of us are still trying to process.

Yes, good, good. Nice to be here. Thank you for the invitation. Nice to see everyone. I feel bad that we don't have a legal disclaimer. Do we need [indiscernible]. So yes, one Perrigo, self-care. So Perrigo is now a self-care company. Our job now is to position ourselves to win. As people have heard me talk about, it has a lot of assets produces 65 billion units a year. 60, 70 volume shares with major customers, is in 2 out of every 3 American households. I think 1 in every 2 aspirin sold comes from us, 80% of omeprazole sold comes from us. And of course, with our store brand business, we save consumers paying nicotine replacement chewing gum, the equipment of $750 a year versus the national brand. So it's a company that really does improve accessibility of self-care for a lot of consumers who otherwise couldn't afford it. What have we got to do. We need to now think about how we use those assets to create more value. I think in store brands, which is a big part of our business in the U.S., where should we be playing? How do we drive value there for retailers, ourselves and consumers. We have important national brands in the U.S., Mederma, Prevacid, Nasonex, and, of course, now Opill. These are profitable underdeveloped businesses, and we need to bring in the capability and the innovation to drive those. We got a great asset in our international business, growing double digit, and we'll do again this year, a great team there, great culture, very reliable. And then the third thing is what is that portfolio for the long term, that offers more opportunity for growth that we can execute at scale more parts of the world with similar innovation, manufacturing and marketing plans. So that's very much what we're focused on now. A lot of good work has been done by the team on getting us better structured, more reliable, more focused executionally. And now our attention turns to how do we accelerate growth more profitably.

Yes. Great. I think kind of dovetailing off that, you've talked a lot more recently about the whole of the blended branded approach. And I think that's something you've highlighted the U.K. as a market in particular, where you've got the good, better, best model working really well. I think it's a little bit unique to a lot of the people here today probably in terms of you guys are pursuing the ability to compete across all 3 of those channels. So I guess just can you kind of lay out what -- just first of all, in that whole blended branded approach, why is that U.K., for example, why is the way that market is structured so particularly attractive for you guys?

Yes. So firstly, it's often the same molecule, the same machines, the same people so you're able to really scale those assets to compete at 3 different price tiers. So in the U.K., we do have national brands being cough-cold, pain relief, a bunch of others. But there's also this better tier, this mid-tier which is very typical for all CPG categories. Actually, OTC U.S. is probably the exception within CPG. It's very common in infant formula and multiple other categories to find a higher premium price in every sort of value and then a real value. So actually, we're the outlier, not having an OTC. Why I like it is, obviously, we're starting at the store brand. That gives us opportunity to trade up using the same asset base. So we know how to do it. We've done it in the U.K. that allows us to grow at about 5% to 8% probably at a gross margin about 20 points higher than our U.S. average, okay. And it allows us a very unique position with retailers because just very strategic to them. You're competing across so many molecules at every price point. You really are their most strategic partner in the OTC space. So we started those discussions on what does better look like for OTC in the U.S. It's a huge potential market. And we're starting to get after it.

Yes. So I guess that goes right to my next question. Obviously, the U.S. is a market that for you guys is structured a lot differently right now. So what are kind of -- what does that journey look like for you to bring to bear the model you've got in the U.K. to a market like the U.S.? What are the key steps as you see them before you and kind of any thoughts around just like the general time line.

Yes. So we're very focused on accelerating our brand in the U.S., probably is a great innovation. We're bringing in people from big CPG companies and know how to build brands. We're bringing in great innovators and know what consumer winning and meaningful innovation is. And we're enabling the investment into those brands to drive the awareness and trial of those. So that is underway. We are getting more thoughtful about our store brand business where we want to play, how do we win, how do we show up? Why Perrigo? And we are starting the work of building out that better value proposition. Very difficult to do that when you are the national brand because you can look at trade down, it can be NPV disruptive. But when you're building up, it's very NPV attractive. So you start to come with the claims where you're better than, but also at a significantly better value to the national brand.

Understood. Understood. So on -- now just thinking this is a topic that a lot of us are very mindful of looking across the consumer landscape. Is this idea of revenue growth management. You guys are kind of unique. You touched on it in the broad amount of SKUs you have across the whole portfolio. So how do you kind of think about revenue growth management, whether it's the pricing, the volume and mix aspect. I know pricing is different in infant formula and we can maybe get into that later. But just maybe in your self-care business, how do you think about driving that on a sustainable basis going forward?

