Perrigo Company plc ($PRGO)

Good afternoon, everyone, and welcome to the UBS Global Consumer and Retail Conference here in New York City. My name is [indiscernible] , part of the UBS Consumer team. And we are very excited to have Patrick Taylor, CEO of Perrigo, joining us today. For those that may not be aware, Perrigo is a leading provider of over-the-counter health and wellness solutions as well as self-care products for consumers. The company was founded in 1887 and is headquartered in Dublin, Ireland. Clearly, the global health and wellness industry remains very dynamic, and we hope to learn today how Perrigo sees the path forward for both the company, as well as the broader industry. In terms of format today, I'm going to go through a series of questions with Patrick. We also have a slide deck that the company will be sharing to help facilitate the conversation. If during this time, today, you have any questions or anything else, please feel free to submit them, and they will show up here on the iPad, and I'll be more than happy to ask your questions. So before we start, I am required to read a legal disclaimer. 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/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call. So with that, why don't we go ahead?

Okay. Let me give a brief presentation, okay? All right. Very good. Good morning, everybody. Thank you for joining us. I have to give a standard reminder here. We will make forward-looking statements, which are, of course, subject to risks and uncertainties. If you could all read that and ask me any quick questions, okay? So who is Perrigo? Perrigo is a scaled consumer health leader, ranked #1 in terms of volume in the U.S. and a top 10 player by dollar sales across the EU. So sensibly a U.S. and EU business. Our portfolio, as some of you will know, is highly diversified across 9 different categories with no single product contributing more than 5% of total net sales. So it's a fairly risk-insulated model. We operate in about 30 countries with our commercial footprint, as I mentioned, centered in the U.S. and in Europe. We deliver meaningful savings for consumers. The majority of our business, about 60% is in store brand offerings. And we offer a broad range of OTC offerings that really reduce the burden on health care systems. 2,000 Perrigo doses are produced every second of the day, so a very meaningful volume scale player. We deliver about $30 billion a year in savings to the U.S. and the EU health care system, a product for people using our OTC solutions as opposed to burning the health care infrastructures. Two out of three U.S. households purchased a Perrigo product, by far and away, the leader in household penetration in OTC in the U.S. And in the U.K., we actually achieved about 80% all household penetration, again, extremely competitive. We are operating in a very challenging market today, but we've made meaningful progress in building the foundation that will drive us forward and deliver long-term value, which I'll expand upon. So the fundamental differentiator we have is our scale. We produce 250 molecules and dosage form combinations, and we compete at every price point. So we reach low-income consumers and, of course, upper middle class and above consumers as well. This, stated simply, allows us to serve more consumers and create more revenue streams. The core strength of the company is the breadth and scale of our innovation, the fact that we have very meaningful strategic customer relationships, the scale of our global regulatory interface. We have hundreds of regulators, which allows us to shape the regulatory environment in the markets we compete, and the scale of manufacturing supply base where we produce 64 billion unit doses a year. Our unique model combines cash-generating store brands, which is about 60% to 70% of our free cash flow with high potential high-margin brands, supported by a low-cost, scalable supply chain. Its 250 molecules and dosage gives us unmatched breadth and consumer reach. And our innovation and demand generation capabilities scales both across our brands and our store brand offering. It's a highly efficient expandable model. This structure enables us to expand household penetration and consumer access. The -- as you heard, the company when it was founded, the mission of the company was really quite simple, to make essential everyday medicines available to everyone, and that is what we stay true to today. So our dual engine portfolio, which is high-growth brands and leading store brands, these anchor our scale whilst driving our financial structure. Our leading store brand business is the cash furnace fueling our branded growth. It's the brands that drive top line growth and margin expansion. So together, store brands and brands give us reach across every price point. It allows us to operate a strong category positions and creates a resilient, balanced growth model. So Perrigo's fundamental strength has enabled us to win with consumers and with customers. This is reflected in the sustained market share gains that we're seeing across U.S. OTC and EU brands. I think this year-to-date, we've put on about 100 basis of store brand growth, seeing growth in all of our core growth brands in the EU. And within store brand, on the latest read, we're up 300 basis points versus a year ago, okay? This is some of the most competitive performance you'll see in all OTC players in Europe and the U.S. So the model is working. We're executing better, and it's a very resilient model, because we compete on all price points when consumers are experiencing economic hardship. Making strong progress on our Three-S Plan. This is basically how we stabilize our business, streamlining our business and strengthen our business. This centers on restoring consistency in our core businesses where we're now growing share, simplifying the portfolio, streamlining our cost structure and building capabilities that support scalable long-term growth. Our 2026 outlook is realistic about our headwinds, especially market softness and the temporary absorption impacts we had as a result of market softness in 2025. But we