Q2 2023 Perrigo Company PLC Earnings Call
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Good day and welcome to the Perry Gold's second quarter 2020, Chief Financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal contract specialists by pressing the star key followed by the Yep.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Bradley Joseph Vice President Investor Relations. Please go ahead.
Good morning, and welcome to Paragon with second quarter 2023 earnings Conference call I Hope you all had a chance to review our release issued this morning.
A copy of the earnings release and presentation for today's discussion are available within the Investor section of the Perrigo Dotcom website.
For the first time I would like to introduce and welcome <unk> newly appointed President and CEO , Patrick Lockwood tailored to the call.
On behalf of shareholders. We are thrilled to have your paragraphs.
Tumors health care experience and expertise will bring a fresh perspective and help inspire the organization to achieve even greater heights again welcome.
Also joining the call. This morning is perrigo CFO Eduardo Bezerra.
I would 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 few quick items before we start first unless stated all financial results discussed and presented on a continuing operations basis. They do not include any contributions from the divested Rx business, which was accounted for as discontinued operations prior to itself.
Organic growth excludes acquisitions divestitures exited product lines and currency in both comparable periods.
Comments related to constant currency remove the impact of currency translation versus the prior year by applying the exchange rates used in the comparable measurement in the prior year's financial statements and third Patrick's discussion will focus solely on non-GAAP results, except as otherwise expressly noted.
The appendix for additional details and for a reconciliation of all non-GAAP financial measures presence.
And with that I'd like to turn the call over to Patrick.
Thank you Peter.
Welcome Brad and thank you everybody for joining us this morning.
Maybe 40 days into my pair ago tenure greatly appreciate the warm welcome I've received from my PARAGARD colleagues.
The pride and excitement for our business comes through in every interaction and I'm very energized to join them in the next phase of PARAGARD is growth.
I want to recognize and thank Murray Kessler, our outgoing CEO for his leadership and positioning Paragon as a major player in global Okay.
I'd like to start off the call today by sharing what excites me most about the opportunities in Paraguay and also provide thoughts on our framework for building long term sustainable growth.
I've actually followed PARAGARD for several years now I know we have always believed this is a truly unique business is well positioned in the REIT industry with numerous strengths. Let me highlight a few of those.
It has tremendous manufacturing scale in the U S. The ability to produce over 50 billion doses every year across a wide range of formats, including tablets liquid.
Sprays lozenges and creams to name, but a few.
This manufacturing capability translates into nearly 16 doses produced every second of every day, that's incredible consumer reach.
As a global company Perrigo has strong customer relationships with the top U S. Retailers. In addition to strong pharmacy relationships across Europe .
100000 direct pharmacist partners.
Perrigo embodies a solid focus on cash and cash flow mindset, which helps generate an annual cash conversion ratio of approximately 100% driven by several actions, including prioritization simplification standardization on pricing.
Finally, Perrigo has a strong innovation engine and the ability to fast follow across nearly every major OTC category.
In fact, Paragon has more of a proved OTC anders than any other company.
A false vulnerability as exemplified by the launches of store brand equivalent to bow tolerant pain relief Joe and.
Advil dual action tablet, both of which will launch the day after the national brand exclusivity expired.
This innovation and speed to market enables our retail partners to truly differentiate their brands on the shelf.
Another exciting example of our innovation is hotel, which I'll discuss further in a few minutes.
There's been a lot of work accomplished over the past five years to physician Paragon as a leading company in the consumer self care space.
But there's still an awful lot of work to do to consistently win and to fully capitalize on our assets and our opportunities.
So a few thoughts on the building blocks that will drive sustainable growth.
First is to continue to refine where we are going to play Perrigo has made great progress to find a way to play within brand itself kit, Yes store brands are indeed brand. It's okay, but this will continue to evolve.
Consumers, Okay PARAGARD participates in attractive segments that is set to benefit from favorable tailwind aging populations a heightened focus on himself had treatment.
And ever more cost burden shifting to consumers is set to drive attractive category drugs.
Next is to define how we're going to win.