Yes. So a couple of things there. We're looking to pricing, right? So -- and because in our international business, 90% is branded. So we have -- we see very strong position on pricing. And so that's a key driver of our growth this year that we're seeing in 2024. But also, we're -- we established in our new structure, a team that's exactly focused on revenue growth management. So all the trade spend and how do we optimize our channel as well. So it's a key driver for continuous growth. The same thing we're looking to the U.S. and of course, there is a different level of competition on the store brand side, right? But we're looking to how can we continue to drive pricing and look for opportunities also to improve the way we manage our trade spend as well there.

Yes. And do you feel like in general, just if you look at the OTC category maybe relative to some other categories within HPC, it at least seems from our side of the fence that maybe pricing has -- I don't want to say lagged peers, but there has not been as much pricing in the category as maybe some other household product categories. Do you think it sounds like pricing is a meaningful contributor for this year. But how much headroom do you think there is within the category in general? I know a lot of that will be driven by innovation, but how much headroom is there with where the consumer is for incremental pricing that you guys see?

So the way we look into is, for instance, trying to separate the international versus the store brand, right? So the -- in international side, there is still a lot of appetite. And we're seeing that, and so the net realization between the price and the inflation effect that's impacting cost. We expect this year to be even higher than we saw last year. And so we have some positive trends and results that we're seeing in the first quarter as we push our price into our network that's going in the right direction. In the U.S., as Patrick mentioned, I think it's more the opportunity on how do you balance the portfolio. We think that there is an opportunity further to trade up on the store brand because we believe there are a lot of consumers that see the opportunity but need to be better educated about the value that it brings, that is similar to the national brands, but there is a little bit of trust component there that we need to educate better consumers about that. So that per se can translate into a very good, strong value proposition and translate into higher pricing in the store brand side, right? So when you look into infant formula, the concept of good, better, best is very well established. And so the more consumers look into best propositions for their child, their infants at the beginning of their life, we have an opportunity also to bring also higher pricing in that pricing architecture across the 3 price points.

Okay. Great. Makes sense. So thinking a little bit more about the near term now. And of course, I want to touch on infant formula, color yourself, shocked. I think it would be helpful here. It's a category that not everyone here is maybe as intimately familiar with. So maybe just to set the stage, maybe could you just walk through what's kind of happened over the last several months in terms of like the drivers of some of the headwinds that have run up against the business? And maybe if you're able to give us a kind of a mark-to-market on where we are? I know you guys gave an earnings update very recently. Last we heard, the Wisconsin facility was back online. Any progress on the other 2 facilities in Ohio and Vermont.

I think that was about 20 questions. So yes, for sure. It's -- I mean, listen, there's front of mind for investors, it's front of mind for us and it's front of mind for our customers. So we had a number of interactions with the FDA that I talked about in the earnings. We had a number of quality incidents. And the industry has struggled to achieve 2 things, which is quality compliant manufacturing given these new guidelines from the FDA and operational reliability or supply reliability, okay? Obviously, you can't miss on quality compliance. So it's come at the expense of reliability, high levels of scrap, low levels of case fill rate, et cetera. So with Wisconsin with the FDA, we clearly needed to accelerate and augment our work that is do more faster to get that to quality compliant and operation reliable, very positive story, okay? So we have done remediated that plant. We -- the start-up was faster than expected. And the throughput is better than expected and better than quarter 1, quarter 2 a year ago. Now a different formulation. So it's not completely apples-to-apples, but it's extremely encouraging. So we are fully compliant and operationally reliable and producing and moving through different batches, ahead of our expectation, okay? And whilst I'm not going to talk to what that means in terms of the EPS guidance that we gave at this stage because we're only 4 weeks in, we need a bit more data. It's very encouraging. Okay? On Vermont and Ohio, we had also seen issues. And again, we want quality compliant manufacturing and operational reliability. We scrapped over $50 million of product last year, okay? We have to change our GMPs, our protocols, our processes, our training, our culture, the number of quality people that we have working on the lines, et cetera, et cetera, which is what we've done. So the Vermont and Ohio is much less complex than the Wisconsin challenge that we had. We finished the root cause analysis in Vermont. We are still producing in Vermont and we know precisely what we need to do in terms of corrective actions and preventative actions. And again, that is ahead of our assumptions a few weeks ago. Ohio, the same. Ohio is still producing. We are doing the assessment on that side right now. And again, we'll come back with what [ cappers ] are appropriate in terms of informing them the interventions. So we are moving very well, all right, towards quality compliant, reliable supply operations, and we will be there within a few weeks. The Wisconsin done. Vermont partially done, Ohio to be done, but they will be done much faster than what we did at Wisconsin in part because we bring that know-how now to those plants. Right thing to do, okay? And we think positions us very well in the industry.

