Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us in Oppenheimer's 24th Annual Consumer Growth and E-Commerce Conference. My name is Rupesh Parikh. I'm the senior food, grocery and Consumer products analyst here at Oppenheimer. I'm pleased to introduce our next presenting company, Perrigo. Joining us today are President and CEO, Patrick Lockwood-Taylor; and EVP and CFO, Eduardo Bezerra. So thank you both for being here today. So just a quick note on the format session. To start, I'm going to turn it over to Patrick for a brief overview of the company. Then we'll move to a few questions that I have and finally move to audience Q&A. So if you have questions, please enter them in the question panel below the video. So with that, Patrick, I'll turn it over to you. Audience just give us 1 minute for some technical issues.

Can you hear me okay?

Yes, we hear perfectly. Go ahead with the presentation.

Apologies for that. Never let me near a computer. All right. Well, good afternoon. Thank you very much for joining us today. It's a pleasure to be here. I wanted to talk a little bit more about Perrigo, who we are, what we're doing, what our outlook is. And then hopefully, we'll have some time at the end to some of your key questions. So first and foremost, actually, we're having a technical difficulty again. Just give me one second. Thank you very much. All right. Anything we want to say very good on the next chart here. We play in the self-care industry. As many of you know, this is a very sizable category over $400 million, growing approximately 4%. You can see the statistic here that well over 2/3 of households now considering wellness is a critical priority in their everyday lives. Self-care category delivers a tremendous amount of value savings in the health care infrastructure, U.S. alone, well over $170 billion by reducing doctors' visits, prescription medications, et cetera, about EUR 33 billion across Europe. Critical point here is that we completed every price point including a store brand and value, that allows well over 30 million more U.S. households to actually access self-care products that they otherwise couldn't afford to. And in Europe, again, we see over 1.2 billion treatments per year. Again, this will talk to the critical nature of self-care and the critical role that we play within that. Just to turn a little bit more to the scale. We produced well over 65 billion units a year. That's equivalent of 8 doses annually every person in the world so just to put that in the context of consumption, about 2,000 Perrigo doses are actually consumed every second of the day. No one else can really talk to you about sort of volume impact and usage around the world, it's incredible. I've already talked about some of the savings that we create. We alone over $30 billion -- but we also play in the context of self-care genuine improvements to people's everyday lives, about 2 billion fewer cigarettes smoked in 2023 because of our nicotine replacement therapies, actually saving consumers well over $0.5 billion a year. Again, something that's not often understood is just the access that we achieved in the -- over 2/3 of all households purchased a Perrigo product. And in 2023, we provided a release for over 50 million consumers from cold symptoms in Europe alone. We're an extremely diversified company -- this allows us to provide scale, reliable, fairly predictable growth. The thing that's not often understood we're often seen as a store brand business. Actually, over 40% of our sales now from national brand, particularly in the international business, which is probably about 90% branded. Of course, the balance is still coming from our very strong multibillion store brand business where we enjoy very strong market leadership positions, really with every store in the 2 countries where we dominate store brands in U.S. and U.K. every store carrying our range. As we talk about the company, really, we are laser focused on what needs to be done in the short and midterm as we get this company back on track of the sustainable value-accretive growth, which is really our rating [ drive ]. First and foremost, of course, we have to stabilize the formula business -- as I'm going to expand upon later on. We're well on track to recapturing $140 million of annual adjusted operating income in '25, capturing all of that plus in '26. We expect to see earnings in that business really normalizing in quarter 4 of this year, and we're well on track for that. Critically, as well, we have to deliver Project Energize. This was a significant cost saving program. It's gone extremely well. We expect to realize $100 million, $110 million in cost savings by the end of '26. We're increasingly focused on restoring growth and margin growth to our U.S. store brand business. As I'll talk about later, we have something like a 50 volume share, but there are still over $3 billion of near in white space opportunity for us $6 billion in total. There being and plenty of opportunity to get bigger and more profitable. We are an amalgamation of several transactions, but it is critical that we stream them -- this company to one operating model, which we refer to as One Perrigo. This will allow us to optimize and scale the operating structure, and we're making significant progress on that. Key for us ultimately is driving free cash flow over our asset base. We're looking at the numerator denominator constantly. We will see significant improvement in free cash flow going forward, given the significant investments that we had this year in Project Energize and infant formula, but I'll talk about that thing -- on that later. And delever the balance sheet. This is critical for us, fantastic progress. We were 5.5% a couple of years ago. By the end of '24, we'll be at about 4% and will be 3% to 3.2% or so by the end of '25. So significant progress, in line with our long-term commitments outlined in February '23. I wanted to just talk a little bit about these accretive initiatives. These basically would be investments and focus, significant cost and cash opportunities for us simplifying the businesses or streamlining them, and we've made good progress here. The HRA acquisition synergies totaled $55 million, and that will be fully realized by the end of this year. Supply chain reinvention program was really about simplifying operations, rationalizing SKUs, taking out layers. The total NPV from that initiative on 5 years is about $160 million with a 5-year ROI of over 60%. So a super program generating significant shareholder return. Project Energize. Similarly, there was an investment cost to this, where you can see the $140 million or $170 million of savings by the end of '26 -- overall investment $40 million to $60 million. But once again, this is a 5-year ROI of over 80%. So again, very sensible investment delivering very meaningful cost and cash upside for the company and our shareholders. Infant formula has been a significant focus for us this year. We have made outstanding progress in line, it's not ahead