Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

All right. Well, good morning, everybody. Thank you so much for being here. My name is Korinne Wolfmeyer, and I'm the beauty and wellness analyst here at Piper. We're happy to have the Perrigo team with us today. We have CEO, Patrick Lockwood-Taylor; and CFO, Eduardo Bezerra. For those unfamiliar, Perrigo is about a $4 billion market cap company. We use their products every single day. Perrigo is a major player in the branded and private label self-care space. They make products like generic ibuprofen, allergy med and even infant formula. So we'll start with a brief presentation and overview from the team and then jump into Q&A. So take it away.

Thank you very much. Good morning, everyone. We just wanted to give a few slides, just to explain who we are in the business we're in and what we're focused on. So we're in the self-care category, which is an essential consumer staple category. It's about a $400 billion category worldwide. Worldwide produces about $170 billion of savings. It's been about reducing doctors' visits and prescription medications. And each year for perspective, about 1.2 billion elements across Europe alone are treated with OTC. We delivered substantial benefits to consumers and society. About 2,000 Perrigo doses are produced every second of the day. And we alone produced about $30 billion in yearly savings to the U.S. and the EU health care systems. Our household penetration is extremely high relative to our competitive set, about 2 out of 3 households in the U.S. actually purchased a Perrigo product. We're building out critical capabilities needed to win in self-care. We are a 130-year-old company. So it comes to no surprise that we have a very strong foundation and a very strong asset base. We think we're poised for greater scale across multiple fronts and have the capacity to drive value-accretive growth through consumer-led innovation by winning more store brand business and through brand building as well, which I'll come on to explain. We're getting clear on what our core conferences are and bolstering those, and also getting very focused on what our long-term enablers are for future growth. Importantly, we're very well diversified across global self-care categories, which insulates us a lot from seasonality impacts, which allows very predictable scale growth. Branded products represent about 40% of our portfolio today, and will disproportionately drive our growth going forward because they tend to have a much higher margin profile. Our store brand business is about 60% of our revenues and can be found in every major U.S. and U.K. retailer, and we're by far and away the largest provider in the U.S. Just turning a little bit to how our portfolio allows us to win with emerging trends. In -- for example, GLP-1 usage, this is expected to drive certain OTC categories. The market today represents about 6 million users, growing to about 30 million users over the next 5 years or so. Growth in this space has the potential to drive meaningful increase in OTC usage as GLP users have the potential to be OTC category multipliers, what I mean by that. There are a lot of side effects associated with these products, leading to a lot of OTC opportunity. For example, one GLP user may basket and experience, nausea, dirrhea, headache, constipation and gas side effects, meaning that they will look for OTC remedy against all of those. We've worked through specific claims, and we'll look to add more relating to GLP-1 side effects, and we've now started to provide a one-stop solution for this working with our major regions. This is about 1 example of the Perrigo scale really providing a unique solution for emerging OTC trend. And when I started at Perrigo, there was no doubt in my mind, it was an organization comprised of very dedicated, loyal and talented individuals, and we have now built that out much further as we focus on blended branded growth. We've welcomed additional world-class talent both in the executive team, but also the Senior Vice President, [ Eduardo] . In quality, brand building and other leadership positions, including innovation. Much stronger consumer focus, much more knowledge on the health care category, much more expertise in CPG. These new leaders, as you can see from the chart, are finely joined from world-class consumer organizations. Perrigo is becoming a destination company as we get very clear on how and how fast we will grow, and the kind of win culture we're looking to develop. So as I finish and then I'm going to hand to Eduardo just to share some update on our balance sheet. Our near in focus is really quite simple, which is to deliver and to delever. Stabilize our own performance of business, fully recovering the $140 million of annual adjusted operating income through '25 and early '26. Continuing with our major cost saving initiative, which is Project Energize, realizing $100 million to $110 million of cost saving million to '26. Starting to regrow, which we are, which hopefully we can expand on in a minute, our critical $2.5 billion U.S. store brand business, expanding our market share and our margins in that business. Getting our cost structure optimized under a 1 Perrigo operating model, which means common systems, processes, financial planning, techs act, et cetera. Continuing to prioritize free cash flow generation, which is improving strongly and critically deleveraging our balance sheet. We're on track to be below 4 by the end of '24 and 3 to 3.2 by the end of '25, and that all remains on track. Let's talk a little bit about the balance sheet optimization. Eduardo?