Okay. So no change in how you're thinking about the shape of the year at this point, but things are progressing well, given where we were 4 weeks ago.

We feel very good about where we are. No change in message track yet.

And I think, Bryan, the way we're thinking about the infant formula business going forward, this normalized basis of $140 million of operating income, right? So 2023 that was a little bit less than half of that in terms of OI. This year on our guidance, we assume that's going to be even a lower number, given some of those conservative assumptions that we consider about that Patrick just highlighted. But the way we're thinking about that during 2024 is a big impact in the first quarter so about $50 million lower than last year, right? In the second quarter, we expect to be similar OI versus last year. And then third and fourth quarter, we expect a significant recovery mainly on volume, right, because we had a lot of hiccups there. And also, we couldn't fully realize the price increase. We took significant price during last year given the new regulations and the impact they had in our overall production cycles, et cetera. So it took 2 adjustments in pricing, the most significant one in the beginning of the third quarter. And so we expect that in the third and fourth quarter, we're going to see the full realization of that price increase in a much more normalized volume base, right? So when -- that way, we expect at the end of the year to be in a much more run rate level of what the $140 million OI expectations should be realized in a normal year going forward.

Okay. That's really helpful. And even as we think about -- I believe what you guys laid out back in February of '23 in terms of just you went through by category and talked about even top line growth expectations. Obviously, there's some noise in the near term. But thinking out to next year, it sounds like maybe a little like closer to that 3% target in nutrition, give or take, you're going to be exiting, you're trending more towards that being achievable looking at '25.

Yes.

Okay. Understood. All right. Something that I think you guys are probably a little bit more eager to talk about is Opill so let's switch it over to that. You've begun shipping. I saw some samples upstairs, Eduardo tried to get me to try one, which I politely said no. And I know you have high aspirations for ACV conversations with retailers have gone quite well. So I guess just looking out over the next 12 months, how do you guys -- how are you guys going to define success for the brand? Broad question?

We are excited about Opill. It's a game changer for us. It's a game changer for the consumer here in the U.S. We need every day access to that particular medication. So it's a good switch. It's not age restricted. We -- the production aspect has gone extremely well. we have ample capacity for upside. We have the first 12 months outlook on the ground, which is good. And the commercialization model, the consumer model looks very good. Retail support is very strong. It will be very high distribution levels, both omnichannel. The activation starts in April. So we're pipelining right now. And we have a sophisticated digital less consumer model. We understand the consumer's journey. We understand the key questions. We understand how to provide the answers and reassurance in a frictionless way. This is a complicated, sophisticated choice that needs to be medically informed and well understood. And we think we've set up the mechanisms to do that in a fast way, okay, but to sufficient debt. So we're optimistic.

In terms of dollar sales, incrementality, anything like that out.

Eduardo?

So we expect, from a gross margin standpoint to be accretive to our expectations in 2024, right, and expecting that to continue '25, et cetera, as the first year of launch, and we're building all the awareness on the old brand, right? So [ POs ] we expect to be the first product on that whole brand architecture that the team is working on. And so we are putting a lot of money behind that to make sure the awareness takes place. So it's dilutive in the first year, right? So -- and as we progress, second year, we expect that more in the third year to be accretive on the OI side. But from a gross margin standpoint, we're already seeing that positively benefiting our numbers for '24 and '25.

Okay. Any particular learnings that you're taking to this process from the HANA product that you had in the U.K?

Good question. Yes, we have to compress the conversion cycle. So in the U.K. between becoming aware and actually conversing too, it was 2 to 3 months, okay? We've got to really get that down to 2, 3 days to achieve the velocities, we've built out a whole new sort of concierge model, really helping her navigate through those 3 or 4 critical medical questions he works through. And actually now going to reapply that back in HANA's equivalent of Opill in the U.K. So actually, now we'll export that back to the U.K. on how to accelerate that business.

