Q3 2024 Perrigo Co PLC Earnings Call
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Speaker Change: Good morning, ladies and gentlemen and welcome to the Paraguay 3rd Quarter 2024 Financial Results Conference Call.
Speaker Change: Got this time, all lines are NA, let's say no limit.
Following the presentation, we will conduct a questioning-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.
Speaker Change: I would now like to turn the conference over to Bradley Joseph, VP, Global Investor Relations. Please go ahead.
Bradley Joseph: Good morning and good afternoon. Welcome to Perigo's third quarter 2024 earnings conference call. I hope you all had a chance to review our press release issue today. A copy of the release and presentation for today's discussion are available within the investor section of the perigo.com website.
Speaker Change: Joining today's call are President and CEO Patrick Lockwood-Teller and CFO Eduardo Bezerra.
Speaker Change: I would like to remind everyone that during this call participants will make certain forward-looking statements.
Speaker Change: Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our release issued earlier today.
Speaker Change: A few items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis.
Speaker Change: Continuing operations include the HRA rare diseases business, which was classified as held for sale after the first quarter end, and does not include any contributions from the divested RX business, which was accounted for as discontinued operations prior to its sale.
Speaker Change: Second, organic growth excludes acquisitions, divestitures, exit and product lines, and currency in both comparable periods.
Speaker Change: 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's financial statements.
Speaker Change: And third, Patrick's discussion will focus solely on non-GAAP results, except as otherwise noted. See the appendix for additional details and reconciliations of all non-GAAP financial measures presented. And with that, I'm pleased to turn the call over to Patrick.
Patrick Lockwood-Teller: Thank you, Brad. Good morning. Good afternoon, everyone. Thank you for joining today's call.
Patrick Lockwood-Teller: I would like to begin with an update on the advancements we have made towards building One Perigo and the progress we have made towards our fiscal year expectations.
Speaker Change: Stepping back, OnePerego is an operating platform designed to deliver a unified global operating rhythm built on speed, agility, reliability and data-driven decisions.
Speaker Change: Main building blocks include one optimized organizational structure, one operating model and way of working, one unified enterprise technology network,
Speaker Change: and one focused and scalable portfolio.
Speaker Change: Bringing all these pieces together will allow us to significantly advance our vision.
Speaker Change: to provide the best self-care for everyone.
Speaker Change: During the third quarter we have taken significant steps to strengthen our One Perigot culture and Brad building capabilities.
Speaker Change: by expanding our executive leadership team with the appointment of a new chief brand and digital officer, Dr. David Ball, in addition to appointing a permanent general counsel, Charles Atkinson.
Speaker Change: Both David and Charles bring an immense amount of industry-specific experience and will be instrumental to Perigo achieving value-accretive, sustainable growth over the long term. I wish them both a warm welcome.
Speaker Change: Turning to our recreative initiatives.
Speaker Change: The team has executed Project Energize extremely well, achieving $95 million in gross savings year-to-date, partially offset by reinvestments of $16 million.
Speaker Change: As a reminder,
Speaker Change: We expect Project Energize to deliver $140-$170 million in gross pre-taxed annualized savings.
Speaker Change: while reinvesting 40 to 60 million of these savings all by the end of 2026.
Speaker Change: Early reinvestments have been focused on adding or repurposing key talent across the organization.
Speaker Change: In addition to the appointments of both David and Charles, we've reinvested in other areas such as global quality, IT, category management, and disruptive growth.
Speaker Change: These new leaders have added more than 200 years of combined consumer experience to the company.
Speaker Change: Our Supply Chain Reinvention Program is delivering gross savings of $32 million year-to-date.
Speaker Change: corresponding cash outflow of 18 million
Speaker Change: This program in total has achieved $72 million in gross savings and a corresponding cash outflow of $42 million, according to an extremely solid ROI.
Speaker Change: The Supply Chain Program has delivered growth margin expansion.
Speaker Change: Unlock capacity in constrained areas to pursue new business.
Speaker Change: lowered our standard production costs and increased US OTC service levels which most recently achieved 92% across all US customers up from 80% in the prior year quarter.
Speaker Change: The efficiencies gained from this program are partially offset lower production volumes primarily in USOTC and nutrition.
Speaker Change: We have also made demonstrable progress to augment and strengthen our infant formula business.
Speaker Change: when net sales grew plus 3% versus the prior year quarter, plus 58% sequentially.
Speaker Change: More on the formula in a few moments.
Speaker Change: Next, we delivered third quarter gross margin of 41%, an increase of 160 basis points compared to the prior year.
Speaker Change: and plus 40 basis points sequentially.
Speaker Change: This strong third quarter expansion is driving year-to-date gross margin of expansion of about plus 90 basis points.
Speaker Change: Now to our earnings phasing.
Speaker Change: which remains heavily weighted towards the second half of the year due to the timing of recovery in infant formula and benefits from Project Energize.