remain confident our long-term opportunity is very strong. On the next slide. Despite the challenged OTC market, Perrigo gained share in most U.S. categories in 2025. This is one of the strongest performances I've seen in an OTC, or a CPG company, that operates in so many different divisions. Our share gains are accelerated through the year and indeed are accelerating in 2026 as well. This is meaningful because that's after years of decline in share performance for Perrigo. Our retailer partnerships are strengthening. We took $100 million in new distribution and competitive takeaways in 2025, which is being executed continuously in '26. This reinforces our value propositioning is resonating in a value-oriented consumer environment. As I mentioned, our EU critical brands are also gaining share despite soft consumption across the region. We're seeing stronger brand activation, improved supply and our new advertising campaigns are driving continued performance. This demonstrates the strength of our brand-building capabilities and the scalability of our playbook across the different markets we compete in. Turning more to the Three-S Plan. So we've stabilized U.S. store brand share and actually, we are now strengthening our U.S. store brand share. Infant Formula service levels are now back over 90% with a quality assured operation. The business is stabilizing in the IF category. We're building share, and we're outlooking modest revenue growth there, despite a very challenging Infant Formula macro environment. We're streamlining our portfolio. We exited the rare disease business, the Australian hospital business, about 60 brands in Europe and the derma sale hopefully will be fully executed early in quarter 2. The Infant Formula and Oral Care strategic reviews are progressing. Cumulatively, we've achieved $320 million of cost savings from the Energize project and the supply chain reinvention. We're strengthening our business. Our innovation pipeline has tripled in value versus a year ago. We're seeing much stronger EU brand performance, which will continue, and we are enjoying enhanced retailer partnerships with next level demand generation. We just announced a new 2-year program, which addresses current market conditions and will further strengthen our Three-S Plan. This improves productivity work, streamlined operations, which in turn will enhance our competitiveness. We just announced a global workforce reduction of about 7% and targeted supply chain and distribution efficiencies. These will yield annualized savings between $80 million and $100 million, 80% of which will be realized during 2026. The market is difficult. That requires us to address that in terms of cost competitiveness, which we're doing, and we're executing at speed. We do expect market consumption to remain soft in early 2026, then stabilizing in the second half. Many of these effects were transitory, and we're just anniversarying those now -- starting now. We have not seen a fundamental change in the human health, or human health habits over the last 9 months. They're just transitory effects. Consumption did weaken further in early 2026 in January and February, somewhat stabilized in March. And this, of course, has been worsened by the Middle East conflict and gas prices. We expect Perrigo consumption to outperform the market because of our innovation, demand generation efforts with retailers, the geographic expansion we're now undertaking and distribution gains. Perrigo's share of U.S. store brand, as I mentioned earlier, is plus 260 basis points in the last 13 weeks, plus 310 basis points in the last 4 weeks, okay. This is best in Perrigo history performance, and is certainly way ahead of any of our competitors. We're focused on building on our progress in 2026, navigating these near-term market pressures and the temporary manufacturing impacts that we had, which was about $0.60 of EPS based upon '25 market softness, which we see as a onetime effect. So our strategy and portfolio focus sets us up for growth as conditions normalize. About 95% of consumers when they switch to store brand stay with store brand. So that's an annuity for us going forward. As many of you know, we recently broke out our business into CORE Perrigo and other categories. CORE Perrigo is the business we are truly building for the long term. That is our go-forward portfolio. The categories where we have seen and established durable advantages, and this is where we are focusing our capital and our capability. Defining CORE removed the noise from Infant Formula and other divestitures, giving investors a clear comparable view of the earnings engine that matters. This is our CORE go-forward expandable business. The details on sales, margins and EPS are shown on the page, but the headline is that CORE performance reflects temporary headwinds that we are actively offsetting with cost actions and continued share gains. For 2025, CORE baseline EPS was $2.52. As we add absorption, A&P investments and the incentives that we've built back into '26, we see those largely offset by savings and base business performance. We do see additional modest headwind from interest, taxes, FX and share count. Based on continuing challenges in end markets driven by consumer confidence and conflict in the Middle East, we now expect CORE EPS range being 30% in the first half, 70% in the second half, driven by seasonal categories and the timing for when our cost savings will land. So really, we've made very meaningful progress on the Three-S Plan in '25, and it's clear the strategy is working for us. It's durable and it's expandable. We're growing share consistently again after several years of decline in both U.S. OTC and key EU categories. We're expanding in the right categories with strong retailer partnerships and a more focused portfolio. Our financial structure and operational discipline continues to strengthen, supported by proven cost-saving programs. We also now believe we have in place the leadership, capabilities and a scalable growth model needed to drive long-term value, with 2027 positioned as a key year of acceleration. Thank you. All right. Now a few questions.

