Q3 2023 Perrigo Company PLC Earnings Call
Good morning, everyone and welcome to the Paragon <unk> third quarter 2023 financial results Conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
I ask a question you May press Star and then one to withdraw your question you May Press Star two.
Please also note today's event is being recorded.
At this time I'd like to turn the floor over to Brad Joseph VP of Investor Relations.
Sir.
Please go ahead.
Good morning, and welcome to Paragon third quarter 2023 earnings Conference call I Hope you all had a chance to review our release issued this morning, a copy of the release and presentation for today's discussion are available within the Investor Relations section of the Perrigo Dot Com website.
Joining today's call are president and CEO, Patrick Lockwood, Taylor and 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 release issued earlier this morning.
A few quick items before we start.
First unless stated all financial results discussed and presented our are on a continuing operations basis.
They do not include any contributions from the divested Rx business, which is accounted for as discontinued operations prior to itself.
Second organic growth excludes acquisitions divestitures exited product lines on currency in both comparable periods.
All 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 financial statements and third Patrick's discussion will focus slowly solely on non-GAAP results.
Otherwise noted see the appendix for additional details and for reconciliations of all non-GAAP financial measures presented.
For today's agenda, Patrick will cover our solid quarterly financial results and strong business fundamentals.
I'll then discuss the evolving dynamics in the infant formula industry, followed by our excitement for the anticipated launch of wholesale.
Well then round out his comments with our reflections after four months of CEO provide an update on our strategy to build a sustainable and value accretive growth engine and and with area of focus to close 2023 had.
Eduardo will then walk through the financials, including our updated guidance and with that I'd now like to turn the call over to Patrick.
Thank you, Brian and good morning, everyone.
We delivered another quarter of solid financial results highlighted by gross margin and operating margin expansion.
Net sales grew two 2% compared to the prior year.
Organic net sales declined one 2%, including an unfavorable impact of.
<unk>.
Percentage points from discontinued lower margin Skus and AHRI distributor transitions, both designed to expand margins.
Year over year gross margin expanded 300 basis points.
<unk>, a 70 basis point benefit from our supply chain reinvention program to 39, 5%.
Operating margin expanded 130 basis points to 13, 4%.
For the fifth consecutive quarter cargoes delivered double digit growth in gross profit.
Operating income and earnings per share.
This performance puts us in the top of course all of our peers.
Digging a little deeper into quarter, three net sales of our global cough cold and premium products increased 7% compared to the prior year, excluding portfolio optimization efforts driven by seasonal seven which was particularly strong in Europe.
We then see CRE organic net sales grew six 2% as we held market share in growing markets and categories.
In addition to cough cold and pain growth was broad based.
<unk> skincare offerings and high single digit growth.
Kay store brand business.
Yes.
Organic net sales declined five one.
1%.
Favorable pricing the acquisition of Gateway and new products was more than offset by legacy infant formula.
Three six percentage points from the discontinuation of low margin Skus.
Normalizing consumer consumption.
And a comparison to the strong and then early cough cold season last year.
Importantly store brand OTC dollar volume and value share grew during the last 13 weeks.
Consumers seek high quality products at a good value.
Turning to infant formula.
The background for over two decades, <unk> has successfully and consistently produced high quality safe and effective infant formula.
As the leading player in store brands.
We've proven we can deliver the most advanced and innovative infant formula on par with the national brands, while delivering value for consumers.
No one else does this.
But it is tougher now than ever before we're extremely proud to play an important role in this as central category.
In response to the updated FDA guidelines issued in March and subsequent warning letters to multiple facilities in the industry. We have shortened production campaigns before more frequent major cleanings of our facilities.
Leading to more downtime between campaign.
In addition, we implemented enhance product testing and quality procedures, leading to longer inventory holds before product is released to customers do.
Due to these factors, we have been unable to replenish safety stock leading to low customer and stocks intermittent SKU availability and lost sales.
With these changes now implemented production improving each week, we are focused on rebuilding safety stock for our highest volume skus.