Speaker Change: For the third quarter, we delivered EPS of $0.81, an increase of plus 27% year-over-year and plus 53% sequentially, and we are reaffirming our 2024 adjusted EPS range of $250 to $265.
Speaker Change: In summary, we've made significant progress in 2024. We're delivering on our recreative initiatives, the infant form of business is recovering, and we've taken actions to simplify and consumerize our business.
Speaker Change: There's a lot more work to do.
Speaker Change: Now let's turn to our third quarter earnings highlights.
Speaker Change: Third quarter net sales decreased 3.2 percent year-over-year, while organic net sales declined 2.4 percent, which I will speak to on the next slide.
Speaker Change: Gross and operating margins expanded meaningfully versus prior year, plus 160 basis points and plus 340 basis points respectively.
Speaker Change: These factors led to an operating income growth of plus 21.3% and EPS growth of 26.6% to 81 cents as just shared.
Speaker Change: Now, to Organic Next Sales, which declined 2.4%, including an impact of minus 2.8 percentage points from lost distribution of lower-margin products and U.S. store brand, in line with our second-quarter earnings pool discussion.
Speaker Change: Organic net sales from the rest of the business improved 0.4 percentage points driven by women's health and healthy lifestyle categories.
Speaker Change: The nutrition category had a minus 0.2 percentage points impact on organic cells as lower sales of low margin or electrolyte solutions more than offset growth in infant format.
Speaker Change: Organic sales of our global OTC brands grow plus 2.1% versus the prior year stemming from strong performance of Compete, Nasonex, BroncoStop and Bronconolo. Overall our brands continue to perform well.
Speaker Change: That went from four minutes.
Speaker Change: Job number one in infant formula was to recover and complete our self-remediation actions so that all our sites produce reliable, quality assured infant formula. We have done this and are now achieving high attainment of quality production and packaging.
Speaker Change: Group number two in infant formula is focused on bringing back service levels across all retailers and contract customers.
Speaker Change: in addition to building safety stock to lessen any potential shock to this business.
Speaker Change: Our highest volume store-brand SKUs are now back on shelf and we are currently achieving approximately 85% in stock across our largest customers.
Speaker Change: Looking ahead, we expect all customers, including contract, to be in stock with their highest volume SKUs by year end.
Speaker Change: Now that the largest store brand customers have inventory, job number three for Informa is sales activation.
Speaker Change: This entails drive-and-demand creation to promote switching to store brand formula through online ads, promotions and other activities.
Speaker Change: This work has recently begun, resulting in store-brand volume share of non-whip powder increasing 160 basis points compared to the prior period as of the latest consumption data.
Speaker Change: The recent and short-lived consumption spike during the first week of October, likely due to pantry loading from the poor, strike and hurricane Milton, also contributed to the store-ground share gains.
Speaker Change: Our contract customers recently began reintroducing SKUs and we are leaning in to support and optimize their business.
Speaker Change: including the launch of several new products. However, early volume share gains for these customers have been slower than the store brand share gains.
Speaker Change: While a lot of focus this year has been placed on infant formula, we're also driving consumer preferred innovation. Perigo is strategically positioned to leverage emerging trends and partner with retailers to drive growth in categories where we play.
Speaker Change: One trend worth highlighting is the increasing usage of GLP-1 medications, particularly for weight loss.
Speaker Change: This market is expected to grow from approximately 6 million users today to approximately 30 million users by 2030.
Speaker Change: GLP-1 users often experience multiple side effects, which can be managed with OTC products, creating an opportunity for Perigo and our retail partners.
Speaker Change: For example, a GLP-1 user may need multiple products to treat nausea, diarrhea, headache, constipation and gas.
Speaker Change: By focusing on specific claims related to GLP-1 side effects, we can provide retailers with a one-stop hub of convenient and accessible OTC offerings that cater to consumers seeking release.
Speaker Change: Retail activation of this innovative program is expected to begin later this quarter.
Speaker Change: This program is just one example of leveraging Perigo's scale and agility to quickly provide unique solutions for an emerging OTC trend.
Speaker Change: Stepping back, I've spent considerable time over the past 16 months assessing our organization, our portfolio, and the competitive landscape to ascertain where we play and how we want to win. This work has identified several attractive growth opportunities that have potential to be impactful in the long term.
Speaker Change: It has also uncovered additional initiatives necessary to rewire Perigo and set us on a path to achieve sustainable, value-accretive growth.
Speaker Change: These initiatives are, one, stabilising key areas of our business.
Speaker Change: 2. Streamlining our operations and 3. Strengthening our foundation for the long term.
Speaker Change: or, as we will refer to these initiatives, the 3S model.
Speaker Change: We will provide more detail on these initiatives during our Investor Day early next year, but as a brief overview.