Yes. Talking a little bit about that. So there is no change in our debt paydown strategy. As Patrick mentioned, we still expect to achieve a little bit below 4x at the end of this year and low 3x by 2025. So we are committed to pay down $400 million of all the investment-grade bonds that we have maturing at in December. And yesterday, we announced a refinancing. We expect to be out of the market by Thursday. And so 2 things important to highlight there. So we have $700 million that are due in March 2026. And also, we are taking a portion of our term loan B that we have. So $400 million out of $1.4 billion of notes that we have, and we're replacing with 8-year notes of about $750 million and about EUR 350 million that we're launching in the European market. So again, no change to our overall debt, it's just extending the maturity terms that we have there. We expect a favorable coupon rates, mainly in the European market on our higher bonds as compared to the current term loan B rate that we have currently because of sulfur rates that we have right now. So the euro-denominated notes create a natural hedge because, as Patrick mentioned, 40% of our business today, we generate internationally, mainly in Europe. And so that creates a natural hedge into our business. Also by taking that refinancing now, we reduced the uncertainty because of the U.S. elections and how liquidity in the market could take place. Also, if we delayed that and we left that for, let's say, the first quarter of 2025, we would be at risk to have our debt as current. And then you enter in all the discussions with rating agencies and auditors about how much cash that you have in the balance sheet versus how much you have current debt. So it made a ton of sense there. An important thing is all 3 rating agencies, Moody's, Standard & Poor's and Fitch, they all reaffirmed their current rating and their outlook. So no changes versus our current debt profile. So again, just a regular financing that we're doing at this stage to really take advantage, mainly on the coupon rates in the European market. Okay.

Great. Well, thank you both so much for that overview. It's really helpful in the background and in the infill of the debt, really, really useful. So thank you very much. I would like to touch on, I guess, just jump right into probably the biggest topic for Perrigo right now, which is the infant formula business. It does seem like you've gotten things pretty under control. All sites are now up and running and production is on its way to normalizing. So a few questions here. First, maybe you can give us a little bit of color on your expectations for that business heading into the back half. What you've seen so far over the past couple of weeks and months? You have said production is normalizing, but how far into that safety stock build are you and when should we really start to see a pickup in the sales data from that recovery?

Yes, I'll give some perspective and then Eduardo. So job 1, we get to quality of compliance. That was done in the first 4 months, 5 months of the year across the 3 summit significant undertaking done extremely well. We have excellent environmental control and monitoring and compliance. That was fundamentally important and very well done. Second was the ramp-up of the production, okay, getting to the attainment levels that we've historically seen with much more thorough quality led GMP. We're at or ahead of a year ago for that attainment. Okay, which is very good. So too much more disciplined, much cleaner running, much more smoother with much less downtime. The third part of the exercise, as you rightly say, has been rebuilding retail pipeline, fill inventory back of store, distribution centers. That is going well. We're 90% plus in our major customers but not across all customers. We still have work to do to the pipeline. As soon as that's completed, we'll focus to the last element of your question, which is really on consumer activation. There's no point in doing that until we have good in stock levels in stores. We're seeing that. We will start the demand creation activity literally any day now. And that will allow us to start rebuilding consumption and demand for consumers typically switch from branded to store brand proposition after about 3 or 4 months of being in the category. That's when we have to target them. Obviously, having such low inventory position and stall about few months, you have seen a dip in share. And we should start to see sales consumption sales recovery in quarter 4 and then acceleration. So for us, as we look at it, all on track and on track with what we have built [indiscernible].

Great. That's great to hear. I also believe you still have the final FDA review, I believe, in November when [Audio Gap]. Can you describe to us what all that review will [ pay-off] and how confident you feel that in the change that you've made heading into that review?