I anticipate our operations to normalize by the Middle of next year. This improved production continues strong demand stool Brown formula and Danielle organization price actions implemented in 2023 positions as well to recapture most if not all of the 35 cents EPS impact.
Against our original 2023 expectations.
Turning now to <unk>, which will be the most unique product launch in the history of pair ago, forming an entirely new U S OTC category.
This launch requires an innovative approach to et cetera, right brand awareness and consumer conversion.
We will build one to one consumer relationships leveraging CRM data that we'll sell.
And get smarter throughout a consumer's journey to maximize the <unk> brand experience and as conversion.
To accomplish this we are partnering with leading technology organizations to build our marketing technology stack that we're driving great engagement through all touch points through consumer conversion from awareness to purchase.
As we ramp up prelaunch activity timing the OPO selling to retail customers is now expected in quarter $1 24 to ensure customer inventory levels meet the buildup of consumer demand.
To maximize long term potential in this category, we will look to extend investment beyond the <unk> Brian.
Franchise of women's health products.
Now I'd like to reflect on what first full months to see.
Ive immersed myself in all facets of our global organization.
With many key stakeholders, including many of you our shareholders coming out of these conversations I remain confident in our strategy.
And I'm increasingly excited about the opportunity ahead.
Our business is highly unique marked by significant scale.
Full points of consumer access and value.
It is attractively diversified.
Let me briefly explain each of these.
With an addressable market of $400 billion.
The global self care segment has cemented itself as an independent industry within consumer products.
<unk> is unmatched evidenced by the fact that every second of every day 2200 doses of our products are consumed around the world I mean, the only company that can produce most major products across <unk> Tau categories.
We are a leading provider of value and access through a distinct model across brand value brand and store brand.
Not only do our offerings drive savings for consumers through value pricing, but also by bypassing doctor visits for their health needs and providing very significant savings to the healthcare systems as well.
Lastly.
Our horizontal category breadth of vertical pricing is a unique advantage.
Our offerings extend through knowing major OTC product categories with our blended branded portfolio, providing consumers access across the value spectrum.
At that point of purchase.
Our portfolio is also well diversified.
Economic environment shift across geographies and across Sku's with no one product representing more than 3% of total revenue.
This better Insulates us from economic slowdowns and seasonal factors in individual categories.
My interactions with all key stakeholders have clarified the next evolution of strategic thinking of PARAGARD.
Throughout these learnings four key pillars have emerged culminating in the blueprint design to deliver the one paragon model.
A model in which our portfolio.
<unk> systems structure, and behaviors will be simplified standardized and scaled.
This will position us to win in self care through the creation of a sustainable value accretive growth engine.
We'll drive Perrigo financial performance for the long term.
First we will consume our eyes and digitize the company.
Second drive category growth in partnership with our customers.
Third leverage our global supply chain and four optimize into one global operating model.
To provide a bit more detail on each of these first we will deliver consumer preferred brands through innovation.
While consumer rising and digitizing PARAGARD.
Consumerism, a pair ago, we'll focus on bringing consumer preferred innovation and brands to market and more value accretive offerings.
This will be enabled through the digitization of PARAGARD pairing our marketing strategies with digital insight.
That will offer real time actionable insights and end to end visibility of the consumer journey.
This is a transformation in how we're going to bring products to consumers.
<unk> is a great example of this well.
Where we have a stack of marketing and digital tools to enhance the consumer journey and accelerate conversion.
Next we will leverage these consumer preferred offerings and our strong customer partnerships to drive growth in the OTC categories, where we participate by delivering differentiated solutions benefiting all members of the value chain.
All of this will be powered by our global supply chain, allowing for increased manufacturing of higher margin products.
Our supply chain reinvention program is already delivering significant benefits, including the reduction of 750 of the thousands of Skus planned for this year.
Finally, we will evolve to a uniform operating model that will drive consistent focus across our organization on the most value accretive opportunities, we will simplify standardize and automate and globalize our structure to optimize our organization.
This will provide tremendous opportunity to reinvest in our business and enhance financial performance by driving brand growth capability and accelerating consumer innovation.