Yes. Well, insightful presentation, Patrick. So you've now been CEO for nearly 3 years. What changes have you made to both the organization strategy? And how much more do you [indiscernible]

Yes. Is it only 3 years? So this is a fundamentally different company. We've really almost got back to who we are, which is an essential medicines company made available to everyone. So we've really refocused ourselves as a simpler, more focused health care CPG player. Significantly simplified the portfolio, got to a much more efficient customer service-orientated supply chain, that's delivering record case fill rates at much lower cost, significantly streamlined the organization. I think over the last 3 years, about 17% reduction. The -- as you heard me say, obviously, the portfolio is much more focused now on essential everyday medicine. We -- about 80% of the executive lead team is new to position and really world-class in CPG and OTC health care. We brought in dozens of CPG, Senior Vice President, Vice President. So a leaner, more focused, more cost competitive organization. Yes, I think a lot of the work of transforming Perrigo to a competitive OTC-focused company being done. And now the agenda moves to scalable, sustainable revenue.

Okay. That's quite helpful. Maybe staying on strategy. You still have ongoing strategic reviews for Infant Formula and Oral Care. Where are you in that process? And when you think about what you expect to final decisions? And is there any early indication. I can repeat the first one?

No, I got it. Yes, both of those businesses are in strategic review. So Infant Formula, growing share, modest revenue growth outlook for '26, very difficult trading environment and an evolving regulatory environment. We've made great progress in getting to excellent customer service and excellent quality assurance as we took on the change in government regulations probably about 3 years ago. There are 3 headlines to the strategic review for Infant Formula, okay? We will either optimize the current business, which will look at manufacturing consolidation. We will look at partnership opportunities, or we'll look at divestiture. We're early in the process of exploring, obviously, it's a very complex piece of work, and we'll make announcements as we finalize that work probably later in the year. Oral Care, we've done a great job driving the profitability of that business. It's a very diversified Oral Care business, but there are 3 or 4 just major players. And we just feel that we are subscaled in that business. And others essential business is Oral Care, this may be better suited for them. The profitability has improved year-on-year, and we do see a good share opportunity. It's just for us, CORE business is faster growth, higher margin and more scalable. And again, I hope that we complete that work over the near term and as we do, obviously, will.

That was actually going to be my follow-up. Well, that's helpful. Maybe shifting over to capital allocation. Since capital discipline underpins your strategy, how do you allocate capital to CORE brands and let's say, store brands and other areas of your business?