Okay. Got it. One thing I wanted to touch on is cold, cough and flu. I know it's a relatively smaller piece of your business, but it seems like a lot of what we heard a couple of months ago was a slower start to the season. Obviously, you're lapping multiyear strong comparisons, but we have seen maybe incidence rates pick up a little bit more recently. So just from your guys' perspective, I'm curious to see what you've seen out of the category more recently and yes, any of your thoughts there?

Well, let me hand over to the world's leading source of energy.

Well, that's quite interesting. So yes, as you said, I think given what happened in the prior year season, everybody built enough plans that we would see a significant season. And I think there was a lot of questions about is it delayed, et cetera. Remember, in Q3, we had a lot of debate about that in our earnings in November. And -- but we saw incidents increase significantly in December, which is more normal. And then receding in January and February. Quite interesting enough. So we are now in New York and temperatures are quite high for this time of the year, right? And so cough and cold at the end we're expecting to be more normalized. So we've seen inventories come into a more regular pace there. The interesting thing is a shift now into a stronger allergy season, right? So last year, we had a very strong cough and cold season, low temperatures extending further on. And we almost didn't have an allergy season, neither in the spring nor in the fall. So it almost went from...

I always have an allergy.

Well, but this year, and I come from Florida. And so I had to clean my -- in front of my house twice already because it's all orange. And we're seeing a significant uptake in allergy. So perhaps this year is going to be more focused on allergy than cough and cold. And so we have a strong position on the portfolio on that. And so we feel that we are in a very strong position. We have our Nasonex brand as well product. And so we think that we are in a good position if that's what is going to happen, right? So we don't know, right? So eventually, in the coming weeks, temperatures go down, could go down significantly, and we'll see how it's going to play out, right? So.

Yes. Got it. Makes sense. One more kind of broader one on the...

And the margins are much better on allergy than they are on cough, cold.

Interesting. Okay. Okay. One more broader top line one. Just in terms of looking at your U.S. business, are there any particular categories where you've seen trade down to store brand or like within your OTC portfolio more than in others?

We've seen it actually very broadly, probably in the last 3 or 4 months, to your earlier point, a lot of the national brands did price quite aggressively. And so that sort of held up their value shares. But as we got into late quarter 3, certainly quarter 4 and continuing into this year, you are actually seeing store brand volume share growth and value share growth. And that's been fairly evenly split across the categories, actually. Now we win with that. And as we create other tiers of branded businesses, we'll win when that reverses as well okay? And again, that's the key distinction for us is always win where the consumer is. But do so in a more value-accretive way.

Okay. Understood. Last one on the top line. Just thinking about the 1% to 3% organic for the year, the answer might be as simple as infant formula and we move on. But, it is, flex point to the [indiscernible] Well there you go.

Well, I think yes. If, again, I think we said this in the call, if we take infant formula out, which is not easy to do, I agree, but the rest of the business is 4% to 6% organic growth. It's earnings per share growth in the mid-teens. Is GM expansion to 40 and a bit, and it's double-digit OI expansion as well. All of that is ahead of our 3%, 5%, 7% growth algorithm. So the performance of the business is actually very encouraging. The efforts the team have had on these restructuring and these synergies, these reinvention efforts and these -- particularly the international driving branded growth in international working extremely well. We got hit with an urgent necessary requirement in infant formula, which we're moving through much faster than we had expected to.

Yes. Makes sense. I'm realizing I did not give my disclaimer. So if anyone has any questions, I'll take a look at the iPad in around 10 minutes or so and we can do some audio -- audience Q&A. But until then, just thinking about the operating margin trajectory. Obviously, there's a lot of moving pieces this year. I think the guidance implies somewhere -- like if you take the midpoint somewhere in the neighborhood Eduardo of 75 basis points or so of expansion this year, if you include energize and everything so if you could just kind of refresh us all. And I mean I know we just came out of the quarter, but in terms of how you're thinking about the margin trajectory in CSCA versus CSCI. And just any color you want to give from -- just from a cadence standpoint, as moving...