Defining key pillars is crucial in the work to operationalize. These is happening now execution against these pillars will recall skillful sequencing to strengthen our long term foundation and we will provide updates on these initiatives as our work continues.
To wrap up.
We have mobilized around the four key pillars that will create.
The sustainable and value accretive growth engine to drive cargo for the long term.
We must continue to focus on operational excellence and deliver our trusted self care products, we have gone in the sell in for the cough cold season, and there was an opportunity for us to further build retail store, particularly in the U S.
Also in the Americas, we expect store brand market share gains to continue while building safety stops in infant formula.
In International we will continue to leverage our brands that are growing and on trend, notably in women's health and skincare.
Finally, a few brief comments regarding oral phenylephrine containing products and acetaminophen litigation.
Most of you know an FDA Advisory Committee recently voted the oral phenylephrine products do not provide efficacy to consumers looking for D. Congestion relief following the vote. The FDA communicated publicly there are no safety concerns with these products.
If a decision is made to remove will reformulate.
The agency will work closely with industry.
Recently, a retail pharmacy chain remove single entity phenylephrine production. This shows.
Our sales of this product across all of our customers is de Minimis.
Sales of phenylephrine containing products accounts for.
Approximately and only 2% of total pair ago net sales are very low margin and only our U S business.
We do not currently expect retailers to pull combination products ahead of the cough cold season.
This could create a shortage.
Turning to see the benefit we have not been named in litigation and the FDA reiterated its stance. There is no causality between ADHD and taking these products during pregnancy.
Additionally, we have not agreed to indemnify any customers R&D day off.
In closing, we delivered another solid quarter results with double digit growth in gross profit.
Operating income and EPS in addition to meaningful margin expansion.
We are single mindedly focused on improving our cost structure cash flow and profitability.
I'd like to thank all of our Purgo colleagues for your commitment to a self care vision.
Now with that I will turn it over to our CFO at water to cover the financials in more detail Eduardo.
Thank you Patrick and good morning, everyone.
Looking at our financials, starting with our GAAP to non-GAAP summary.
Company reported GAAP income of $15 million for the third quarter earnings of 11 cents per diluted share.
<unk> net income was $87 million and adjusted diluted earnings per share was <unk> 64 cents per share versus <unk> 56 per share in the prior year quarter.
A few adjustments to the third quarter pretax non-GAAP P&L totaling $88 million War first.
<unk> expense of $68 million second restructuring charges of $15 million, primarily related to our supply chain reinvention program and third unusual litigation expenses of $3 million.
Full details can be found in the non-GAAP reconciliation table attached to this morning's press release.
From this point forward all dollar amounts percentage and basis point changes are going on.
Adjusted basis, unless otherwise noted.
Thanks, Patrick over net sales I will begin my comments at gross profit.
Both gross profit and operating income achieved this strong growth compared to last year, driven by pricing actions and contributions from new products will cover our margin expansion in a moment.
Our adjusted effective tax rate for Q3 was 19, 2% versus 21, 8% last year due to changes in these jurisdictions all mix of learnings and impact of benefits not realized all certain pre tax losses in 2022.
These factors led to double digit adjusted EPS growth of 14, 3% year over year.
Year to date, EPS has expanded 33% compared to last year.
Look at our margin expansion in more detail total <unk> gross and operating margin increased 300, and 130 basis points, respectively versus the prior year.
<unk> gross margin expansion of 430 basis points was driven by strategic pricing and a winning portfolio actions.
Productivity savings and the addition of the higher margin Gateway acquisition.
This led to a 90 basis points improvement in operating margin in the quarter.
Yes.
Gross margin declined.
20 basis points as pricing actions offset the impact of inflation in the quarter, but could not fully overcome unfavorable mix driven by top line growth in our relatively lower margin UK store brand business.
Operating margin increased 250 basis points, driven by favorable gross profit flow through and lower advertising and promotional spending.
Year to date total Perego delivered an adjusted gross margin of 38, 5% ahead of our expectations for the year as we continued to benefit from strategic pricing actions and acquisitions and our supply chain reinvention program.