Speaker Change: First, we recognize the importance of stabilizing key areas of our business, namely infant formula, U.S. store brand, and core brand share growth in our international markets.
Speaker Change: Most of these stabilization efforts are well underway and delivering good results, including high attainment levels for quality production and packaging in infant formula, increasing service levels, better joint business planning with customers, and driving demand creation, which is a critical differentiator for our U.S. store brand business.
Speaker Change: and three continued execution and achievement of our accretive initiatives.
Speaker Change: Second, we will position ourselves for long-term sustainable growth by further streamlining the operating model, systems and manufacturing operations, the more simplified global model, with one way of working.
Speaker Change: This will entail one focused and scaled global portfolio, prioritizing growth opportunities at the category level and implementing a blended brand strategy tailored to local markets.
Speaker Change: Finally, we will strengthen and operationalize the company by prioritizing free cash flow while continuing to de-lever the balance sheet.
Speaker Change: concentrating innovation investments of bigger growth initiatives with the highest ROI and leveraging our successful innovation chassis across more brands including store brands.
Speaker Change: Again, I'm looking forward to sharing details of my path forward at the investor event early next year.
Speaker Change: In summary, we're on track to deliver against our 2024 EPS commitments and expectations.
Speaker Change: We have made significant progress stabilizing core businesses. We have invested in world-class CPG capability and leadership, and we're executing with excellence against our recreative initiatives.
Speaker Change: I believe we are in a much better position for more reliable earning per share and revenue growth.
Speaker Change: and we're also advancing our work to consumerize, simplify and scale one paragraph.
Speaker Change: Investment in brand building capabilities are yielding early positive results, evidenced by solid OTC brand performance in the quarter.
Speaker Change: and we're significantly advancing our strategic work to fully realize long-term sustainable value-accretive growth.
Speaker Change: the 9,000 pergo team
Speaker Change: continue to provide significant value to consumers, customers and society as a whole by delivering our important and necessary self-care solutions.
Speaker Change: The dedication to our purpose is truly remarkable. They embody the One Perigo ethos and together we are committed to making life better through trusted health and wellness solutions accessible to all.
Speaker Change: With that, I will turn our call to our CFO, Eduardo Bezerra, to cover the financials.
Eduardo Bezerra: Thank you, Patrick. And hello, everybody.
Eduardo Bezerra: Looking at the third quarter financials starting with the gap to non-gap summary.
Eduardo Bezerra: Primary adjustments to our third quarter non-GAAP P&L were, one, amortization expenses of 51 million dollars, two, the removal of 31 million dollars related to gains on exited businesses and product lines,
Eduardo Bezerra: 3. Unusual litigation of $25 million and 4. Restructuring charges of $19 million primarily related to our supply chain reinvention and project energized programs
Eduardo Bezerra: Full details can be found in the non-gap
Eduardo Bezerra: From this point forward, all financial results discussed will be on an adjusted basis unless otherwise noted.
Speaker Change: Turning to our third quarter and year-to-date P&L.
Speaker Change: Since Patrick covered Q3 net sales, I would like to highlight the meaningful Q3 year-over-year operating income growth of 21.3%.
Speaker Change: driven by the Recovery in Infants formula, including favorable production efficiencies, net favorable pricing across the enterprise, and benefits from Project ENERGIZE.
Speaker Change: Net sales year-to-date decreased 7.5%.
Speaker Change: Year-to-date organic sales were down 6.3%.
Speaker Change: including minus 3.7 percentage points.
Speaker Change: from infant formula and minus 4.7 percentage points from lower first-half seasonal demand for cough cold and allergy products and FKU prioritization and non-loss-to-distribution in U.S. store brands.
Speaker Change: These impacts more than offset plus 2.2 percentage points of growth across the rest of the business.
Speaker Change: Year-to-date operating income increased 1.8%
Speaker Change: as Net Favorable Pricing and Benefits from Accretive Initiatives.
Speaker Change: more than offset a minus 10.4 percentage points impact from infant formula and minus 3.5 percentage points impact from exited businesses and product lines.
Speaker Change: Year-to-date EPS declined $0.09, due primarily to discrete tax benefits in the prior year of $0.11, inferring a $0.02 increase at a constant tax rate.
Speaker Change: Additionally, year-to-date EPS included a minus $0.26 impact from infant formula highlighting EPS momentum underpinning the business driven partially by management actions.
Speaker Change: The team continues to focus on achieving margin expansion.
Speaker Change: This expansion was driven by, number one, infant formula recovery, which drove operating margin expansion of more than 1,900 basis points in the nutrition category, two, benefits from our creative initiatives.
Speaker Change: Three, favorable mix within store brand and across the global portfolio, and fourth, operating margin expansion in the U.S. oral care business of 830 basis points due to pruning of the portfolio and cost optimization.
Speaker Change: I should also note that CSEI delivered a record quarterly operating margin in Q3.
Speaker Change: Great job done by the team in court.