really of our expectations. The large-scale plant reset at 3 plants that went through significant remediation that is now behind us. It's been completed some months ago, very good. We have seen significant improvements in quality control, production, packaging and release attainment. Just to put some numbers around that, we've seen a tenfold improvement in our environmental stability, which is outstanding. And while we're still early in the post-remediation production ramp-up, early results are very encouraging, where we have seen significant improved production versus pre-remediation levels. So we are achieving industry-leading quality control at near historical record production mills -- a fantastic effort by the entire Perrigo team and my personal thanks to them. [indiscernible] point one as we finish a campaign, everything goes into testing. All batches are part of one campaign, you have to wait for the last batch to be produced. That means it can take up to 3 months from production, actually realizing revenues. So definitely, what we produced in quarter 2 is realized in quarter 3. We expect sales to continue to ramp up. We're working extremely hard to refill pipelines. And we will see the probably 70% to 80% of revenue being realized in the second half with our earnings normalizing in this business in quarter 4, and we are well on track to achieve that. As we turn to another critical part of our business, which is, of course, in particular, our U.S. store brand business, there's been a lot of focus on this. We have optimized the supply and the manufacturing network. We've taken a lot of SKU prioritization -- the existing businesses through extremely low gross margin and then using that capacity to more profitable products. We're starting to get much more competitive as we defend critical businesses, but also, again, much more focused on where do we want to grow. We will see as our old measure, a greater share of free cash flow from this category as we focus on innovation, which basically allows us to claim superiority versus national brands recently focused on white space expansion. As I mentioned earlier, we see $3 billion of very near an incremental opportunity, prebid total market size and for a total white space opportunity just in U.S. store brand of about $6 billion. We're also effectively exploring new dosage forms, which have higher barriers to entry, growing the value add to retail and consumers and a greater margin opportunity for us. So a lot of focus and a lot of exciting development to come from the store brand business. There has been a lot of focus of late on seasonality effect of cough-cold and in particular analogy, and I want to turn to those because we are well insulated to get those. There is no change to our guidance as a result of a weaker cold season in the U.S. or a weak allergy season. The reason is this. Our business is also going part international. That business is predominantly branded. We didn't see any evidence of destocking. Category growth was strong, and we felt about 7% pricing as previously shared. This, in one part, insulated us from some of the effects that we've seen in the U.S. in terms of destocking and quite weak seasons. Next, 75% to 80% of our business is nonseason with a very diversified portfolio, infant nutrition, nicotine replacement oral care. These are fairly steady, reliable consumption patterns and are also disproportionately profitable to us, and that insulates get from these seasonal effects that we did actually see this year. So for us, really, this is just business as normal. We financially managed to be midpoint in season that allows us to manage upside and allows us to absorb downside. So you'll see no change in our guidance as a result of these weak seasons in the U.S. We are well insulated against that. Critical aspect for us, again, 40% of our business is branded. These are #1 or #2 share positions in the categories that compete and we're seeing very good growth. We have learned a lot from the Opill launch, and we're porting a lot of brand building and digital capability. Of course, it makes good sense to apply that against some of our other branded opportunities that we have in the U.S. And these are just some of the sort of early results we're seeing from that focus on branded, which will be a disproportionate growth driver for us. But Mederma growing at 25% or so, which is about 2.5x faster than the category. Nasonex is growing 3x faster than the energy category in the U.S. And I'm very pleased to say that already, Opill is a 1.2% share of the U.S. contraceptive category in less than 9 weeks in a category of over $1 billion do the math on the size of that at retail. But these indicate to us that we're starting to get the right people and the right brand ability to the programs with the right investment that offers sustainable growth, a very margin-accretive payouts for the company. Now it is critical that we continue to improve normal free cash flow generation. We'll do that through a combination of these things, EBITDA growth, which is strong. We have made investments in some of those accretive initiatives, but those costs are winding down now. So this is just us achieving the full upside in terms of cost and cash of those initiatives. We continue to make working capital improvement in inventory days, receivables and payables and we will continue that effort. So as I mentioned earlier, we're well on track to deliver our midterm leverage ratio commitments we made to you, which by the end of '25, we'll be in the low 3s. So we're fully on track for that and a core focus for us. So as I wrap up here, and I hope this was helpful to understand more about Perrigo has diversified our portfolio is how we're insulated from seasonality effects and that really we're growing EBITDA and EPS very strongly with very strong outlook. We've played a vital role in the [indiscernible] that we've delivered value to consumers and society by improving access. We are consumerizing simplifying and scaling on Perrigo. We remain on track with these important accretive initiatives. We've made outstanding progress in infant formula and getting to quality compliance and reliable manufacturer. We're focused now on driving our performance in our U.S. store brand business. We will get back to gaining share and driving free cash from that very sizable portfolio. Mentioned, we're largely insulated from seasonality. These effects that others have seen don't play out for us. There is no change to our guidance at all relating to this. We've invested a lot in brand building capability is starting to pay off, not just in Opill, and that's its early success in other parts of our U.S. portfolio, which have tremendous growth opportunity. And critically, we remain focused on delivering. That is saying we're going to deliver, we deliver. We're reliable. We're predictable. We execute well and critically delevering in order that we can drive significant additional TSR through that. And with that, I very much welcome any questions.