We're increasingly disciplined about this. Store brands and national brands both respond well to investments. We're clear of what that investment looks like and the relative payout. So really, we go through an annual process of what demand generation activity can we do with store brands in order to grow its share and our share of it, and more money is going towards that as we get better at that type of work. National brands really a bit of a shark tank, which brands have the most growth opportunity with the highest yields, as you'd expect in any CPG brand company. And that's a function of the quality of its brand building, its innovation, its distribution opportunity and more and more the geo expansion of those as well. In terms of corporate projects, again, which are maintenance capital sort of investments, and then what are those other corporate projects for what strategic purpose with what financial returns. So we're getting more and more disciplined with capital allocation within brands, within store brands and certainly within corporate priority projects. And actually, sorry, including innovation. The innovation returns that this company had were quite good. But over the last year, we've tripled the value of our innovation. Revenue return of last year saw about $40 million coming from innovation, that will almost double this year on a go-forward basis, will also improve as well. So more consumer meaningful innovation scaled across more brands and geographies, giving us a much better revenue.

And then how would you classify those?

A multitude. So some of it is geo expansion. Some of it is new form. Some of it is addition to form, be it flavors, et cetera. Some of it is new technology. So increasingly, more consumer meaningful, more differentiated and more scalable.

Okay. That makes sense. Sticking with capital allocation for a moment. Very quickly on the dividend, your yield is now north of about roughly 10%. What are you -- like what are your thoughts on this allocation?

Yes. We've had a lot of questions on our dividend policy. Our priorities in terms of capital allocation, obviously, invest in the business. We continue to pursue a leverage ratio 3 or below, take us another 2 to 3 years, and then to maintain our dividend policy. The Board recently approved with me the maintenance of our dividend as we saw. Frankly, those are our capital allocation priorities. We review them as all companies do periodically. But at the moment, that's our position.

That's helpful. Maybe taking a step back to the broader environment. I think you highlighted that in your presentation. But we have seen weakness across total store in the U.S. and slow consumption in the EU as well. What do you think are the drivers? And second, the weakness in total store and soft consumption in your consumer health categories?

Yes. So I think a lot of companies, us included, were surprised by the market. The rate of market slowdown last year. No one really anticipated that, and I think there are a number of contributory reasons. The -- most of the issues that we see are transitory, and we're starting to anniversary them now, which is why we believe we will see stabilization in the second half. So what happened last year? Probably the single biggest impact is we've had years of quite high price inflation in this [indiscernible] A lot of big brands took a lot of pricing on an annual basis. Cumulatively, that was driving market value growth. They stopped taking those large price increases really at the end of quarter 1. Secondly, consumers faced with increasingly tough economic outlook traded down. They traded down in terms of unit size. You also saw a lot of big brands and retailers doing temporary rollbacks, so more volume was sold on promotion. So that took a lot of money, a lot of value out of the market, and so the market did contract. We then had a very weak cough/cold season, which we then saw late in quarter 4 and in January and February. So in January and February, approximately, the U.S. OTC market was about 5% down. I'm about right with that. That's pretty unprecedented. Now we are starting to anniversary some of those effects. We will continue through the year. So our expectation is you'll see stabilization of that. There are only 1 or 2 categories, predominantly pain solid dose that have seen year-on-year decline in household penetration. Most other categories actually saw increases in household penetration and indeed, volumes did grow last year. So there's not been a fundamental change in the health condition or in habits and attitudes of [indiscernible], okay. In the EU, market slowdown was much less pronounced than it was in the U.S. The value of the market did actually increase last year. And indeed, the market is still growing in January and February of this year. So this seems to have been a particularly strong U.S. effect, which again, we believe is transitory. Anything to add?

No. Thank you, no.

And I think you mentioned innovation being a driver. What are some of the things that you're going to like reinvigorate growth back [indiscernible]

Yes, innovation, driving store brand share of category, okay? That allows us to access probably underserved lower-income consumers who tend to have more -- less molecules on hand than higher income consumers. That's a terrific expandable opportunity. We are looking at additional distribution gains for us, geo expansion. So some of these impact market, some of these obviously impact our performance within the [indiscernible] We do expect, and we are certainly accelerating share gain, and we do expect to grow faster than the market through the rest of [indiscernible]

That's interesting. So I have a few more questions left, but I wanted to take a second to pause and remind everyone that if they have any questions, please feel free to submit them, or you can [indiscernible] later. I don't have any questions yet. So with that, now let's get back to it. So as we look to your 2026 outlook, can you speak to what drivers -- what drives performance in this year at the top, middle and bottom of your outlook?