Early in my tenure, but I can tell you Paragon has a lot of tools to differentiate from competition to win with consumers.
<unk> E Commerce leadership, and extensive portfolio with deep category insights and world class manufacturing innovation and scale it.
It is our job to better leverage these tools to win consistently with consumers in a differentiated and impactful way.
Understanding how we can further leverage our existing capabilities. In addition to new capabilities that we might need in order to sharpen our approach to drive further differentiation.
Our supply chain Reinvention project is a good example of this and this is on track to drive down cost to increase efficiencies and to better leverage our manufacturing scale.
Going forward, we will look to accelerate additional capabilities, including Brian building.
A more meaningful consumer journey.
<unk> said that we might differentiate our products at the show.
Yeah.
Finally to optimize a pair ago operating model and to perform better as one pair ago, while there's already been a lot of progress here for example, our supply chain reinvention program, we have more to do to harmonize our global operating model we.
We will seek to one operational drumbeat common systems structures and Kpis that we can deliver our products to consumers and the most sufficient value creating way.
Now a brief update on our accretive initiatives.
First is the progress we continue to make on our supply chain reinvention program.
Paraguay work system is being rolled out across our manufacturing footprint.
This foundational technology is enabling the work systems that have already been installed and 35% of online.
Generation very meaningful actionable data.
And as part of a winning portfolio focus.
We optimized production of higher margin Skus, which drove 40 of the 260 basis point year over year gross margin uplift within our Americas business.
We also continued to realize synergies from acquisitions, which had tried to tracking slightly ahead of expectations through the second quarter.
The HR a distributor transitions are already providing meaningful cost savings and margin expansion.
As you know trying to twenty-three unfavorable EPS impact.
The 16 to 18 cents from the distributor transitions is not expected to repeat in 2024.
All these initiatives contributed to another quarter of consistent year over year results with total PARAGARD net sales growth of more than 6% gross margin expansion of 220 basis points and 18% operating income growth of 47% EPS growth.
Importantly, we ended the quarter with a very solid cash position.
Other notable highlights from quarter to include strong organic net sales growth of 7% and our international business, where we continue to hold share in growing markets and categories.
This growth was broad based which included cough cold Eddie Parascience insect repellent and skincare offerings.
In the U S. More consumers are choosing store brands as compared to national brands evidenced by store brand volume share growth of 70 basis points over the last 13 weeks.
Specs at Perrigo share total store, Brian was lower or the same 13 weeks due to the planned S. K U prioritization actions during the quarter, which again enhance gross margin.
So I think late last month, the FDA approved <unk>.
The first ever daily oral contraceptive available OTC in the U S.
It was a momentous day for our organization and one that comes at a pivotal time in the women's health space.
To once again congratulate the entire women's health care team.
For nearly a decade to achieve this small study this.
This approval highlights PARAGARD strong innovation that I, just mentioned I know people will be an important part of the building blocks of our long term sustainable growth.
This switch will define a new category within women's health a breakdown traditional barriers for the 64 million women that make up the total addressable market in the U S.
<unk> has the potential to be broad across consumers, who had not ensure are new to the category using less effective methods will choose to switch from prescription to the OTC product.
Worked in a number of prescription toy T C switches in my career and this is the most exciting.
Which is can be a very effective pathway to brand building as they typically garner strong retailer support drive net new growth and in the case of Oakville open up an entirely new category in the OTC space retailers are also excited about this upcoming product launch as you may have seen from news reports to leading drug chain stores.
We have disclosed that they expect to off Oh pill.
We have made this decision to fund pre launch investments for Aimco, coinciding with the unexpected retailer channel fill late this year, we continue to expect Oakville on retailer shelves in early 2024.
This is a meaningful opportunity for our U S OTC business, and we plan to invest judiciously and with intent to smartly maximize reach of the Opel Brad as with any branded launch we do not expect the product to be accretive to earnings for the first 12 to 24 months.
In addition to oilfield I also wanted to provide early thoughts in our infant formula business. We recently completed the gateway facility and good store brand acquisition and that integration remains on track.