Thank you for that Patrick. So to start, since everyone spends a lot of time on your CSCA business, I'd like to touch on your CSCI business. Are there any insights you can provide on the CSCI business that you think some investors might not appreciate?

Thank you. I'm glad you asked that. A lot of the focus is always on our U.S. business and sort of heritage business. So CSCI, outstanding business being delivering double-digit growth now for several years, is starting to see significant enhancements in its operating structure and therefore, it's OI structure going forward with gross margin expansion. Large number of brands competing across every country in Europe and markets outside of Europe, enjoys #1, #2 share positions in each of those brands. Many of these are being local important, profitable, growing brands. As we look at that in terms of opportunity, simplifying the structure, and really [ fitting ] in on core categories and brands that we think give us more profitable growth and more scalable growth. And what I mean by that is the same chassis, the innovation, the marketing, the go-to-market being applied to more brands, more commonly -- across more markets. So it really is a driving element of our performance recently and certainly going forward with a lot of top talent that we're looking to leverage in more parts of our operation as well.

Next, can you walk us through some of the key puts and takes we should be thinking about as we look towards rest of 2024?

Eduardo, want to take it?

Yes. Thank you, Patrick. Rupesh. Good afternoon, everybody. join the call today. So first of all, as we look into 2024, as part of a result of our Q1 call, we reaffirmed our outlook for this year, right? So, some of the key areas of focus that we have for the remaining of the year is, of course, starting with infant formula. So Patrick already mentioned about the importance for us in the second half to really continue to increase volumes and get to Q4 with a normalized run rate that we'll speak about the size and the profitability that this business has in our portfolio. So we continue to focus on knowledge accretive initiatives. So both the Project Energize, that we launched in Q1 and also continued to deliver on the supply chain reinvention programs. They are both on track and helping to improve our operating margin, continue to build and expand the Opill awareness, as Patrick mentioned, that's a key focus every day we learn a little bit more about how that complex category evolving and all the actions we've taken to improve awareness trial and conversion of different consumers there. We do expect in the second half to have shipments more aligned to consumption, right? So we talked a lot. We heard a lot in Q1 and continue to hear a little bit about destocking of retailers in several categories, including OTC and Oral Care. So we expect that at these levels, we should see more normalization of that in the remaining of the year. Also, both categories usually in the U.S. but also in Europe, we see in the third quarter, the start of the sell-in across that important cough and cold season that starts in Q4. Also, we're finalizing our sell-in on the summer season as well for all the insect repellant, sun care and also allergies in Europe. And also get the U.S. store brand back to winning share and continue to grow margin through the different actions that we have been taking, both from the supply chain reinvention as well as Patrick reinforced, we have a significant opportunity on white spaces that we want to continue to explore there.