Sure. Thanks, [indiscernible]. And thanks, CBS. Thank you guys for allowing us the opportunity here to present the Perrigo story to everybody. We appreciate that. When we look at our midpoint of the guidance, maybe that's the way to first start. It's everything Patrick was just articulating, which is second half stabilization within the U.S. and a pickup within the European marketplace from a consumption standpoint. What that translates into is still down for the year within the U.S. and slightly up for Europe. And those share gains that were shown in the slide deck and discussed here, we do expect to continue regardless. So the midpoint really takes into account all of those factors in addition to the innovation, the competitive takeaway, the demand generation, the geographic expansion, which is expected to happen more prevalent in the second half. So about 2/3 of those drivers are expected to come through in H2 versus H1. Then when we look at where -- what could get Perrigo to the higher end of the range is. Well, the higher end would incorporate predominantly market coming back faster than expected. We do see a bigger pickup here, more seasonality. As you know, seasonality resets every single year. So 1 year does not have an impact on the next year's seasonality rate. And also if some consumer confidence starts to settle down. So we do see those macro factors start to occur, we could see ourselves at the higher end of the range. In addition, that would really help through some of the throughput and the volume within the plants, which could overtake some of the headwinds that we are seeing from under absorption that's left over from 2025. And then I'll close out just on the low end, if we continue to see markets decline, deteriorate, consumption not start to stabilize in the second half, we've taken into account a number of different factors. I think Patrick walked through some of the expense savings that we're looking at and the cost savings program. So there's a lot of levers within that framework, but that would most likely put us more towards the lower end of our range.

Okay. No, that's helpful. Then maybe just building on that, as we think about the path ahead, can you speak to the key revenue growth drivers beyond 2023?

Yes. Yes. Hopefully, it's becoming clearer and clearer what our portfolio will be, why it's attractive and how we're going to scale it. And that will be -- involve the following. Better brand building, driving share of our brands through more consumer impact in terms of our communication, in terms of our innovation, in terms of distribution and local brand activation. So more of our brands going into more geographies, better executed more consumer engaging way. Next is the scale of our innovation, right? It's getting bigger, more differentiated, more scalable. We're able to apply it to more brands and more geographies, and that will drive revenue harder. We will continue to focus on what's called competitive takeaway, winning contracts to supply more retailers in the U.S. and in more countries in the EU as well. And the next one, just tends to grab more headlines than it's probably worth nearer term, the geographic expansion. We only compete in 30 countries. In the America, we have 70% household penetration, as I mentioned, and in the U.K., 80%. So when we unleash our model, we win with more households than anyone else. We only have 5% global household penetration. Our opportunity to expand into more molecules in existing countries, and into more countries is a fantastic long-term revenue opportunity for us. So really, it's not a question of do we have great growth opportunity. It's how do we sequence them in a balanced risk-appropriate way for the long term.

That makes sense. Maybe touching on one last topic here. Are there any impact on geopolitical dynamics on sourcing, logistics or pricing?

Yes, we can probably break that down into two things. So tariffs. On again, off again, on again, off again. Largely the recent Supreme Court ruling and the administration's reaction to that is largely a wash for us, okay? So no impact. On the Middle East, highly manageable for us. We do not have a business in the Middle East, have very limited sourcing from the Middle East and even the oil price movements are very manageable for us at this stage. Now who knows how that will expand and how long this will be in place for. But at the moment, very, very minimal.

All right. Well, why don't we leave it there? Patrick -- Please. Sorry.

Do you tend to see volume shifts towards store branded products during these periods of time? And how much is the retention to in periods of [indiscernible] are there other things that tend to trigger volume shift as well?

