Q3 2021 Perrigo Company PLC Earnings Call
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Good day and welcome to the Paragon with third quarter 2021, the earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one at a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
Now, let's turn the conference over to Brad Joseph Vice President of Investor Relations. Please go. Please go ahead.
Thanks, Tom and good morning, everyone and welcome to Paragon <unk> third quarter fiscal 2021 earnings conference call.
I Hope you all had a chance to review the press release, we issued this morning, a copy of the earnings release and presentation for today's earnings discussion are available within the Investor section of the Perrigo Dot Com website.
During today's call are president and CEO, Murray Kessler, and CFO Ray Silcock.
I'd like to remind everyone that during this call participants will make certain forward looking statements. Please refer to the important information for shareholders.
And investors and Safe Harbor language regarding these statements in our press release issued earlier this morning a.
A few items before we start first unless stated all financial results discussed and presented are on a continuing operations basis. They do not include any contribution from the divested Rx business, which was accounted for as discontinued operations prior to its sale.
In addition to the other non-GAAP adjustments as described in the appendix adjusted profit measures, including adjusted EPS and adjusted operating income excluded from the prior year period certain costs incurred to support the operations of the Rx business, which were reported in continuing operations in the appendix for additional details and reconciliations.
All non-GAAP financial measures presented.
Second organic growth excludes acquisitions divestitures and currency in both comparable periods and third Murray's discussion will be focused solely on non-GAAP results and with that I'd like to turn the call over to Murray.
Thank you Brad and good morning, everyone.
Yes.
A major accomplishment company changing accomplishments the kind that will secure perrigo, a bright year for years to come.
Unfortunately, we also experienced some very significant challenges this quarter related to the Gulf global supply chain disruption experienced by many companies in multiple industries.
Come back to those in a few minutes, but first I want to remind everyone that during the third quarter, we completed our transformation to a consumer self care company by first.
Closing the generic Rx divestiture transaction for $1 $6 billion.
Which dramatically lowers volatility it makes self care, our sole strategic focus and second announcing our agreement to acquire HRA pharma and its leading portfolio of consumer self care brands for $1 8 billion euros, which we estimate will add $400 million in revenue and $150 million in op.
Operating income in.
2023.
During the quarter, we also dramatically reduce the tremendous uncertainty that has been an overhang on kalydeco for the last three years.
This was accomplished by favorably settling the headline $1 6 billion Euro Irish tax.
Much smaller amount.
And while we believe Paragon had a very strong case with the tax Appeals Commission disagreed. This tax assessment cut across the company $3 billion or more when including interest we settled for 297 million euros in total with cash payable of 266 million net after we receive Craig.
For prior payments.
The issue is now completely resolved and behind us.
And even better we paid for that settlement from a $355 million Euro Award we received during the quarter through binding arbitration arising from the Omega transaction. The result, Paragon with now they focused consumer self care company poised for strong growth unencumbered by the major <unk>.
<unk> of the past our long term future has never been brighter.
Let's shift back to Q3 business performance.
Results were below a year ago, mainly due to under absorbed overheads and higher input costs.
For net sales supply chain disruption was the culprit.
This led to an inability for paragon to meet very strong consumer demand in the quarter.
Absent the supply chain disruption net sales growth would have been in line with what we had projected.
Higher costs for freight other input costs and lower operating efficiencies in the form of Unabsorbed manufacturing overhead attributed to last Winter's historically weak cough cold season also negatively impacted earnings let me provide a bit more detail.
For net sales is forecasted the strong consumer takeaway in Q2, two translated to higher factory orders in Q3.
It was highlighted by a 21% year over year growth rate in our cough cold sales in the U S and continued double digit growth in E com plus 36% year over year globally.
Consolidated net sales increased 4% versus year ago, Despite a supply chain disruption impact up $43 million with the bigger impact in the U S $38 million, causing a five five percentage point drag on <unk> Q3, net sales performance.
Had those orders shift under normal patterns.
C. A shipment growth would've been very close to the strong consumer takeaway growth observed in the quarter.
Let's take a look at those market trends for CA importantly category consumption grew briskly in the categories. We compete in for all three of our U S business units.
Total OTC category was up 18, 1% versus a year ago.