So as you said, we're expecting between 50 and 100 basis points there. And so from a gross margin standpoint as we said we expect to be around 40%, excluding infant formula, but the big contributor on the operating margin is really the Project Energize where we expect about $100 million of benefit of that, right? So that's a key driver for that benefit there. Also, it's important to take into account the HRA synergies, right? So as we commented last year, we expected the first year of synergies to be offset by the distribution transition program that we had. So a net impact was negligible in the first year. So the second year, you have the full run rate of Q4 of last year on synergies and you don't have that effect in 2024. So that's the full benefit of that. On top of it, we have the supply chain reinvention program. Last year, we had 30 basis points. That was mainly relating to the second half of the year. So we expect in the full year, much more accretion in 2024 as we have the full year. As we go to the second round of 1,000 SKU rationalization that we're doing and the other benefits we see in the planning side and sourcing as well. So those are the main drivers. But I would say, Project Energize, it's really helping a lot into that plan.

Okay. Got it. And so more -- just so I'm clear, more margin expansion in CSCI for CSCA this year taking all those pieces.

Yes.

Okay. Great. And now I want to talk a little bit about the long-term gross margin opportunity. Because if you go back to your Investor Day, I think a little over a year ago, the goal was for gross margins to reach 40% by '25, I believe. And now if you exclude infant formula for this year, which I know that's a big piece. But with the help of energize, you're basically getting back to 40%, right, because it's 39%, 100 basis points. I was a math major so it's not all right. And I just -- like how are you thinking about the longer-term opportunity at this point? Because we touched on earlier, you've got innovation from things like Opill, which is going to be margin accretive. It sounds like the general way that you're looking to take the portfolio even in the Americas would favor margin accretion. So just how are we thinking about kind of a longer-term gross margin target and maybe the runway from here past this near-term choppiness?

Yes. So we're -- as we have talked in our earnings, right? So in this near term, we want to make sure we focus on delivering on our 2025 commitments and there's still a lot of work to be done and make sure we deliver on Energize the infant formula stabilization and also help make sure our store brand business, we get that back into further role for the years to come, right? As Patrick alluded, we're going to do an Investor Day later on in the fall. And so we're doing right now a portfolio review on all the different items of the portfolio and how do they fit into our long-term strategy, right? So there are certain categories that for sure, are more attractive versus others, right? When you think about the operating margin and how that plays out to our long-term growth like Opill is a key example, right, in women's health. There is the whole skin healing category, where Compeed in Europe and Mederma in the U.S. play a key role there. And so we're in the middle of that work on really being able to say, okay, what's our ambition long term into -- in terms of gross and operating margin long term. So at this stage, we're committed to delivering what we said for 2025 and executing against that, but more to come in a couple of quarters.

Okay. Sounds good. reminding me, one thing I meant to ask on Opill actually, just given that it's a new product, kind of a new category here, you could almost say. How did you guys approach pricing the product in the market. And I guess, as we have like the launch and retailer activation, how active will you be in kind of monitoring that price point in terms of consumer adoption.

Yes. The pricing, of course, is at the sole discretion of the retailer. They control the shelf pricing. We did model out, obviously, different price volume models. And so against affordability, volume, accessibility our target economics of the initiative, retailers target economics. We think the price points are good. There is an important part of the market where pricing may be a barrier. We can use HSAs, FSAs, we're exploring other consumer support programs. And of course, this whole topic, which has come up a couple of times in the discussions today. And the current administration is very [ pro ] at this that it's -- you can use insurance to claim it. That could produce a very significant change in the demand profile for that. And we need to model that, understand that and see how we support that. That is going to be a medium-term effort though. So I don't think there's an urgency to that, but we do need to understand it. Inevitably, there are those that would want this to be priced at a much lower price point. They're not actually paying for that. We would be. So we have a different point of view. But we think $20 for a month supply is competitive on a per day basis, right, given the convenience of that, there's no co-pay on that, et cetera, et cetera. So we'll learn. We will learn, but we do need to understand what happens and how do we get ready should it move to insurance coverage.

Okay. Great. This one's kind of for both of you, but Eduardo, we'll start with you. Just on capital allocation. The cash costs from things like Project Energize deleveraging, there's definitely been a more concerted, I feel like tone from you guys on reinvesting and then obviously, you've got the dividend. So just how are you thinking about ranking priorities from a capital allocation standpoint?