Speaker Change: Switching to organic top-line performance by segment is starting with CSEI.
Speaker Change: Organic growth in the quarter was plus 1% driven by positive 3.5 percentage points from the upper respiratory, skincare, and women's health categories.
Speaker Change: Growth across these categories was driven by share gains in key brands including BroncoStop, Compete and L1.
Speaker Change: This growth was partially offset by supply constraints in pain and sleep aids categories and lower consumer demands for VMS products.
Speaker Change: In CSEA, organic net sales declined 4.4%, due primarily to minus 4.4 percentage points from the loss distribution in U.S. store brands we mentioned in previous quarter.
Speaker Change: lower sales in the nutrition category of minus 0.4 percentage points offset by growth of positive 0.4 percentage points across the rest of the portfolio.
Speaker Change: Sales of U.S. brands including Nathan Axe and Prevacid, in addition to the Opio, were significantly higher compared to the prior year.
Speaker Change: Turning to third quarter operating income, both segments delivered double-digit growth versus prior year.
Speaker Change: Record quarterly operating income in CSEI included benefits from accretive initiatives, lower variable expenses, and favorable pricing.
Speaker Change: These drivers more than offset the impact of lower volumes and exited businesses and product lines.
Speaker Change: CFTA growth was driven by infant formula business recovery, benefits from accretive initiatives, and favorable store-brand mix.
Speaker Change: These factors more than offset lower volumes, including loss distribution, and higher advertising and promotion investments, which support the growth of our U.S. brands.
Speaker Change: Q3PS also included a net impact of minus three cents from currency translation and exited businesses and product lines.
Speaker Change: Now a bit of color on our three major initiatives and their projected cash outflows.
Speaker Change: Our supply chain program kicked off in 2022 and is expected to achieve $100 to $120 million in gross pre-tax annualized savings by the end of 2025.
Speaker Change: The cash costs to achieve these benefits were originally estimated at 160 million dollars.
Speaker Change: Given our heavy scrutiny on every single dollar spent, we now expect to achieve the same benefits for 30 million dollars less than originally projected.
Speaker Change: Our infant formula self-remediation actions began in January of this year following updated manufacturing guidelines introduced by FDA last year.
Speaker Change: The focus of this initiative is to ensure all infant formula sites are producing reliable, quality-assured infant formula.
Speaker Change: We now project a cash outflow of approximately $25 million in 2024 related to this initiative, which again, as good news, this outflow is below original projection of $35 to $45 million.
Speaker Change: Finally, to Project ENERGIZE, our global investment and efficiency program to drive the next evolution of capabilities and organizational agility.
Speaker Change: We now project cash outflow for this program below our original estimate by approximately $5 million, another bit of good news, and we remain on track to deliver our previously stated benefits.
Speaker Change: In summary, these three actions are necessary to help stabilize key parts of our business, streamline our organization, and strengthen the company for the long term.
Speaker Change: Through a stringent approach to capital allocation, we now expect the total cash outlay from these three initiatives to be approximately $50 million lower than originally projected.
Speaker Change: Turning now to our recent refinancing.
Speaker Change: During the third quarter, we enhanced our debt structure by issuing $715 million notes and €350 million notes, both due in 2032.
Speaker Change: Both issuance were highly oversubscribed and well-received by fixed-income investors, resulting in lower coupon rates than the initial price talk.
Speaker Change: Receipts from these notes were used to redeem our $700 million notes during March of 2026, which came off our balance sheet early in the fourth quarter, and to repay $390 million of our existing Terminal 1B.
Speaker Change: These refinancing actions will result in a lower weighted average interest rate after executing derivatives, while having no impact on our total long-term debt outstanding or credit rating.
Speaker Change: Cash on the balance sheet at the third quarter end was $1.5 billion, an increase of $921 million from the second quarter, including the $700 million applied to redeem the notes due in 2026.
Speaker Change: Cash inflows included $205 million of upfront proceeds from divesting the rare disease business, which closed in July.
Speaker Change: approximately 1.1 billion dollars in proceeds from the refinancing I just discussed which closed in September and third quarter operating cash flow of 42 million dollars
Speaker Change: Cash outflows for the quarter included $27 million of capital expenditures, $38 million returned to shareholders through dividends, translate to a current dividend yield above 4%,
Speaker Change: and the prepayment of approximately $390 million on our Terminal 1B.
Speaker Change: On October 2nd, after the third quarter ended, we completed our refinancing activities by fully redeeming our $700 million notes due in 2026.
Speaker Change: Deducting these amounts from the third quarter end balance implies a pro forma cash balance of approximately $764 million at the end of the third quarter.
Speaker Change: Next.
Speaker Change: Four quarters operating cash flow is expected to be sizable, as this is typically the largest cash generation quarter due to natural phasing.
Speaker Change: Separately, in the second quarter of this year, we settled and paid a $97 billion shareholder lawsuit.