In the second quarter. This acquisition contributed $44 million of net sales in our nutrition category, which was partly offset by $5 million from a discontinued product line, a $5 billion of loving themselves from pediatric drinks.
Within the nutrition business net sales of our legacy infant formula products were up $6 million or 6%. Despite lapping a strong comparison in the prior year due to a national brand supply issue more on that in a moment.
Second quarter gross margin in nutrition expanded 730 basis points compared to the prior year and nearly 200 basis points sequentially. This is a solid business.
As for the prior year National brand supply issue that I, just mentioned PARAGARD has stepped up to supply as much infant formula to parents as possible by running our facilities 24, seven and prioritizing our highest volume S. K use to reduce production complexity, therefore, achieving more than 115% infant.
The output.
Pretty heroic effort by the team.
Looking at the current landscape for infant Formula market is normalizing as the.
<unk> impacted national Brian just returned with many of its F. Skus. Additionally, recent changes to FDA guidelines are impacting the entire industry, resulting in lower manufacturing volumes higher production costs, a higher risk of scrap reassuringly. There was more demand for our stool Brown forman than we can supply we have not most.
Any distribution and we've used pricing actions to offset higher costs. We're now working to reintroduce S. K use that would de prioritized last year and to restore customer shelves, but given the impact of the new regulations. This will take time.
The healthy growth of our youngest consumer is our utmost priority of our team is working relentlessly to ensure families have to nutritionally equivalent to school brown format that they need at the lowest price on shelf.
I'd like to conclude by reinforcing a few central points to achieving Paradise full potential.
Perrigo is well positioned in the self care industry and has a number of tools to differentiate against competition.
I know how hard my colleagues at work to make that happen.
Our job now is to put these pieces together and to continuously innovate in everything we do to better serve consumers.
The people to pair ago, a very talented and very driven their focus on the right priorities, including cash flow generation and deleveraging.
Our 2025 growth algorithm shared in February .
Remains on track and I'm focused on plans to optimize and unlock our full potential.
Telerate and sustain top performance.
As you May expect on working with our global businesses to assess our market positioning and our long term plans and work is already underway on winning initiatives I look forward to sharpening my thinking that I continued getting to know the organization and team and then sharing more details in due course.
With that I'd like to thank you well now turn it over to our CFO Eduardo.
Thank you Patrick and good morning, everyone.
Before I dive into the quarter on behalf of our entire operating committee I would like to welcome Patrick to the <unk> team.
Thank you Johnny has brought a tremendous amount of energy and knowledge to our business and we look forward to working with him as we continue to execute on our self care strategy and of course, it's music to my years, but I hear Patrick to talk about our intense focus on cash.
Starting with our GAAP to non-GAAP summary, the company reported GAAP income of $9 million for the second quarter, our GAAP earnings of six cents per diluted share.
Adjusted net income was $87 million and adjusted diluted earnings per share was 63 cents a.
Their share versus 43 cents per share in the prior year quarter.
Adjustments to the quarterly pretax non-GAAP P&L include a net total of approximately $70 million driven primarily by.
Amortization expenses up $70 million.
Restructuring charges of $6 million.
And the removal of $10 million of legacy royalty income received in the second part.
Full details can be found in the non-GAAP reconciliation table attached to this morning's press release.
From this point forward all dollar numbers basis points in margin percentages will be on <unk>.
Adjusted basis unless stated otherwise.
Those are very good to report that net sales grew six 4% organic growth was 80 basis points, including an unfavorable $2 seven percentage points impact.
Our bullish so S K youll prioritization actions to enhance margin.
Fars USDA organic sales declined two 7%, including an unfavorable four one percentage points impact from the SKU for integration I just mentioned.
A light dollar just season in the U S also impacted organic growth by negative one eight percentage points.
We didnt, yes, yeah organic growth remained robust.
Seven 1% compared to the prior year as our brands continue to resonate with consumers.
Profit increased $52 million or 13% driven by strategic pricing acquisitions and favorable mix.