Total nutrition, which for US is infant formula and electrolytes was up 29, 9% in oral care was up nine 7%.
It's worth noting that total store brand OTC lost market share to national brands during the third quarter about one five share points.
But this is not a reason for concern.
The share loss was attributed to buyers of national brands, increasing consumption rather than buyers of store brands switching to national brands I repeat the growth did not come from private label buyer switching to national brands and that's good news as the National brands drive category growth it becomes a revenue.
<unk> for us in the future.
In our <unk> division market share was stable in Q3 like the U S. The categories. We compete in a very strong rebound in consumer takeaway and they grew briskly.
Total CSPI consumer takeaway was up nearly 10% over a year ago.
But tsi factory shipments lagged consumer takeaway and we're basically flat for the quarter.
We believe this trades to a light pre cough cold season buying by pharmacists across Europe, who were worried about getting stuck with too much inventory if the cough cold season doesn't rebound, but that worry appears unbounded as the cough cold season in Europe is in fact off to a very fast start.
Consumer takeaway was up 36% in Q3.
We expect this to translate to strong Cup coffee sales in Q4 as pharmacy inventories are low as I, just stated and we already saw that begin to occur in the month of October that is strong cough cold sales.
Turning to the third quarter earnings EPS fell short of our internal projections and was 15 cents below year ago.
Supply chain disruption negatively impacted EPS by an estimated eight cents.
Lower operating efficiencies and higher input cost impacted by 17.
And separately, we had two product recalls that had a <unk> <unk> negative impact type.
Tight management of expenses offset some of these negatives.
Looking towards updated guidance, we expect consumer demand to remain very strong in Q4. However, we also expect higher input costs supply chain disruption and the impact from under absorbed overheads to continue.
Based on Q3 results and those continuing trends, we have lowered our EPS guidance range for the year to $2 to $2 10.
This new annual estimate includes a total year negative estimate of 79 per share for COVID-19 related external factors, which is obviously quite significant.
And again that that's what we experienced so far plus the fourth quarter estimate.
I place these factors into three buckets as follows.
First cough cold the impact of a historically weak <unk> season.
Significantly impacted our first quarter net sales and earnings as well as continuing to have a negative impact on manufacturing efficiencies through under absorbed overhead for the balance of the year total impact estimated at 49.
Higher input costs.
The second factor.
Like in cost that is progressively escalated throughout the year, including freight and other input costs.
Our estimated to have a total impact for the year of <unk>.
And then finally supply chain disruption, both inbound and outbound logistics that became a major issue beginning in Q3.
As estimated to have a full year total impact of 'twenty one.
We believe this large reduction in 2021 net sales and EPS from these three factors is not indicative of the underlying progress. The company has made and that they can progressively be recaptured over the next two years.
Let me address each bucket one at a time to explain how we believe that will happen.
First.
The historically weak cough cold season that dramatically impacted Q1 net sales was clearly a one off.
Illnesses are up according to <unk>.
Cough cold consumer takeaway was up 61% in the U S and 36% in Europe during Q3 and October cold call sales per pair ago remained robust.
While we arent yet forecasting a full recovery to the 2019 level cough cold sales are expected to be up dramatically in the first quarter of 2022 versus 2021 as that higher volume runs through our plants with negative absorption impact will come back to us, albeit that will take <unk>.
Months to 18 months to play out.
But we have a very high confidence in getting this full 49 back.
Second the 21% impact from supply chain disruption is also expected to be temporary.
Our global supply chain is forecasted to gradually improve by mid next year.
But in the meantime, we've taken a series of actions to improve the current situation, including outsourcing highly complex product lines to a third party logistics provider, allowing more room on our trucks for higher profit OTC products.
Also adding regional carriers for challenge shipping lanes.
<unk> additional distribution center personnel.
Which allows us to change our order delivery scheduled to account for the many know shows we've experienced and finally, increasing the purchase cycle for ingredients and packaging and the like from 30 to 90 days to make sure we have sufficient lead times for delivery.
These actions have resulted in a 25% increase in daily shipments for the month of October as compared to the third quarter average.
Not all of the actions that have even been fully implemented yet.
Some of these changes will remain in place until the larger U S supply chain normalizes. Some of these changes we intend to lead in place as a hedge against future disruption.