Speaker Change: This quarter we received $70 million from insurance coverage related to this settlement.
Speaker Change: We believe we are entitled to recover at least the remaining $80 million of the shareholder settlement and we will continue to vigorously pursue recovery during the fourth quarter.
Speaker Change: These factors are expected to translate into meaningful fourth quarter operating cash flow conversion.
Speaker Change: Lastly, we intend to fully repay $400 million of perigo notes when due in December 2024 with cash on hand, resulting in end-of-year net leverage of approximately four times, down from 4.5 times at the end of the third quarter.
Speaker Change: Taking all these moving parts into account, we continue to plan for year-end cash-on-the-balance sheet of between $500 to $550 million, assuming insurance recovery of the remaining shareholders second.
Speaker Change: Turning quickly to guidance, our 2024 Outlook remains largely unchanged.
Speaker Change: Why we expect organic and all-win net sales towards the lower end of their respective outlook ranges, adjusted gross margin between 39 to 40 percent, and meaningful year-over-year adjusted operating margin expansion.
Speaker Change: In addition, we now expect full-year adjusted effective tax rate of 19 to 20 percent, slightly lower than before. And finally, we are reaffirming our EPS outlook of between $2.50 to $2.65.
Speaker Change: In closing, the team has taken swift action to offset known and unknown headwinds, achieving year-to-date operating income growth compared to the prior year. We remain on track to deliver significant benefits from our accretive initiatives at a lower cash cost than originally planned.
Speaker Change: We bolster our balance sheet by refinancing $1.1 billion of debt, and expect to lower our total debt outstanding and interest expenses in 2025.
Speaker Change: Looking ahead, we will continue to focus on free cash flow generation and invest in our business for the long term.
Speaker Change: Thank you for your ongoing support as we further our journey to fulfill our vision as one parent.
Speaker Change: With that, I'll turn back to you, Brad.
Speaker Change: Thanks Eduardo. Operator, can you please open the call for questions?
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received.
Speaker Change: Would you wish to cancel your request, please press the star followed by 2.
Speaker Change: If you are using a speakerphone, please lift the handset before pressing any keys.
Speaker Change: Your first question is from Susan Anderson from Kenneth Ford. Your line is now open.
Susan Anderson: Hi, good morning. Nice job on the quarter.
Susan Anderson: I guess maybe just on the infant nutrition business, good to see that getting back on track. How should we think about the ramp in fourth quarter and then also for 2025? Should we expect...
Speaker Change: kind of the normal run rate of sales there. And then just in terms of the improvement in the margins, the 1,900 basis points, I guess, is that, should we expect that to continue as we kind of look forward at that level, I guess? Thanks.
Eduardo Bezerra: Okay. Hi, Susan. Morning, Eduardo here. So, first of all... Yeah. Can you hear me well?
Susan Anderson: Yep, I can hear you.
Speaker Change: Okay, perfect. So, again, so as we look into infant formula in the fourth quarter, right, so we continue to expect as we shared in the beginning of the year, right, so first half would be impacted and then we would see a recovery and a ramp-up going on there. So the store brand is really going pretty well on track.
Speaker Change: and five of our largest customers. And then in the last quarter, we expect to expand that to our full retailer. And so that's...
Speaker Change: That's what we have in our plan to continue to see growth there. The key question mark is really our contract business, right? So, as you saw on our note, you know, we grew our store brand share by 160 basis points.
Eduardo Bezerra: while in total 40 basis points. So there's still, given the dynamics going on, mainly on the branded side, we're watching closely what is gonna happen with our contract business, right? So that's an important aspect.
Eduardo Bezerra: Related to and then looking forward to 2025, right? So we continue to see, you know, recovery of our store brand.
Eduardo Bezerra: market share, right, so and we expect to
Eduardo Bezerra: you know, continue to see that strong progress throughout the year and we're going to continue to watch closely what happens with the contract business, right? So as you know pretty well...
Eduardo Bezerra: the improvement margin on the margin side, right? So remember last year, you know, we saw Cygnus come to low margin.
Eduardo Bezerra: in 2023, right? So we expected the level of margins that we're getting this year, you know, in terms of gross margin.
Eduardo Bezerra: to continue to evolve. Again, highly dependent on the contract business and how that's going to play out, but we continue to expect.
Eduardo Bezerra: You know, significant progress both in gross margin and operating margin to continue in 2025 as we address most of the issues that we found in the first half of 2024.
Speaker Change: Okay great thanks for all the details and then maybe if I could add one more just on Opal if you could talk about and you obviously some nice growth there but I guess how it's trending versus your expectations how the new customer acquisition is going and the marketing around the product and then maybe just any thoughts around you know expectations for Opal for next year thanks
Eduardo Bezerra: yeah hi Susan this is Patrick can you hear me okay
Susan Anderson: Yeah, hi Patrick.