These benefits more than offset infant formula and unfavorable mix and legacy CACI.
Moving onto the balance sheet cash on hand at the end of the quarter was $598 million, an increase of $43 million from the end of the second quarter.
Operating cash flow for the quarter was $125 million.
A conversion of 143%.
Third quarter operating cash flow included outflows of $12 million from restructuring unusual litigation and acquisition related expenses. We also invested $32 million in capital expenditures and return to $39 million to our shareholders through dividends.
Looking ahead, we are reaffirming operating cash flow conversion for the full year of approximately 100%.
We also continued to make steady progress in reducing our net leverage we ended the quarter at four eight times net debt to adjusted EBITDA versus five five times at the end of 2022 and continue to expect net leverage around three times by the end of 2025.
As it relates to capital allocation, we are reviewing our reinvestment plans and mechanisms of shareholder return, while keeping our commitment to deleveraging our balance sheet I expect to provide further details next quarter as we finalize our 2024 plants.
Now to our full year 2023 outlook.
As Patrick discussed in infant Formula we are working to rebuild safety stock and production is improving while at the same time continuing to work through the production changes.
Given the totality of the dynamics, we now expect fourth quarter total nutrition net sales to be similar to the prior year.
We continue to expect a normal cough and cold season in the U S and Europe and as a reminder, last year season was both early and strong.
We are in a better inventory position with liquid cough cold products in the U S versus last year, which will allow us to capitalize in the event of a stronger season.
We remain extremely excited about the long term potential for appeal unexpected on retail shelves in Q1 next year.
The updated time ill sell into retailer customers, who is also included in our expectations.
Lastly, we are updating our assumptions for the recent moves in foreign exchange rates, which are now expected to have an unfavorable impact in the fourth quarter.
Taking all these factors into account, we now expect year over year organic net sales growth of 1% to 3% and reported net sales growth of 4% to 6%.
Our accretive initiatives, including supply chain reinvention program and synergies from acquisitions are anticipated to expand total very good gross margin above our original estimate of plus 200 basis points versus prior year.
We now expect our full year tax rate of approximately 14% due primarily to the release of tax reserves related to recent audit settlements.
While we have updated our expectation for infant formula and currency translation, the strength of our diversified portfolio.
Our margin expansion and a lower expected tax rate allow us to maintain the mid to lower end of our regional 2023 earnings per share guidance range.
In closing I would like to thank our Paragon colleagues for their tremendous efforts in the third quarter and are working to take advantage of the many opportunities that lie ahead now I will turn the call back to Brad Brad.
Thank you Eduardo.
Can we now open the call up for questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one on your touchdown telephones to withdraw your question you May Press Star two.
If you are using a speaker phone we do ask you. Please pick up your handset prior to pressing the keys.
Ensure the best sound quality.
Once again that is star then one to join the question queue.
We will pause momentarily to assemble the roster.
Our first question today comes from Chris Schott from JP Morgan. Please go ahead with your question.
Hi, This is Ethan brown on for Chris Schott, Thanks for taking my question.
Start off you mentioned I believe a 33 <unk> impact to 2008 to the original 2023 guidance from lower.
Infant formula sales and just hoping you can talk about the progression through 2020 for Fiat franchise.
More color on how you expect to recapture that EPS impact and maybe what normalized sales look like for that franchise going forward and then I have one more follow ups from there.
Okay, Hi, Chris This is Eduardo Thank you for a question so as we highlighted in our into our numbers. So we saw this impact that's mainly happening in the third and the fourth quarter. So as we highlighted there.
Q3 was our first full quarter of.
Operating under the new FDA guidelines, so we sharpened our production campaigns to perform more frequent.
Major cleanings, and we implemented the handset product testing and quality procedures and because of that we were unable to replenish our safety stocks. We're now really focusing on rebuilding those safety stocks for our highest volume skus.
And production is improving week by week. So we anticipate our operations to normalize by the Middle of next year and then we expect to recapture most if not all of the 35 cents Cps impact by mid 2024.
Okay, Great and then my.