And third as for the input cost <unk> from the second half of this year and any flow through impact in the first half of next year will be addressed by raising prices on 70% of our product lines, and CSPI and 75% and CCA.
Hey.
U S retailers have been more accepting than usual price discussions as they understand the massive cost increases, we and frankly, everyone else are facing and national brands are also raising price and we will continue to maintain a tight focus on.
On disruption discretionary costs and remain focused on achieving at least the final $30 million of project momentum cost savings.
Several other actions have also been put in place to get earnings growing again.
We've made several management changes in the U S to refocused the team on core OTC market opportunities of which there are many of which have already resulted in some <unk>.
<unk> customer wins.
Our successful and growing E com business, which is up 25% year to date remarkably on top of last year's more than 100% growth has been reorganized internally to allow focus and added resources to further accelerate growth.
And of course, the previously announced acquisition of HRA will have a dramatic positive impact on our financial results and the growth trajectory of Paragon.
The transaction remains on track to close mid next year.
So to reiterate despite the best efforts of my Purgo colleagues and they've been remarkable the COVID-19 pandemic has raised successive challenges, which began in 2020 and continued through 2021.
The impact has been real and our response has been real as well, we believe that the negative business impact of the big three drivers in 2021.
Storage weak cough cold season supply chain disruptions and higher input costs will be mostly recovered <unk> be offset with pricing and project momentum cost savings and.
And we remain on track to close HRA mid next year, which will substantially increase net sales operating income and margins for years to come.
We therefore still believe we can get to or at least close to our original 2023 EPS targets. We shared with you back in May 2019, and again during the HRA announcement, just a few months ago. So from our perspective. This is not a reset it's just a very big bump in the road.
In conclusion.
We've come a long way over the last three years with the most massive elements of the transformation plan, having come to fruition in this most recent quarter.
<unk> generic Rx Division has been divested the HRA acquisition is on track and is expected to add approximately $1 of EPS in 2023, and the Irish Noah and the uncertainty it created over the last three years is gone.
<unk> is now a focused consumer self care company determined to be a world class consumer software company that consistently delivers profitable growth over the long term consistent with industry peers.
And while COVID-19 has created many unforeseen challenges in 2020 in 2021 Big challenges, we worked through them as they occur and we will not let them deter us from making our vision a reality nor hitting the ultimate growth plans. We originally established.
With that I'll turn the call over to Ray Silcock, our chief financial officer to discuss the financials in more detail.
Thank you Murray and good morning, everyone.
Firstly with respect to the major strategic initiatives completed this quarter and outlined in this morning's press release I'd like to reiterate Mark's comments that these achievements do indeed lay the foundation for our bright future.
But as Mario said, the operating environment in Q3 was challenging and had a significant adverse impact on our quarterly results. So I would like to thank the team at Perrigo for all their hard work navigating through them.
With that let us take a look at our third quarter results in greater detail.
First let's review, our GAAP to non-GAAP adjustments.
On a consolidated basis, the company reported a GAAP loss from continuing operations of $54 million for the third quarter of 2021, a loss of <unk> 40 per diluted share.
On an adjusted basis consolidated net income was $61 million and adjusted diluted EPS from continuing operations was <unk> 45 per share a 25% decline compared to prior year.
The adjusted EPS decline versus last year is primarily due to one lower operating efficiencies primarily overhead under absorption as a result of lower manufacturing from the weak 2000, 22021 cough cold season.
Two higher freight and materials costs due to global supply chain disruptions and three the impact of two product recalls one in Europe and one in the U S.
Pre tax non-GAAP adjustments this quarter totaled $311 million, primarily these were from our excluding the positive benefit of the $395 million Belgian Arbitration Award we received in Q3.
We also added back 53 million of amortization expense as we always do and $25 million in acquisition and unusual litigation expenses full details of these and other adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release.
The principal non-GAAP tax adjustments for the quarter with a $309 million Irish.
Irish no settlement and $108 million in tax arising from intra entity transfers of intellectual property due to the Rx divestiture.
These led to an adjusted effective tax rate for the quarter of 21, 3% down from Q3 last year's adjusted effective tax rate of 24, 6%.
The reduction in our adjusted effective tax rate was primarily due to the release of state uncertain tax position reserves, partially offset by tax expense this year.