These were partially offset by inflation, primarily in Ti lower manufacturing productivity.
Nutrition stemming from the infant former regulations, Patrick discussed and the HRA distribution transition sales retires.
Operating income increased $21 million or 18% driven by gross profit flow through partially offset by operating expenses from acquisitions.
Before we discuss margins a bit on the second quarter effective tax rates, which was seven 3% versus 23, 9% last year.
This was due primarily to the release of reserves and other tax attributes associated with the settlement of various tax matters, including a discrete benefit of eight cents per share in the second quarter.
Built all of these factors led to an impressive 46, 5% EPS growth versus the prior year.
Total variable gross and operating margins expanded 220, and 110 basis points year over year, respectively.
You can see FCA gross margin expanded 260 basis points driven by the same factors that drove gross profit. In addition to the benefits from S. SKU prioritization.
Operating margin expanded 80 basis points due to favorable gross margin flow through partially offset by higher operating expenses, but also the addition of gateway and increased promotional investments.
Yes, Yeah gross margin expanded 30 basis points due to the same factors that drove gross profit <unk> operating margin increased 210 basis points driven by favorable operating leverage.
Cash on hand at the end of the quarter was $555 million, reflecting an increase of $17 million from second quarter last year.
Operating cash flow for the quarter was $53 million in operating cash conversion of 61% to adjusted net income in line with our assumptions, we're still projecting approximately 100% cash conversion for the full year driven by anticipated phasing of cash generation.
And improvements in working capital.
Also in the quarter, we invested $20 million in capital expenditures and returned $37 million to shareholders through dividends, we continue to make steady progress in reducing our net leverage as we ended the quarter at five one times net debt to adjusted EBITDA versus five five times.
At the end of 2022.
Turning now to guidance.
We are affirming our 2023 reported and organic net sales growth guidance and EPS range, which is comprised of several factors including.
The unexpected adjusted tax rate for the second half of 2023 of approximately 19, 5% leading to a full year adjusted tax rate of approximately 17%, including the second quarter adjusted earnings per share discrete tax benefit of eight cents per share.
Investments in mobile pre launch activities, including building large quantities in marketing and advertising plans to support our late fourth quarter retail channel field I had brought up getting two shelves in early 'twenty to 'twenty four.
Current dynamics in the infant formula industry that Patrick discussed.
And then I assume the normal 2023 cough and cold season.
In adult all our guidance reflects the strength of our business and the balancing of opportunities that we're currently managing.
Given these assumptions and our typical earnings phasing, we anticipate second highest earnings per share will be more heavily weighted towards the fourth quarter, approximately 60% of our second half learnings.
In closing I would like to thank our colleagues around the world for their efforts, we continue to progress our strategic initiatives, while meeting the needs of consumers around the world with that I will now turn the call back to Brad Brad.
Thank you Eduardo.
Ravi can we now please open the line for questions.
Okay.
Thank you.
Thank you for crossover.
To ask a question.
Start bank one.
Sean.
B using a speaker phone.
But before.
Okay.
To your question.
I would like to retire crashed.
Scott.
Oh pardon me.
Barack Oscar.
Our first question comes from Chris Schott with JP Morgan.
Please go ahead.
Great. Thanks, so much further questions and Patrick got Great Oh, Gee I've got the call maybe the first question you mentioned several areas of focus in the framework for sustained growth can you, maybe just help us a little bit to understand in terms of your top priorities moving into this seat.
Which of these are kind of the biggest opportunities you see for Paragon, which we think about you always just about some of the performance issues. The company's attitude about portfolio. It's about focus is it consistency of manufacturing just maybe help us think a little bit about how you're prioritizing those initiatives.
Yes, good morning, Chris Thank you for the question.
I walked through in detail the strategic plan for the company.
Drove number one is we have to deliver those priorities, they're going to have the most impact on cost and cash.
Oh why growth.
They include the supply chain reinvention.
Integration.
And that's both HR array and the new production facility that we have we bought from Nestle in Wisconsin.
So cool that landing the big strategic initiatives right and those all are foundational to the 2025 growth algorithm that we've committed.