Second question is just now that we're a couple of quarters into the margin recovery can you talk about the expected gross margin progression from here and how to think about sequential trends for the overall Americas business.
And how do you think about normalized margins longer term for the company.
Yes, so as you were able to see where we're pretty proud of that.
Progress that we have been doing as we highlighted in our Investor day, we're expecting about 200 basis points improvement, but as we share today, we expect and we're going to outpace that.
Given all the focus we have done both on the winning portfolio.
Exiting low margin products, but also really improving the overall margins through strategic pricing and continue to work on the prioritization of our portfolio. So we expect that too to go beyond the 200 basis points. This year, so as we look into 'twenty.
24, we continue the same trajectory. So that we originally mentioned we would be achieving 40% gross profit margin by 2025, but given the pace that we're seeing today, we most likely are going to be able to outpace that objective.
Thank you that's it from me.
Thank you Kristen.
Our next question comes from Susan Anderson from Canaccord Genuity. Please go ahead with your question.
Hi, good morning, Thanks for all the details this morning, it's very helpful.
I was curious I had a question on the slide on.
The store brand versus National brand in the latest 13 weeks. The 0.7 share gain was that I guess overall or was that in your categories and then.
I guess just looking at the categories that you play and did you see share gains across all of them or were there any categories, where you saw some losses and then I have a follow up.
Yes, so Susan these numbers that we shared.
Our across the categories overall right. So we're seeing consistently over the last 13 weeks.
<unk>, 7%.
Our into volume share gains of Star brand and from a dollar standpoint, as you know because of national brands have been more aggressive on pricing.
As we look into the dollar share we see slight gains as we continue to track debt into the latest information that we got in October that continue that trend and we believe that's very very positive. So it means that.
Our consumers on a volume basis, they're really trading down we're not seeing that.
Extensively because of the differential on price increases, but the positive thing is as compared to last year, where you remember we had some challenges on the having announced the inventories. This year, we are in a much strong position.
As the cough and cold season continues to.
Progress now as we saw a little bit.
The slow start, but we're starting to see a pick up on that we are at the highest level of the last years on liquid cough and cold so.
The strong season.
Strong cough and cold season confirms we are very well positioned to capture additional.
Volume and value versus our current estimates.
Great and did you guys say, how much of an impact to the top line the U S nutrition and branded OTC products in the Americas had.
Well through Q3, we would say two thirds infant formula one third the delay on the season.
What we saw in the third quarter versus the original expectations.
Okay, Great and then if I could just add one more you mentioned the price increases and I was curious how much did you raise price and was it across all categories or what categories did you see price increases in and then.
So I'm curious just how the retailers and the consumers are responding to those price increases.
Yes. So overall, we have almost 5% price increase I would say the significant portion of that is in the infant formula business remember.
Because of the FDA guidelines and the changes in the operations that we had to do you know our we're talking with the with retailers about that and so.
We implemented those actions in July.
We talked before and we havent seen any pushback.
Of course, we will.
Hope to see more of that benefit, but because of the supply chain challenges to adapt to the new FDA guidelines, we haven't been able to fulfill the volumes that but we.
We expect that our.
Pricing benefits continue and also next year, we should see the leap effect into the first half of the year.
Okay, great. Thanks, so much good luck the rest of year.
Thank you.
Our next question comes from Daniel.
Well.
<unk> from <unk>. Please go ahead with your question.
Hi, Thank you I wanted to follow up on the Phenylephrine products I was wondering how long it would take for you to change the production of the combination drugs like how much of a lead time it would take to hit retail shelves.
Well. Thank you for the question. So the first thing is today, our exposure and the overall portfolio is about 2%.
The strong total company net sales.
So far the impact has been very small to all retailers and we saw only a single entity Fannie laughing products right.
So we do not expect any action of combination of products, given the safety and potential for shortage. So we are already working.
To reformulate our.
For an electric products with other active ingredients.
If needed so we are pretty well on track with our plans for the next season.