Okay. That's great. So starting with last year, right? So we were able -- we look into our operating cash flow conversion versus our net income. So last year 2023, we had a very strong performance, 115%, we ended up with $750 million in cash so ahead of our expectations, which was very, very strong and positive. When you look into overall the sources of cash and uses of cash, right? So sources of cash, really, this year, we expect 90% to 100% operating cash flow conversion. Also, we are expecting significant cash from non-core divestitures that we have laid out last year. And so we have been executing on that. We expect that to be concluded within the first half of 2024. And then we have about $400 million of debt to pay down at the end of the year, right? We have important capital investments. And as you also mentioned, we have both Project Energize as well as the remediation in infant formula that we laid out for this year. And that's going to be the focus a lot of our reinvestments in the company. And the last piece is dividend. So recently, we came out with our dividends that we announced by if I'm not wrong 21st year, the consecutive growth in dividends that we want to make sure we keep that as a core way to return value to our shareholders. Of course, as we look more long term, and we continue on our path to achieve like 3x net leverage by 2025. That will open a sort of new opportunities on how they think about returning value to shareholders as well as other reinvestments. I'm sure Patrick wants to talk a little bit about that.

Yes, the question is important. We want to narrow to a more scalable financially attractive portfolio, okay? That will probably mean we can release some assets over time. Then it's all right, what to do with proceeds, how to best purpose those to invest for growth and more sustainable long-term growth, but also invest in the health of the stock. So a major commitment is to deleverage. We see a clear path to that about 3 by the end of next year. But then to start looking at some other things, we've actually just set up an office for a strategic capital allocation, which actually reports to me. We're being much more disciplined on our returns-based allocation, right? So both for our cash OpEx, be it innovation, be it A&P but also for our capital projects, what are they going against? What is the absolute rate of return? What is the payback period, clearly linking through to TSR drivers. Equally, if we're not getting to those thresholds with balance of cash, if it's better to return it to shareholders, it will be done. And then which particular vehicle do we do that by. We're going to outline some of our thinking and glide path on that at the Investor Day later in the year, but we want to be much more return oriented in our mindset and in our compensation and a much stronger linkage through to TSR.

Okay. And so some of that -- some of those comments about like potentially streamlining the portfolio and such, we'll hear more about that later in the year on year. Okay. Got it. And then we did have one come in so let me pivot for a minute here. So on the margin front, you guys mentioned the margin gap between the U.S. and the U.K. Could you envision a time frame or trajectory that this gap can be narrowed.

Definitely, the intent is to narrow it. I think I'd like to reserve the right to give a more informed answer to that as we complete our work. But I think the U.K. model is the right destination point over the long term for the U.S. I think that would look like -- I mean, 10 to 12 points, something like that. And as you stabilize your U.S. store brand business and you disproportionately grow brands, which are typically a 2, 2.5x the average gross margin store brand, you can start to see that mathematically, that's really quite achievable quite quickly. But it's a detailed question, but that is definitely our intent and it's more achievable than it probably initially looks like when you've got that spread of gross margin on the drive part of your business.

Yes. And I guess kind of thinking about that, just kind of in terms of like the consumer flywheel that we see with a lot of other companies within our coverage, it sounds like we have a more -- we've got some room for gross margin expansion over time for sure, and aspirations, hopefully, to do more with some of the improvement in the U.S. business. How do you think about especially as the branded business grows, how do you think about advertising. Now I know the percentage of revenues for you guys might not be comparable to peers? Obviously, it's a very different business. But how do you think about as you get these gross profit dollars flowing through like the amount that's reinvested in advertising kind of to fuel those brand businesses?

Well, we do think about it and we think it's necessary. But it's on a business case led basis. We can't afford to spend tens of millions of dollars on qualified programs of that work. So we're setting a much higher threshold in terms of testing and confirmation and then investing with more confidence. And that's part of the sort of returns mindset that we're talking about. As we get behind brands with clearer propositions and the meaningful and unmet needs. Obviously, it's easier to pay that out. But our return metric for A&P, whilst in other companies would be multiyears, it's going to be a return within a 12-month period. That's just necessarily how we're going to have to do that, and that is quite possible, absolutely possible, particularly in the context of e-commerce, where we have a very strong business and a very strong share. So yes, A&P, but faster rates of return than you'd see in typical other CPG companies.