Okay. Great. That's great color there. And then how should investors think about next year with infant formula normalizing? Can the business deliver more than $3 of earnings per share?

Yes. So the first answer is yes. right? So that's really what we're working on. There are 3 major components that give us the confidence on that versus the infant formula rebound. So that's why it's so critical that in the fourth quarter we get back to a normalized state. Remember, when we talked about our earnings guidance, we expected $0.65 impact related to infant formula into our results for 2024. We expect to see a significant portion of that rebound next year. The key elements that we are considering is building some inventory stock. That's going to be important to make sure we can manage any [ short few ] supply, so that demand is not impacted by that. So we expect a significant portion of that $0.65 to recover. Of course, we expect a dilution deceleration, since we talked about Opill we expected, it to be dilutive for the first 18 to 24 months as we continue to invest not only on the brand, but in the architecture of the brand that leads Opill. And also with all the different accretive actions and the base growth also, that's an important component. So to get to your answer, we should expect to see that higher than 3 -- north of $3 in next year. We haven't started yet our plans to build for 2025, but also there are some other considerations, right? So we're watching closely consumption and also consumer spend right? So that's a critical factor there and also how pricing is evolving in the whole industry. Also, U.S. OTC growth will likely be volume-driven or price driven. In the case -- for the last 3 years, we saw a significant increase in the national brands, the same way we had a benefit on our branded portfolio in Europe. But we've seen U.S. a big portion of that took place on the national brand. So we expect to see less of that and more in terms of volume. Given the significant increases that we saw in branded in international over the past 3 years, we expect that to reduce and not to see the same pace of price increases in our international portfolio. And we're going to continue to look to ways on how can we improve our One Perrigo strategy, right? So Project Energize is a key driver for that, and we still have actions to make sure we're going to be able to operate in a new model and make sure that we complement the buildup of capabilities that Patrick talked about. And also see more normalized inflation across the cost base, right? So in Europe, we still see some things. In the U.S., we saw deflation taking place that helping the cost side, and that's why we see more push from retailers side on the national brands. But those are some of the key elements we're taking into account as we continue to work in the second half on our 2025 plans to be able to give a more precise range of where we expect over the next year, Rupesh.

Great. So I'm going to wrap up with one final question. So you spoke about your evolution to One Perrigo and your current focus on delever and delever -- or sorry, deliver and deleverage. Can you talk about how you see the One Perrigo strategy evolving over the longer-term?

Yes, I'll take that one -- thank you. So yes, [indiscernible] through '25 deliver and deleverage, as you said. And really, this is about executional excellence in our core business to maximize free cash flow generation and enable us to delever. Second critical element of that is to deliver Project Energize commitments to enable margin enhancement for us going forward. As we've mentioned several times, continue to work to return infant formula as they will propel operations and has gone extremely well, and we are well on track. And in our U.S. store brands business, that's about us focusing on driving growth and margin expansion. Really, through '25, that's the critical work to deliver and delever and if we do that, we set up very good EPS and debt sort of outcome for ourselves. Beyond '26, really, it's about achieving sustainable value-accretive growth. And this really just follows very -- from what we're already doing, which is accelerate profitable branded growth, to build a more robust consumer-led innovation pipeline, which is well underway. And to ensure that we have a total shareholder return mindset embedded in all levels of the organization and all investment decisions. Finally, as we go to One Perrigo, we spent a lot of time recently looking at our portfolio. We're much clearer on which categories and brands are the most attractive, scalable growth. Will share more of that thinking as we have our Investor Day early next year, we can expect a more focused portfolio going forward centers in categories with such favorable growth rates, where we believe we can achieve #1 or #2 position and also much more attractive overall ROI. But that very simply is how we see the growth one week to the other. It will be most significant change in investments and most of what we have will be right on a very tight criteria basis.

Great. Well, thank you. I'd like to thank the Perrigo team and Patrick and Eduardo joining us today.

Thank you.

I appreciate it, Rupesh.