Yes. One of the benefits of Perrigo is we compete at every price point. So certainly in a softer economic environment, people do trade down into -- or trade across, I should say, into store brands. It's very sticky. About 90%, 95% of consumers once they use the store brand, realize it's identical and a much better value [indiscernible] very little switching back into brand. So as we mentioned, our share gains -- volume share gains are significant and accelerating 310 basis points this year -- sorry, the most recent read. 90% to 95% of that will stay in place going forward. The -- an opportunity we haven't really talked today is to continue driving store brand OTC market share, okay? That is very profitable for retailers. It offers great value for consumers, and it is underdeveloped. And it's probably given how few molecules, lower-income consumers tend to have on hand versus higher income, it's probably one of the biggest market expansion opportunities there is. So we continue to partner with the major retailers, how do we drive awareness and trust and household penetration of store brand OTC.

Thank you. Please.

Certain number of people recently lost their health care as a result of changes in The Affordable Care Act. Did people start to [indiscernible] under the Affordable Care Act, they could have access to -- not branded, Ethical Pharmaceuticals. Is there any shift during that period of time when people saying, look, I cannot get to an Ethical pharmaceutical, so I'll use some sort of alternative care through OTC products.

It's a great question. I haven't seen a marked shift if we look at household penetration of store brand. I'd also challenge ourselves and our retailers to probably show up better to make that more obvious to those affected consumers as well. We should take that away as an action step. So thank you for that. Because one would expect it, but I think we can make it easier.

Any more questions? Go ahead.

So one question. I know kind of your strategy around M&A seems to be very much kind of focus, focus, focus. And sorry if I missed this at the beginning, but would love to have any more color on how you're thinking about M&A and portfolio expansion alongside the divestment strategy?

Thank you. Okay. So you store brand Infant Formula? Okay. You'd save $1,000 a year, if you use it anyway. M&A. Number one value destructor in OTC is large-scale M&A, okay? So I'm very wary of it. Two, number 1 value driver is OTC switch. So we're very focused on that. We have simplified, streamlined or made more strategic portfolio, as you rightly mentioned. We are very interested in geographic expansion because we're only in 30 countries with 5% household penetration. And we are very interested in certain subcategories, which could look like something we either develop organically or bolt-on, okay? And we're very interested in partnerships that enable those two things. I think the chances of us doing large-scale M&A is very remote for the reasons that I've just said. So we are focused on sequential growth, but just being very, very disciplined about how we do it.

Do we have another?

I remember speaking with Murray years ago and one of the things that surfaced was that as you talked about, there's a lot of innovation. There was always an inherent complexity in the portfolio as well, too. And as you're sitting here trying to simplify the -- or have simplified the business actually, coming on the tail of it is all the innovation. So how do you manage that so you don't, sort of, refill the complexity bucket again in a way that isn't positive for the business?

Yes. Great question. Having spent a vast amount of time simplifying, as you can imagine, I'm somewhat allergic to recomplexifying. So our innovation was hundreds of initiatives, highly localized, with very little incremental value because it lacks scale. So what we've done now is innovation that's meaningful to consumers that can be scaled across different brands in different markets. So we have 4, 5, 6 cough/cold brands. As opposed to innovating to each one of those and the geographies they're in, we want innovation that can be scaled across each of those and taken to new geographies. Sort of call it the Perrigo chassis concept. We innovate to create a chassis that we then scale across as many aspects of Perrigo as we can. That's a much better payout. It allows us to invest in more consumer meaningful innovation that's differentiated and superior to competition. Now back to the shark tank, every category has to compete for the innovation dollars. And they do that by being more consumer meaningful and a better payout because they find a better way to scale it. I don't care where the innovation goes as long as it's best for the company and best for shareholders. So the more financially attractive categories, NRT, very attractive margin, very attractive cash, very underdeveloped geographically, competes very well for innovation, for example. So it sort of self-contained itself in terms of complexity given those thresholds that we put in place. Good question.

Are there any more questions? I don't have any on my iPad either. Well, on behalf of UBS and those in the room and those listening online, we want to thank you for taking the time to be with us today. And we wish you nothing but the best of luck moving forward and hope you will join us.

Thank you very much. Thank you, everybody.

Thank you.