Okay. And then kind of in that same vein, kind of just on innovation, Opill obviously, a huge undertaking for you guys is the way you're kind of thinking about it, maybe this is for you, Patrick, is the way you're thinking about it maybe more larger scale innovation like Opill or is Opill a little bit more of a -- I don't want to say an isolated incident, but you're going to mixed in and singles and doubles with some -- well, everyone wants a home run, but how are you thinking about the size of innovation from here after something like Opill.

So again, we're going through a new process now much stricter resource allocation and innovation, and it's always a blend. You need all of the above. The switches are highly attractive as was talked about, O, is the brand, Pill is the first leg of that store. We're also looking, of course, HRT and a number of other categories within that as a women's health care full life stage brand. So we will look at switch. We have probably 3 or 4 are starting to work on. Also though within our brands, you have transformational innovation within the brand and then sustaining innovation. A lot of our innovation spend was towards the low end incremental value and too little was going against those big transformational wins. So it's much more balanced. We're also looking at, though, is the scalability. We -- a lot of our innovation historically small brands, small countries, small ideas, yielding small returns for well over $100 million per year investment. So we need to find big strategic consumer printing ideas. That we can create competitive advantage with that we can scale across as many brands in as many countries as possible. And that's literally the process we're implementing.

Yes. And I guess last one, and then we're pretty much at time here. But just thinking about the 3%, 5%, 7% over the long term, it sounds like we're going to hear probably more on this in a few months now. But I think probably one of the things that investors have said the most recently is that they are -- there's just been some concern with like, obviously, the infant formula incident recently, hard to proceed something like that. But just the ability to deliver on more of a consistent basis with such a broad portfolio without maybe call them land mines popping up. So just how do you think about like that 3%, 5%, 7% longer term? How big are the changes going to be to get to a more sustainable delivery from here?

So I'll give some perspective and then we'll get the adult on. Business is a risk. There's always land mines. Regulations change, competition changes, consumer changes, there's a report. That's just real world. Our job is to deliver. Now we have a very wide asset base? And I got a question earlier about, are you managing contingencies to absorb the shocks. So I think we have to manage our business in order to deliver those commitments. You get the card to do. Our job is to come up with the best hand we can and the card the play that we committed. So we're thinking much more now about how to sort of insulate the business from those shocks such that when they happen and they do happen and they will happen and they happen in every business. But it's those that are able to absorb because they've built in either contingencies or optionality such they can manage. This has been an area of great focus of ours over the last few months and certainly coming into '24. Okay. So I think we have more ability to absorb and hopefully, over time and best of patience with us has been good, but it is for us to now demonstrate that we can manage a business to deliver consistently and not get knocked off track when these inevitable landmines happen and they happen in every company.

Yes. And I think just to complement, right? So when you look into the 3%, 5%, 7%, there are a couple of key levers there that we believe can help us. First is as we scale, look and scale beyond just the U.S. and international so you can have the benefit of a structural cost that can play on a fixed basis to make sure that any business that you get beyond the international and other regions, you can have the OI benefit by diluting the corporate cost so that's why you see that leverage coming in operating levers to our framework. And also, as we continue to delever and our interest expense continue to go down. And we believe we have a very solid tax structure as we play around the world. So that can give us incremental leverage to get to the 7%. So I think beyond just the top line 3%, there are other levers that we can pull on the operating margin as well as managing our interest expense and taxes that can still deliver a solid bottom line growth over years to come.

And I think the final piece on that, that we owe investors is what is that differentiated believable long-term growth story. How are you going to keep growing year in, year out and a clear pathway to do that. I think at the moment, we sort of moved from one year to the next, delivered a lot of our performance through restructuring these. But now as we start to look at attractive revenue growth, what does that look like? And not to place too many expectations on this Investor Day in the fall, but that's what we will talk about is Investor Day in the fall. So some very important things to be considered, strategized on and then communicated. But to your point, we have to show that we can manage a business and deliver despite the inevitable shocks you get in the business.

Good stuff. Looking forward to the Investor Day, clearly, the bar is. Well, thank you all of you for sticking around. I know it's been a long day. Hopefully, we'll see you tomorrow. And thank you to Patrick, and thank you to Eduardo. It's been great.

Thank you, Bryan.

Thank you, everybody.