From this point forward all dollar numbers basis points of margin percentages will be on an adjusted basis unless stated otherwise.
Consolidated net sales for the quarter increased 4% driven by e-commerce by contract sales to our recently divested Rx business from price increases and also from improved U S. Cough cold season sales, which have started to turnaround in Q3.
As compared to Q3, 2020, but are still down versus last year on a year to date basis.
Net sales also benefited from $9 million of favorable currency and $5 million from acquisitions.
On an organic basis, excluding the effects of currency and acquisitions net sales grew by two 6%.
Consolidated gross profit in the quarter was $35 million lower than last year.
Primarily as a result of lower operating efficiencies and higher material and freight expenses as well as the $9 million cost of two product recalls.
<unk>, partially offset by $6 million and favorable currency and acquisitions.
Consolidated gross margin in the quarter was 34, 4% 400 480 basis points lower than prior year driven by the same factors.
Consolidated operating income in Q3 was $112 million $29 million down from last year.
Operating expense reductions, including project momentum savings helped partially offset the unfavorable gross profit flow through.
Measured as a percent of net sales consolidated gross profit in Q3 was 34, 4% down from 39, 2% for the same period last year.
Global supply chain disruptions, which caused higher material and freight costs were 130 basis points of this impact while overhead under absorption from the historically weak 2000, 22021 cough cold season, principally in the first and second quarters, where another 150 basis points.
In addition, we experienced those two product recalls which cost 80 basis points.
These headwinds together with unfavorable mix in our base business driven by contract sales to the recently divested our Rx business and lower sales in <unk> weight loss category, resulting in a year over year gross margin decline of 400 basis points in the quarter lower op.
Operating expenses of 80 basis points, partially alleviated these effects.
We expect the gross profit headwinds to gradually reverse over the course of the next year or so as the cough cold season returns to its historical levels.
And overhead absorption levels in our plants normalize and supply chain disruptions fees.
Now, let's turn to the third quarter segment results, starting with consumer self care Americas net sales for the quarter increased four 6% driven by E. Commerce third party sales due to the divested Rx business and better cough cold sales excluding favorable currency.
Fee of $2 million.
Organic net sales grew four 2% in the quarter.
Gross profit in the quarter was $193 million $29 million below last year, driven by unfavorable plant overhead absorption higher material and freight expenses and a product recall in the energy category. These factors led to a year over year gross margin decline of five.
170 basis points.
Operating income for the quarter was $106 million $28 million lower than prior year, driven by unfavorable gross profit flow through partially offset by operating expense reductions, mainly R&D and administrative costs.
Moving onto.
Excuse me moving onto consumer self care international.
Net sales grew two 8% driven by favorable currency and acquisitions.
Performance in the UK store brand business greater demand for our smoking cessation products and improved pricing.
Excluding the benefits of currency and acquisitions organic net sales decreased <unk>, 6%.
<unk> gross profit was $166 million three.
3% down from last year at 290 basis point decline in gross margin unfavorable mix from lower sales in the weight management category together with the cost of the recall were only partially offset by favorable currency and acquisition.
Operating income was $46 million $6 million lower than prior year, primarily due to the impact of the product recall.
Moving now to the balance sheet and operating cash flow cash on the balance sheet as of October. The second was $22 1 billion and included one 6 billion from the Rx divestiture plus $418 million from the Belgian Arbitration Award.
Operating cash flow in the quarter was $350 million, including the Belgian Arbitration Award as a reminder, the cash outlay for the Irish tax settlement and the legal fees with the Belgian Arbitration Award were made after the end of the quarter.
In closing.
Our third quarter results were significantly impacted by the macro environment in which we operate which is reflected in our updated full year adjusted EPS guidance in the range of $2 to $2 10.
We remain confident in our plans to deliver long term profitable growth as we recover from this quarter is temporary adverse impacts and move forward with the successfully closing and subsequently integrating the HRA acquisition.
Operator can you open the line for questions. Please.
We will now begin the question and answer session to ask a question Press Star then one on a touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Elliot Wilbur with Raymond James. Please go ahead.
Good morning, good morning.
Marine despite all the deciding factors over the last couple of quarters that explain various aspects of the company's performance no. One can figure out what's going on with gross margins.