Okay. Thank you and then I was wondering if you could comment on the effort recently in the Senate to have be OTC birth control covered by insurance, how that would even working and what <unk> thoughts are on that.
Yes, hi, good morning, this is Patrick.
We are aware of those efforts we support those efforts we're still in discussion.
To also include the FSA and HSA supports.
Describe it at the moment is a work in progress and hopefully we can give a favorable update soon.
Okay.
And then finally, if I can squeeze one more in.
I was just wondering if it's more of an open ended question, but what has been the response from your customers about the SKU rationalization efforts what are your learnings to date has it been mostly one off decisions, where one decision to not produce a product has not had any sort of impact on anything else or have you learned of things are interconnected in a little more complicated than it seemed it.
Thank you.
Yes.
Respond first and then Eduardo was a bit more detail.
Actually Jim really well well received I mean, both in terms of elimination.
Everybody understands that it is important for.
The mutual value creation.
We see movement into other skus.
And also as we've done SKU standardization across retailers, because we saw changes in pack sizes lid sizes labeling font sizes, all of which was driving tremendous complexity that just wasn't serving the consumer driving preference. So this basically has allowed us to create more value.
Without really any risk or trade out.
So I think so far the effort has gone extremely well we continue to be very focused on the U S to the question earlier about gross margin expansion the opportunity for further pricing and.
And we continue to work that through with our retailers and even looking into 'twenty four.
Yes, and just to complement to what Patrick mentioned this as well.
They highlighted so we achieve it already 750 of the 1000 Skus planned for this year to be simplified and sell direction.
It Hasnt been has been very positive in that sense and we continue to <unk>.
Our conversations with them to progressing in those areas. So.
I think that's been very well implemented in very well communicated with the retailers at this stage.
Thanks Daniel.
Once again, if you would like to ask a question. Please press star and then one.
Our next question comes from.
Kim from Morningstar. Please go ahead with your question.
Hey, guys. Thanks for taking my question here I wanted to follow up on wholesale.
The launch of that product will be maybe a little bit dilutive for some time, the remarketing and SG&A spending.
Eventually get to neutral or even accretive and so I was wondering how big of a headwind should we expect from this launch if any.
Well so.
The way we were thinking about the appeal.
Oh on the lounge, so we expect that the sell in to take place in Q1, mainly because we wanted to make sure. There is continued to you on the product supply.
Based on the anticipated customer repair changing levels, but as.
It was highlighted we want to make sure that we invest in the franchise of the whole women's health category, we expect that to be dilutive in 2024, but I.
It's an important.
Question that I think is probably going to come up at some stage.
We considered that at all.
Earning per share growth for 2000 and for it yes, and yes, we have we still strongly outlook our performance in the two noisy to three <unk>.
<unk>, so even though this will be dilutive.
That's standard of any brand launch the program continues to build well, but it's just part of a sort of balanced set of investments and opportunities as we continue with double digit earnings per share growth.
Great. That's really helpful. Just one more from me can you talk about how much more skewed priorities prioritization is leftover and should we expect any of that for our 2024. Thank you.
I'm, sorry, Skus SKU prioritization.
We will continue with these efforts are driving gross margin by focusing on more value accretive offerings.
So I would expect some effect into 'twenty, four but I would expect.
Less revenue impact as we balance that with growth initiatives to a greater extent than we have in 2003, yeah just to complement their as you remember in 2024, we have additional benefit from the supply chain reinvention program, that's mainly because of the other pillar that we have there.
Into our plants.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the floor back over to the management team for any closing remarks.
Thank you for joining us today, we actually feel very good about the improving structural health of this business the revenue.
The impacts that we've seen are essentially infant formula disproportionately in the U S.
And a slightly slower start to the cough cold season.
This means that the great majority of our programs are on track in line with our expectation producing upper quartile performance and we look to continue that in 'twenty, four and 'twenty five and we feel very good about our long term.
Growth algorithm as well more of a growth in the future will be branded both in the U S and the international and we are currently working through those portfolio choices and we hope to share more with that and the the weeks and months ahead.
So we feel good about our performance.
And we thank you for your support.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.
Okay.