No reason to challenge that.
The second part of focus for US is really just getting to operating a greater level of operating discipline and I'm starting to see that and that's particularly needed in the U S business.
So the second tranche from my focus is in primarily in the U S.
And that does involve really looking at our portfolio and where we need to double down where we have the greatest right to win and it's the most attractive financially.
What's happening now.
Then we need to look longer term and is continuous work of a sustainable growth.
As we learned and look to the future starting to look at the within our categories, which are the most attractive within our brands within the country brand combinations or where do we see the greatest opportunities for growth.
What is the investments in the capability that's needed to support that.
That block of work well.
We will probably start later on in the fall.
That will really go where we focus in the future so land the initiatives.
Drive what I call. The one pair ago operating system and discipline and then really make sure we're focused on what it takes for sustainable growth.
And just as part of that answer it sounds like it's my second question was just on the 'twenty 'twenty five targets that the company provided earlier this year it sounds like you're comfortable with those ratios that were provided.
I am comfortable I worked through them as you would hope and expect in detail.
I think the very well considered I think we have the right action plans in governance in place where they have to be delivered and I will stay on top of that governance constantly to make sure. Each of them is on track and on how we help the teams to stay on track.
Great and then my final question was just a little bit more color on how youre thinking about hotel.
In terms of both the investment needed to build that market and how large of an opportunity to you. So I guess, specifically I know you'd actually it's not going to be an earnings contributor in the first 12 to 24 months, but I think investors have been worried this actually could be a meaningful drag on results in that timeframe. So just any color there would be appreciated and then if you're willing to share a peak sales forecast.
For that product well so be it.
Thanks, so much.
Thank you, Chris I'll, let eduardo to move to the financials.
We're deep in the commercialization process of that we.
We will start to ship later on this full on shows early 'twenty four and the commercial package for that is really what you would expect for any CPG brand launch.
As I look at the plans the solid the solid it's it's a complex sell to consumers given the nature of the category.
And we're doing a lot of work on what is that awareness to trial conversion process.
What investment and consumer touch points are required.
And how long that takes so at this stage I think until really that work is completed to a detailed and I'm happy with.
I wouldn't want to predict what the sales all.
But I certainly will have a much better idea to the next earnings announcement.
Food.
Two of the financials.
So thanks.
Thanks, Patrick just to complement the Cree is what Patrick mentioned, so as you know hard to say so in the second half we're gonna have unimportant investment.
To fund these activities and we were using the tax benefit that we file that we realized in the second quarter to fund that and important thing is we did not expect at least in the first 12 to 24 months for they'll build to be accretive that we build the brand and nationwide.
And make sure this is going to be a successful launch for the long term.
Thanks, and I guess.
Next question please.
Our next question comes from.
Please go ahead.
Hi, good morning, Alex leg on for Susan.
Welcome Patrick and congratulations on the new role.
Thank you very much so.
You.
Just a quick question on the U S business, what are you seeing with the inventory levels at retail are do you think you're back to more stabilized levels, there or are there still categories that have some pockets of restocking opportunities months.
Yeah.
Thank you for the question Eduardo for yourself as you look into the inventory levels at the retail now we see them pretty normalized fried till after last.
Last year that we had a very strong cough and cold season that went up to Q2 I only saw depletion of inventory this year.
So in the first quarter first quarter, a strong pick up but at a very normalized season in the second quarter. So we believe that this is giving time to have more normalization of inventory that's on the retail channel and of course, we expect that for the 23.
24, a cough and cold season in particular to be a normal season. So we do expect that there should be a pick up on you know.
Sales in the third and fourth quarter that were built in our guidance that we shared the news Marty.
Perfect and then just to follow up on the units versus pricing dynamic in the U S and internationally it looks like pricing added I think.
Four eight points of sales growth in the quarter.
Yeah are you are you expecting more pricing to flow through the rest of the year. How are you thinking about.
Price, taking the rest of the year and long term.
Yes so.