I followed this company for a long time, and frankly, I feel a little bit lost right now I don't know where the bottom is and we keep coming in well short of the Companys expectation. So clearly it seems to be something beyond just merely supply chain issues and.
Logistics.
Issues.
Because obviously over the course of the pandemic numbers have been.
Volatile yet margins have been.
Certainly relatively close to historical standards, and certainly well above where we are today. It would be very helpful. If the company could somehow provide a bridge between margin performance gross margin performance CSA.
In the current quarter relative to historical levels. So we can have some understanding of what's happening kind of outside of these one time issues.
Sure, but it's primarily I mean, these are massive one tie initiatives and most of them.
Come back, but listen I get it right I mean, but inflation freight materials 180 margin points. This quarter under absorption of 150 basis points. This quarter. That's 330 by themselves. We sold the Rx Division, we get credit for the sales thats not a real margin deteriorate.
<unk> like we just have to report what was.
Contract sales that we had the profit before you lose 100 basis points on that I mean that really comes off but it is no change to the profitability of the company.
You had a little bit of an offset.
50 basis points on price.
And picked up 100 basis points on the operating margin line from.
Cost savings primarily.
Management of operating expenses, but the big issue is you have three 400 points that came on roaring on strong from <unk>.
Having no cough cold season, and from massive supply chain disruption.
Massive increases in freight we have.
You've got a big business like oral care that buys a lot of its product from China and a container was $6000 of now $26000 hope.
Hopefully everyone believes that will come back again, but those are.
When you translate that out over a longer period of time.
Those are big numbers. The good news is we're out.
<unk> been able to put in pricing. So I think when you recover the cough cold.
Which we're clearly doing already that's real youre going to get that back youre going to get that overhead back.
Supply chain, we will pay more for sort of hurt for a little while until prices start to come down again.
Input costs offset by pricing, we've gotten more pricing.
Proved and into the marketplace.
I don't know when the last time, that's happened for the company, but though but our customers recognize that and but it is not like a national branded business. When you take the price increase on variety and it goes up Monday.
Contracts in that that gets filtered in.
But we have 75% of the business.
Price increase over the next period of time. So it was clearly a hit to gross margins I get it.
I think the short term hits undermine the great work that had been being done.
On product mix on discontinuing unprofitable products on SKU rationalization, I mean, we're focused on margins.
But.
I get it from where you are so you don't see it right now, but I think it will.
No I don't see it and it's difficult to see and I think it would be helpful for the company too.
Shed some additional light and put some additional clarity around all the key.
Key items that you study is positive and then obviously with kind of what we're seeing in our reported numbers, but again I mean, even if I gave you the benefit of 300 basis points in terms of some of these one time issues I mean, youre still look at it.
Gross margins in the <unk> business, which are 38% and that's still 150 200 basis points below what people believe was towards the bottom here. So.
I think yes, you need some additional clarity going forward.
I do want to ask about the.
Absorption issue.
And the impact in the quarter.
I mean, it just seems like with cough cold clearly bouncing back at least in the quarter to 2019 levels and presuming that you are continuing to see relatively high order rates.
I'm, a little surprised I guess that absorptions seemed to have the impact at least in the quarter that you cited.
And I'm not sure necessarily why that would occur if it is just.
You can produce in the warehouses, but not put on trucks I would assume a lot of that unabsorbed overhead is in fact actually allocated to two product cost is not impacting.
Unabsorbed overhead and we're also not seeing that necessarily in terms of inventories increasing I understand there is a lot of moving parts there that could impact the inventory line, but inventories were actually down in the quarter. So I'm trying to reconcile a couple of mature, but youre selling the inventory that you made.
<unk>.
Down, but not not a nonexistent cough cold season, so when you're paying for the Unabsorbed inventory.
Now for what happened last January and February right. So it gets put on to that inventory.
As it gets put up and then as you work it down you're working down inventory with a higher cost to it and then it's like a six month lag in our costing system that that worked through and it will continue on through the fourth quarter, a little bit into next year and then it will slowly start to reverse itself and all the barnyard yet.
Huge windfall.
Okay understood. Thank you.
And I guess just sort of.
Lapsed.
Last question is given some of the.
Changing dynamics.
In the OTC space, and taking pricing and the like could you just talk about sort of where the companies.
Relative market share position is kind of across the private.