Well, we don't know when the FDA will do that. With inspection, typically, they do it when -- at the annual, the warning letter, which is indeed November. There were a key observations in that. So understandably, they reported those aspects of our operation and any other aspect that they want to. We put in a tremendous amount of people, protocols, training, et cetera, which we monitor every day now. And we also have run our own bulk audit to how we perform and also learning from that. What I would say is we feel we have a quality compliance reliable fund. That's what we have to go.

Great. Great. That's great to hear. Another big topic for Perrigo lately has been Opill, which is your new over-the-counter oral contraceptive. From the sales data we track and a lot of your investors track and from hearing you speak on the Q2 call, it does seem like the product is taking a little bit longer to ramp. Compared to your internal expectations heading into the launch, how are you now modeling sales contributions from Opill as well as the marketing spend you plan to deploy into the product? And have you altered your near longer-term expectations at all around the Opill?

Opill. Opill, so it's a new consumer. It's a new category. It's a new consumer journey, okay, which we could never fully understand until it's reality, given as much modeling as we like for Opill. So I think on the very positive side, it's now a 3 share already, okay? The cells are sequentially building. We are getting very good awareness to trial conversion and ahead of expectation repeat. Repeat is in the high 40%, which is very unusual in branded products. Typically, it's about 30% to 36%. We -- the name of the game for us now is to build awareness, okay? So we've shifted our media strategy to do more awareness based advertising across the broader audience, number one. Number two, we have insurance coverage now for Opill. But just because you have the coverage doesn't mean the consumer knows how to activate that. All the pharmacists in the store knows how to activate that. So we're putting an effort now make sure that we're making that as seamless as possible so they can take advantage of that insurance cover. The third aspect, and it really relates to driving awareness is we've got to improve in-store displays, shelf talkers, et cetera. There's too many Opill on the bottom shelf of 2 basins. This is a new category and new brands. There is a responsibility to drive awareness and make it very accessible. Is gross margin accretive now? It will still be EPS accretive. We said between 18 and 24 months. We're still on track for that. So I would say good but we're figuring out how to make it better.

Understood. Understood. Moving on to the rest of the business. On the Q2 call, you talked briefly about managing your retail partners and you did end up dropping one of your partners due to unfavorable terms. That was fairly well received by the 3 investors. Can you walk us through the reasoning behind this? Is this something you will continue to evaluate with all of your partners? And how could these decisions end up impacting your longer-term financial targets?

Yes. I mean we provide very good service, very good regulatory support, highest quality and investment in demand creation to drive store brand. There has to be a reasonable rate of return from that effort or there's just a compromise. The prices that were being demanded by that one customer at one moment in time, we didn't feel we're sustainable. They were too dilutive for us, and we weren't willing to make the trade-off to make that a supportable model. So we walked away from it. Interestingly, they almost immediately had a quality incident with their new supply into a refill, okay? And this is an important aspect of all of these. So the good news is, though, we are now -- despite that net positive this year on new businesses one. So we've replaced that business with more profitable business, and we will continue to seek to expand our store brand business in the U.S. So in the end, you asked the question. Yes, it could be headwind not offset. It could have been a 1.5 point revenue headwind next year, which we've now more than offset.

Great. Good to hear it. And then as we think about your 2024 targets that you've laid out on the Q2 call, you did lower your top line expectations that maintains the bottom line given the margin strength that you're seeing. Can you talk a little bit about what's baked into expectations both on the lower and higher end of your bottom line guidance? How much flexibility have you built in here for the various business segments such as the infant formula business and Opill? And then how have recent sales trends to the extent that you can comment compared to the expectations that you've been laying out?

Yes, a couple of comments there. So I think in the OTC store brand, we're seeing now in the month of -- after a very mild cough and cold season and allergy season as well and destocking from the retailers are starting to see now in certain key categories, an update, cough and cold, the pain. So in between July and August, we saw a positive impact there. So for the remaining of the year, I guess, infant formula is the key contributor to that. Of course, the cough and cold season is coming in line pretty strongly as well as the international business as we continue to expand our skin healing business with compete, we launched cold sore and spots as well that continue to make a good progress there. So those give us a good sense of being still in the range there, aside from all the accretive actions. So Project Energize, we delivered $53 million on a program that we really relaunched in March. And so to achieve what to expect around $100 million this year, we're in a very good position to achieve that operating income line and the EPS targets that we have.