Eduardo Bezerra: All right. Bye.
Patrick Lockwood-Teller: So OPIL, you know, it continues to gain momentum. It's almost a three-share now of all contraceptives over the last four weeks and we are, as you rightly say, seeing week-on-week sequential growth. Awareness has grown very well over this quarter.
Patrick Lockwood-Teller: trial is good and repeat rates well over 40% is actually benchmark.
Patrick Lockwood-Teller: So we're pleased with it, we're not delighted with it. We still think that there is upside to it, it's a new category in OTC and so there's a lot of learning to be done, a lot of optimisation.
Patrick Lockwood-Teller: We need to improve in-store visibility.
Patrick Lockwood-Teller: We'd like to see more display that can generate significant awareness.
Patrick Lockwood-Teller: We're also continuing to learn who are our key user groups. We seem to have three key user groups.
Patrick Lockwood-Teller: We're doing the research to understand why they're used, how to convert them faster, and how to really focus our marketing on growing share with those three user groups.
Speaker Change: So, good work to be done to make it even bigger, and we expect, yes, to see continued growth going into 2025. And, Susan, just to add to what Patrick said, you know, why would we not expect, you know, to see continued growth going into 2025?
Patrick Lockwood-Teller: They're all built to be accretive to EPS. We're seeing it's being accretive on our gross margin, both in 24 and we continue in 25.
Susan Anderson: Do you expect it to be accretive to EPS in 2025?
Susan Anderson: So remember, as we said, more towards the end of the year, right? So we said since the beginning that we didn't expect in the first 18 months.
Susan Anderson: need to be accrued. So as we continue to rationalize our A&P to drive...
Susan Anderson: you know the the margin because remember very important to us given the three-year exclusivity period that you really get the the opium brand in the hands of consumers you know and so we're maximizing that opportunity so that when we come back with the
Susan Anderson: the store brand product, we are going to be able to capture the most value in that category.
Speaker Change: Okay, great. Thanks so much for all the details. Good luck the rest of the year.
Speaker Change: Thanks, Susan.
Speaker Change: Thank you. Good morning. Maybe just starting with.
Speaker Change: the restructuring programs and I guess the cash outflows are coming in better than expected. Maybe adding some context on how that kind of changes your priority list for investing. Are some investments then being pulled forward? And if so, what areas of the organization would that be
Speaker Change: you know some investments that we expect to do
Speaker Change: in the organization, right? So as Patrick highlighted, to really build and strengthen our business, making sure that our R&D and A&P
Speaker Change: are matching a similar level of the branded companies. So that's one key area that we're looking at there as well.
Speaker Change: How do we continue to drive efficiencies in our operations, right? So we continue to invest in our systems, etc., as part of our One Perigo strategy.
Speaker Change: to really, you know, standardize and unify that so that we can get those benefits of project energized, supply chain reinvention to continue to last for the long term. So these are some of the key areas that we're continuing to focus to reinvest.
Speaker Change: Got it. Thank you. That's helpful. Maybe secondly then on...
Speaker Change: Just adding to your comments around the...
Speaker Change: of the Cough Cold Season and really just your exposure to the drug and pharmacy channel. What are you guys seeing there? I know there's some unique pressures in the U.S. with some key customers of yours and so.
Speaker Change: any context on the potential impact one from a seasonal nature and cough cold trends in the US and then secondly just what you're hearing from some of those key customers in that channel and how that might impact your thoughts on the US OTC business.
Speaker Change: Hi, this is Patrick.
Speaker Change: The Cofco business is about 10 to 15 percent of our business
Speaker Change: Typically we don't see an impact when shoppers move channels but most shoppers use all channels anyway.
Speaker Change: And if they're moving their purchase from one channel to another, that's really a neutral effect for us.
Speaker Change: We actually enjoy higher shares outside of the Pharmacy channel, so if anything this is a slight tailwind for us.
Speaker Change: Got it. Thank you. I'll pass it on.
Speaker Change: Thank you. Your next question is from
Speaker Change: Good morning, thanks for taking the questions. I'd like to touch a little bit on the, I guess, the customer controls you're putting in and, you know, exiting relationships for some of the key customers that may be a little bit lower margin. Can you talk a little bit about the true margin differential of these?
Speaker Change: customers and then I believe in the press release you talked a little bit about you know the lower volume maybe being a little bit of a margin headwind so at what point would this you know flip and become more of a tailwind versus a headwind given the volume impact you're seeing?
Speaker Change: Yeah, thank you. Thank you, Corinne.
Speaker Change: But one thing important, we didn't exit the customer.
Speaker Change: Right, so, you know, we operate with all the retailers in the U.S. and that's very common that
Speaker Change: at different times of the year or multiple years, they do their RFPs, right? So, and that was a portion of the business with one specific customer that we walked away because those were very low margins. And as you see, at least in the third quarter, we had a positive impact on our margin because of the
Speaker Change: the margin of that net lost business there. So to us, it's margin accreted on all those actions.