Private label segment, where youre gaining share, we're making sure has slipped a little bit whether or not you think that the.
<unk>.
Price increases.
Creases will in fact have a negative effect on share, but you're taking more than make it up for <unk>.
Margin just trying to understand what some of the moving parts there are in terms of.
In terms of competition from other private label players and small as they may be versus just changing share dynamics versus national brands.
That's a great question by the way earlier because.
At first glance people that are going to look at.
The National brand at the store brand level and I gave you the panel data that shows Thats just from them advertising more.
And getting consumers.
To buy them or so.
That has no effect on our business right now within store brand, we had some big challenges.
We got hit with last year.
Nicotine.
Competition in Los Angeles, and in SMA Anda approvals.
<unk> all in that resulted in some share loss. This year now our business is on a across the board, we're still up and growing across those but they could have gained more and I don't want to accept ever.
Losing share it's not when it's when it's actually sort of been coming from you.
I would tell you that.
I made some changes in management and some other structural areas and we have won a lot of business in the last 30 days. So did we lose some short term share within store brand.
Extent that we can read it right.
Store brand guest provided and we told you a few months ago, we were able to start to break it out ourselves, it's not something that.
<unk> historically reported by IRI.
Are now starting to get that data and as soon as I'm comfortable with it probably in the next Investor Conference. We will do will really break that out for you, but your point is a correct. One so where do I think we got some little bit on digestive health.
A meaningful competition in.
Nicotine replacement I will also tell you that those are the areas, where we've had the most wins recently and where we have a lot of innovation coming so.
But Greg Great question those are normal things. So those are the things I'd like to be talking about on a on a conference call not sure.
<unk> that we had.
Unbelievable orders and all of a sudden we couldnt ship them in.
Because we wouldnt, we wouldnt be having have the discussions were having right now have we just been able to ship the <unk>.
Owners that we have.
But good question.
The next question comes from Chris Schott with Jpmorgan. Please go ahead.
Great. Thanks, so much for the questions I know you addressed a little bit of this in the prepared remarks, but I'm still just trying to get my hands around kind of bridging from the $2 to $2 10. This year to those 2023 goal. So I guess the heart of it is beyond cold cough demand normalizing what else really has to happen to get to that 2000.
23 target to give you confidence to still be sticking with that just given the results. We're seeing here I want to make sure Im clear. It feels like this is mostly cold cough normalizing, but just help me walk through the other kind of key assumptions that go into that bridge over the next few years and then a couple of follow ups from there.
Okay, well listen.
<unk> got work to do to finish it Chris, but let's oversimplify it.
If your two to $2 10, and you get back 49, 50 on cough cold, which we believe which is the combination of the volume impact.
And the absorption of the manufacturing efficiency now you're at $2 50 to 260 annual AD dollar for HRA, you're at $3 50 to 360 and the numbers were $3 65 to $3 95 that we were originally talking about.
At the bottom end of that range, you're off 10 or 15.
And you say, okay al.
Excluding cough cold the rest of the world the rest of the business the other 80%.
If you can grow that.
Sort of the 5% to 10% or you can recover some of these other costs with pricing et cetera cost savings, you're only 15 20 short right. So I mean big components.
205 at about 305 that get back to 50 on cough cold $355 36.
And you got to get.
15, 20 out of the rest of the business over two years.
Okay, Perfect and then just I don't know if you can quantify I think you mentioned youre taking price on a good percent of the portfolio I know, it's something you historically haven't been able to do as much just any flavor on just how much price are you able to get on the portfolio just to help offset some of these supply chain pressures that youre seeing.
Well I mean if.
Historically, we've been.
I have been out there, saying in the U S that there had been 2% to 3% erosion, we've been able to improve that to one 2% and then last quarter that had flattened out in this quarter for the for the first time. It was positive. So we had obviously swung it by a couple of percentage points because it really wasn't mix.
And that was only with.
Sure.
Third or so.
No Brad if we are.
A specific forecast that Chris because the way we go out with price again this is very different than a national brand.
It takes a price increase and then you have a.
You have to say well, what's going to stick relative to consumers buying it right, what's the volume of labs or the price elasticity impact on the volume here. It's different we have no impact on the retail price that's a retailer decision and there's massive gaps in the national brands are taking in many cases prices then.