And then moving to 2025, I know you're not guiding specifically, but there is a lot of investor conversation and debate around kind of the targets that you've been mentioning, which is that kind of $3 EPS target. A little bit -- a few questions here. Maybe a little bit of color on the building blocks to getting to about $3. Is that $3 viewed as the floor? Or is that the midpoint of the target? And then as we think about the margin progression we need to see to get there, you have talked about that 14% to 16% of that operating margin range, where in that range gets us to that $3 target?

Yes. So I think it's -- when you compare to where we are this year versus next year. So we have about $0.40 to $0.45 impact on infant formula, mainly in the first half of the year. So that's a key element of recoverage for next year. Also, there's still a lot of learnings in terms of Opill to make sure it's become less dilutive, but there's still work to be done there. So market growth should be a key element to see how the base is going to be impacting there -- benefiting there. A couple of things to comment is, even in the infant formula side, one of the important elements that we want to make sure we're going to avoid the swings because once a man make or a bad maker decision to shift into an infant formula, a store brand infant formula, they want to make sure that every week as they go to the store, they can find that same formula. And so because of everything that happened and all the changes in the regulation, the regulatory environment, you depleted your safety stocks. So one of the key thing to us is very important, and that for also our customers in months is making sure we're going to have consistent supply. So we're going to need to build safety stock on our side in 2025. So that's one of the things that could impact there. So the $3 range is what we're looking right now as a good point base. There's still work to be done to finalize our plans over the next 3, 4 months, but that's currently where we're thinking right now.

And the go-forward benefit of the cost saving initiatives, so Energize [indiscernible]. I think, three, the building blocks are fairly transparent. And as we continue going through a sort of budgeting process over the next couple of months. But I think we've been a better place for us to answer the question, is that the midpoint and the high point is that there's been [indiscernible]. But more to come on that.

Great. And then the margin progression, I mean, there's a lot of Projects Energize and in the formula business. Any color on where in that 14% to 16% range could you give us out?

Yes. We expect to be in that range. So we expect this year to see significant margin OI expansion as compared to last year. And so we're going to be in that range for sure. The question is, is it the midpoint or is close to the top end of the range. We're still defining a little bit more debt because one of the key things is as we invest in brand building capabilities, because of some of these costs that we have eliminating and some reinvestments we need to do, we want to make sure we set the company and the portfolio for success in the years to come. And so what kind of investments we're going to need to do may shift a little bit in that range there.

Yes. Got it. And then lastly, in our final minute or so, maybe you can touch on just general capital allocation and cash usage. Obviously, the top co is getting that leverage level down a bit. But beyond the debt pay down, how do you -- how are you thinking about your cash utilization over the coming years?

Yes. So I think deleveraging is our top priority, reinvesting in some key areas of the company, right? So we talked a little bit on our overall infant formula footprint, right? So we have 3 sites. And to what extent do we want to upgrade and make further decisions about how we want to ensure consistent capacity in production over time is another one. There's still some lagging effects of the supply chain reinvention that needs to come into play into 2025. But aside from that, we want to keep our return to shareholders. Currently, we are in this consecutive growth profile our dividends. This year, we increased only 1% because of the infant formula reduction, but we want to make sure we're going to continue with that profile of returning value to our shareholders. Today, with dividends, after '26, we're going to revisit that and think, should we do anything different with share buyback, et cetera, it's still early to say. And also, we do not expect any major M&A activities, but making sure that in each part of the portfolio, we have the right combination between brands, potentially switches and other things that will complement to what we have done over the last 5 years.

Great. Well, thank you both so much for being here and present in and looking forward to seeing where the future goes for you.

Thank you, Korinne. Thank you, everybody.