So the first half mainly on the LTC, we had the pick up all their remaining pricing actions that we had last year and we continue to look into opportunities in the second half in the U S.
But the very important as we mentioned in the first quarter.
Cause of the disruptions on the infant Formula business, we had to take a stronger price actions and those war communicate the early July and so we remain on track on our price our.
Projections for the second half.
In the nutrition business as well as in the international business, we continue to price to the value proposition of our brands and were more than offset the inflation that we continued to see impacting our cogs.
Thank you and then my question on the European consumer it looks like they've held up pretty strong and their consumption habits there Ben.
You were trending pretty high I guess, what else are you seeing over there is there any risk of trade down there. It seems like it's the opposite whereas in the U S. We're not really seeing as much trade down to the private label, but it's the opposite benefiting.
Paragon over in Europe .
Yeah, we continue to see a very strong pickup there.
With all our HRA brands as well, we're seeing a very good performance and now its starting in the second quarter. It.
It becomes organic growth, but we saw also in several different categories cough and cold bear aside insect repellent and skincare, a very strong update in the second quarter and we continued to see that and we expect that to continue for the second half of the year.
Yeah, and Alex This is Brad I'd just jump in on the on the U S comment that you made we are starting to see a little bit of that trade down impact you saw in the.
In the materials the earnings materials from today that the volumes are within the U S store brand in particular are starting to gain some share of course, there's a little differential on the dollars as some of the national brands may have taken more sizable.
Dollar price increases, but the volume is starting to pickup in store brand, which I think is it just say important factor to think about going forward.
Very helpful. Thank you I'll turn it back.
Thank you.
Next question please.
Thank you.
Right.
Thank you Mike.
I have a question.
Our next question comes from.
Please go ahead.
Hi, Thanks for the question I was wondering if you could go into a little more detail on what the early learnings from the supply chain reinvention program or it sounds like you've seen some gross margin benefits any reactions from customers about products that you're not going to make.
Yeah, So Joe key things that we're seeing is as you saw in the second quarter, we had about 40 basis points improvement in gross margin tied to the <unk>, that's really a part.
Part of our winning portfolio pillar on the supply chain reinvention. So.
And again remember our first 1000 Skus that we've mentioned we're going to focus those are asking us that we are do not have a major impact on overall on how we handle with the retailers. We're gonna be moving soon to the next phase on how do we continue to do.
Simplify our portfolio and continue to drive more value in our of our OTC category mainly.
The other thing is important to highlight this wet on our <unk> system. So Patrick mentioned about the number of lines that we're moving these new Red zone equipment, and so we're seeing a very important improvement in the efficiency on our lives. So this is helping not only to expand.
Capacity for certain categories that are so needed.
Like in cough and cold.
But also these will help us manage better our inventories and our working capital towards the end of this year and years to come.
Okay. Thank you and then can I also ask what you're seeing in the M&A in the consumer health care space. It seems like it's picking up and.
Maybe if you can remind us where deleveraging falls in as a focus for the balance sheet.
Yeah. So yeah, we're seeing several activities going on in the Indian marketplace.
Different companies trying to streamline their portfolios.
As in terms of our our guidance and our commitment right. So we expect to be around three times that beat that.
In terms of net leverage by 2025, so our three main commitments in terms of how we're going to use our cash that is going to be generated over the next three years, it's up.
Making sure we are.
Reinvest in our business to make sure our.
Supply chain reinvention is fully successful also look into how we optimize our nutrition production capabilities.
As well as returning value to our shareholders and reducing our hour that we have a tranche of $700 million that debt that matures at the end of next year.
And then just this is Brad again, just to reinforce Eduardo comment here, we basically taken out through EBITDA growth over the last six nine it's almost a half a turn yeah has come out. So the leverage is just sitting a little bit north of <unk>.
Five year from five and a half just about six months ago.
This concludes our question.
Yes.
I'd like to turn the conference back over to your properties.
Yeah.
Well, great. Thanks, everybody for joining the call and we look forward to speaking with you soon thank you for your interest in Paragon.
The conference.
Thanks.
That's great.