The retailers will make their decisions on price gap.
Suggest things, but this is a question of.
Our cost.
To them.
And then there is negotiations and then we'll see what percentage, but so far it's gone all gone very well, albeit there is a lag for when that actually gets into the to the marketplace, but.
I don't know if I could quantify today, whether thats, 2% to 3% three somewhere in that range.
Sequentially kind of Kinder, you continue to get a little bit better than what we're seeing even now we're out there with a fair amount I mean, yes.
It's got offset those higher input costs and freight costs.
Cause that I can't continue to have that would be negative for that little formula that I. Just worked for you right pricing plus cost savings has to offset future negatives because we're only six months through it right. So I got to offset that and a first half impact with that to hold the two the two to 210 and then add the dollar and then.
Get some growth.
And then the final question I just wanted to make sure I'm fully understanding it is youre talking about 49 cents from weak cold cough I'm trying to understand how much of this was already known and in <unk>. When you guided to the lower end of the range versus kind of what's new here.
High level. It seems like kind of demand is back so I'm, just trying to understand and I totally get that theres. Some offsets of low utilization et cetera from what happened earlier in the year, but I'm just trying to understand.
Why the impact seems to be kind of growing versus your expectations in <unk> given the volumes. We're seeing so maybe just walk me through a little bit of what is going on this quarter versus what you had line of sight on I guess as of the August guide.
We had line of sight on the Unabsorbed the Unabsorbed was already.
Baked in and when I sat there.
When I sat there on the HRA announcement I thought we had the quarter, we were roaring and orders.
Sure.
The shortfall that we had in the second quarter, which was we had talked about inventory and set it mathematically. It had to came back. It came back we add every day the orders were record orders above levels that we were seeing in demand.
During some of the spikes.
<unk> and <unk>.
By mid August I thought I had the quarter and then all of a sudden logistics is coming in and Youre not shipping it youre not shipping it and digging into it and.
If we normally a ship in.
55 trucks, a day all of a sudden.
We are having between customers not showing up to pick up or customer.
Customers not coming for their pickups or drivers there were scheduled not coming 10, 12 Trust every single day, not showing showing up and we exited the quarter with the highest on ship balance on the.
The company's history, and a $45 million thats in another.
Gas another $45 million or $10 12 on on top of that and.
There are.
And a big spike in freight costs that hit us as well so what didn't we have line of sight as the supply chain disruption the inability to get the.
The inbound product to fill customer orders and dramatically higher freight costs, but the absorbed in Unabsorbed Shannon was baked into the forecast in August.
Okay, Great I appreciate all the color. Thank you.
Again, if you would like to ask a question press Star then one to join the queue.
Question comes from David Steinberg with Jefferies. Please go ahead.
Hey, David Thanks.
Hey, Barry.
Thanks, and good morning couple of questions just continuing on with gross margins I know you said that.
You're repricing, I think 75% or 80% of the portfolio, but it takes some time because there are contracts in place.
So.
Thinking about the bridge to 2023.
Could you give us some sense of what Youre thinking about gross margins in 2022 I assume that will include a lot of the price increases you mentioned with those gross margins be perhaps closer to this year.
Weak side or what you're more of what Youre thinking for 2023, My second question relates to tax.
Can you provide an update on all the ongoing tax issues I know you settled the Irish tax liability case, but there's also an IRS IRS case.
Which is linked to that relates to the old Ilan Athena.
Acquisitions, So could you comment on the IRS tax case as well thanks.
Okay.
Yeah, I mean on the on the <unk>.
Gross margin rate I'm going to turn this to ray but.
I don't want to.
I haven't seen a fully baked out plans because a lot has changed in a month and the teams are working through it but a lot of the gross margin benefit.
As the absorption comes down and the volume runs through the plant later in the year, but you should get cough cold volume benefit and sales benefit in the first half, but I don't I don't have it right.
Well final plan in front of me yet for 'twenty do but yes, we don't have our final plan yet, but Murray said is basically correct, we're going to see the effect of the cough cold season being reinstated.
In the first that was really hit us hard in the first quarter quite frankly more even in the second and we will see that coming back in the first and second quarters.
So I don't really have a number to give you, but I think that.
We see.
We see that.