Speaker Change: We're always watching that closely not to have an impact on an absorption and so that's an area that we're watching.
Speaker Change: very closely, you know, as we progress through the year, and to your second question, you know,
Speaker Change: Some of these actions that we took in the first half, they're starting to play now. We're starting to see Q3 and Q4.
Speaker Change: You know, those exited, you know, specific parts of the business will have.
Speaker Change: an impact on our top line.
Speaker Change: and that may get further into the first half of 2025.
Speaker Change: But with the wins that we had, you know, over the last three to five months, we expect to start offsetting that in 2025. I would say starting in the second quarter, but more consistently in the second half of 2025.
Speaker Change: And just to be clear, those businesses will present a higher margin versus what we lost.
Speaker Change: Great, really appreciate all the color. And then if I could just touch a little bit on what's going on with the selling expense. It looks like it stepped down a little bit this quarter. Was there any shift in timing related to the spend that we need to be aware of as we head into Q4? And then how should we be thinking about the proper run rate for that selling expense going forward? Thanks.
Speaker Change: Yeah, so when you look into the overall, you know, operating expenses, right, so as we launched Project Energize in the first quarter.
Speaker Change: You know, we were expecting to see, you know, significant benefits in the second half of the year. So, what you're seeing there is it's coming down in the third quarter. In the fourth quarter, we expect that to continue.
Speaker Change: But as we look into 2025, we took a very strong position on A&P and R&D.
Speaker Change: given some of the top line impacts that we had. And so as we are working on our plan for 2025, we expect those two lines to recover as compared to this year, but still...
Speaker Change: As we shared, Project ENERGIZE will deliver incremental savings in 2025 versus what we are delivering in 2024.
Speaker Change: which by the way year-to-date were 95 million dollars.
Speaker Change: Thank you. Your next question is from Chris Scott from J.P. Morgan.
Speaker Change: Hi, this is Ethan on for Chris. Thanks for taking our questions. Just starting off at this point in the infant formula recovery
Ethan: What's been the early feedback on demand for your private label and store brand formula from both a consumer and a retailer perspective? And then any updates or changes in thinking on your overall market position? Or concerns on being able to sell the product you produce given the new player in the industry?
Ethan: Hi Chris, this is Patrick. I'll take this and then Eduardo will add some further commentary.
Ethan: We are recovering
Ethan: Store brands share with consumers largely in line with our expectations.
Ethan: We have Mauro Val, a set amount of new mothers who enter the category every month or see exit.
Ethan: We know how to convert them to store brand and at what time and have restarted that marketing activity. So we are in line with U.S. store brand.
Speaker Change: I know a lot of people are watching units sold. The correct measure is non-wick.
Speaker Change: how to pound consumption.
Speaker Change: The reason for that is a lot of the units have moved from small tubs to bigger tubs because the industry had to rationalize its skew because of the new FDA regulations and some manufacturing efficiencies.
Speaker Change: So we are seeing poundage.
Speaker Change: almost mapping
Speaker Change: perfectly onto our recovery expectation. Okay, so that's point one and we will continue to see that store brand share grow as we introduce innovation next year and new SKUs. We actually hope share will actually recover beyond historical levels.
Speaker Change: that will be at some point through 2025.
Speaker Change: So, that remediation has gone extremely well. These are extremely high quality plants and really set benchmarks for the industry.
Speaker Change: We are seeing production and packaging at or above historical levels.
Speaker Change: So we're running higher quality plants more efficiently than we have done historically and we are seeing store recovery and store brand consumer recovery completely in line with our expectation and that will accelerate.
Speaker Change: Yes, you're right, because the industry has been disrupted these past couple of years.
Speaker Change: Firstly COVID and then the new FDA regulations. There has been some new foreign brand entrants into the market. They've established quite a sizable position. They have taken shares from some of the other branded players, some of whom we contract manufacture for.
Speaker Change: So, there are some short-term dynamics playing out and we will continue to monitor and manage that in order that we get to full utilization of our plants.
Speaker Change: These are brands owned by other owners, and it's for them to maintain their in-market competitiveness and consumer appeal.
Speaker Change: Anything to add? Thank you.
Speaker Change: Thank you.
Speaker Change: And then one other question is just on 2025 more broadly at this point, how are you thinking about...
Speaker Change: The pushes and pulls to EPS given the ongoing infant formula recovery, along with the contract wins coming on board in 2025 and a number of other dynamics that are working through the business.
Speaker Change: Yeah, I'll start and then Eduardo will definitely add some more detail. We are highly sensitized and sensitive to the $3 EPS target.