Most of the profitability coming back to us by the end of the year, but it will come back gradually at the supply chain disruptions. These.
Both so we have to bear in mind that under our costing system we have.
It takes six months for the variances to work through the system.
Meaning that our under absorption in the in the second the first half of this year, we're feeling we're still feeling it now.
And we will continue to feed it into the first quarter or so of next year.
As it relates to the tax we're not even I mean, those are a very long way out that the first the first portion of that IRS tax is.
It still comes down to the double taxation from the company's perspective.
There is a agreement between Ireland on U S or what is the right to.
Tax so that that is a battle right now between Ireland.
And the U S. That's in there.
And authorities jurisdiction I forget the name of the MSA.
Yeah.
They have arguments embraced on on both sides and that'll occur over presumably the next year or so and in Italy. They are completely go away or then we begin the argument then.
And we think our arguments are very strong in those regards to whittle those.
Those down if they survived that to a much smaller number and.
I'm going to stand behind the success <unk> had with Ireland on the massive one and my years in the tobacco industry of being able to work through these days.
These issues I know were challenged on gross margins on the business, but I think I've been I've done a pretty good job here of it.
Taking out $2 billion to $3 billion of risk for the company.
Along with our strong legal team will work through these as well I don't I don't see these nearly of the magnitude that we were dealing with them, we will get through those just fine, but it'll be a few years.
Okay, and then just have one follow up in that regards.
The potential for new products so.
Many years ago. The company grew rapidly based on Orange.
Switches.
<unk> cough cold allergy and that kind of ground to a halt and I know you called out Nasonex coming up.
Also the possibility of some other switches like CLS glaze tamiflu.
Yes.
When you when you said that you hope to get back to you.
Two one is in 'twenty three.
Forecast.
Are there any meaning.
Meaningful Rx to OTC switches Bill can do that and do you think we're going to see any foreseeable future.
Yeah.
Just had a person person of this by the group I mean in the immediate term I think we have.
Building out the diclofenac line launching of Nasonex launching of the slice.
<unk> products help me out if I'm wrong on that Brad there's probably nine others.
<unk> worked on that will phase in over the next three or four years, but 2023 numbers don't depend on that and then when we.
Close the HRA deal you have some massive ones and and that's one of the things I'm excited about they just got the switch on.
A daily birth control pill and and okay.
K, which and they are in the process with working on the process with.
The FDA, which could be in there.
Well along the path could be.
Okay.
Yes.
Massive.
<unk> for the company.
And then.
And then the equivalent of L O, one which is not.
That particular molecule is not approved in the U S it'd probably be a bit of a harder pipe. It is one that HRA has one in 35 countries around the world. So.
Which would represent another one because plan b is.
Is probably it's already on the market that company has something like north of 90%.
Basically have a monopoly on the market and.
One of the biggest skus out there in OTC and fast growing and that represents an opportunity.
I think youre going to see switches come back to be.
A very big and important part of our business going forward.
But it's not critical to make the 2020.
At that point 2023 planned recapturing the cost on the gross margin where this call has rightfully been focused and the pushback is fair, that's where we need to recapture those numbers get that volume through those plants get the cost out of the system.
I accept that feedback because that's where I look at the numbers and I say it the same way, but we believe we'll get all that back.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Murray Kessler for any closing remarks.
Sure.
And I just wanted to thank everybody for their interest in Paragon.
I fully understand that this was.
<unk>.
A bit of a punch in the stomach here relative to the cost situation I don't think its parados specific I think it is.
The macroeconomic trend that the world is facing and it's real that teams have responded and we will be able to ship more products.
And I've already seen that with a nice strong month of ABA.
Of October and we will we believe will recapture and get back to those 2023 numbers and I'm not the type to back off those we need to do that so.
But I don't want anybody to lose sight of the fact that.
We put those deployed $2 billion are in the process of that's going to add $400 million in sales to the company.
Over a dollar of EPS.
That we have shed what was the riskiest most volatile business for this company.
Made a $3 billion potential liability go away and we did it for free with a $400 million arbitration.
When so a lot of good things will happen for the quarter for the long term. These short term issues my team and I, we will work our way through it and get it get it done and work our way through this COVID-19 challenges.
And with that I will look forward.
You updates in future quarters. Thanks.
Thank you everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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