Speaker Change: We are literally in the middle of our detailed budget planning for 2025. Yes, you're quite right. There are some headwinds which are common across anyone in CPG, consumer, regulatory,
Speaker Change: channel shifts etc etc the sort of usual suspects
Speaker Change: And again, we have a bigger growth arena than any of our competitors. Why? Because we compete at three price points.
Speaker Change: across hundreds of molecules.
Speaker Change: and so we're able to read where the growth is, where the seasonality spikes are and pivot accordingly.
Speaker Change: So we're working through those growth opportunities. Where do we focus? What is the relative ROI of those?
Speaker Change: Again, we are very focused on the $3 EPS target.
Speaker Change: Yeah, just to just to provide a little bit of color, right, so and we expect to
Speaker Change: to announce our guidance in our Q4 earnings in late February.
Speaker Change: In terms of tailwind, as Patrick mentioned, you know, continue to see category growth, right? So...
Speaker Change: You know, the new business wins.
Speaker Change: that we're seeing the star brand of setting, you know, the volume loss that we expect that to take.
Speaker Change: by stronger position in the second half of 2025.
Speaker Change: Also, the store brand infant formula recovery that we started to see now, you know, the curve is starting to shift up, to shift up, right? So, as it continues from Q4, and also continues the brand growth. So, as we talk about both NCSCI and CSCA on our brand portfolio, we continue to see great strides there.
Speaker Change: Some headwinds, you know, we continue to see competitive
Speaker Change: marketplace, so both in U.S. store brand as regular, as well as
Speaker Change: as we just highlighted on the...
Speaker Change: U.S. Infant Formula branded business and how could that impact
Speaker Change: our contract business, and also, you know, to the point of the question that Corinne made, you know, as we look into our variable expenses for 2025, you know, we expect those to return to a more normal level.
Speaker Change: in the year both in A&P and R&D, you know, as we progress throughout the year.
Speaker Change: The last piece also to highlight is we saw in CSCI a very strong pricing this year, but given the competitive dynamics that's happening across
Speaker Change: all of the major brands.
Speaker Change: You know, we're seeing pricing.
Speaker Change: and Dean Piter.
Speaker Change: And so we expect, you know, not to see the same level of significant benefit on pricing for next year. So, again, there are a lot of still moving pieces, but as Patrick highlighted,
Speaker Change: We still focus on...
Speaker Change: on, you know, getting the $3.00 that's our target and we're going to continue to work on that and give you further updates in February.
Speaker Change: Thank you, that's very helpful. I'll pass it on.
Speaker Change: Thank you.
Speaker Change: Thank you. And the last question is from Danielle Bjelke from WebGuard. Your line is now open.
Danielle Bjelke: Thank you. I wanted to follow up on that last answer from Eduardo.
Danielle Bjelke: The price gap between national brands and store brands, do you think that should widen or narrow alternately to benefit sales or pricing?
Danielle Bjelke: And with that, you know.
Danielle Bjelke: and Mr. Joseph.
Danielle Bjelke: So just to be clear, the question is what happened with the price gap between national brand and store brand across all the contenders or any specific area?
Danielle Bjelke: Your products versus, you know, the national brands.
Speaker Change: Okay, yeah, so again as we talked before we saw a widening that over the last, you know, 18 months. We're starting to see the national brand starting to make further promotions.
Speaker Change: to recover volumes and so we're seeing a little bit of, you know, a reduction of that widening but it's really hard to see that this
Speaker Change: It's becoming really a stronger trend.
Speaker Change: You know, we're going to be watching closely what happens with the cough and cold season as well to see if that starts to narrow as mainly the national brands are looking to recover volumes and this is going to make it more competitive in the marketplace.
Speaker Change: Okay, thanks. And if I could follow up, how does the innovation pipeline look to you? Did we see less, you know, emphasis from the manufacturers on innovation during the pandemic and now we're seeing that return to sort of more normal levels?
Patrick Lockwood-Teller: Yeah, hi, this is Patrick. Just to...
Speaker Change: I'd like to add another data point on your first question.
Speaker Change: Store brand volume share is up 120 basis points on the most recent 13-week period so more consumers are Shifting to store brand as they become more aware that these are identical bioequivalents
Speaker Change: at tremendously better value. So we've seen that. We are seeing more investment and requests for investments in demand creation from our retailers.
Speaker Change: to support their store brand proposition and to grow share of that. These are significantly more profitable for these retailers and offer much better value in an economic type cycle.
Speaker Change: that's on that. Second on innovation.
Speaker Change: We're going to talk a lot more about innovation in February. For us, specifically,
Speaker Change: We spend a lot of money on innovation and it's our belief that we can make that work much harder for us in terms of
Speaker Change: qualifying consumer preferred innovation focusing on those categories and brands that we want to disproportionately drive and making sure that innovation is more scalable.
Speaker Change: Historically we've done small innovations for particular brands of particular countries, but frankly the payouts just...
Speaker Change: not competitive enough. So we have massively reduced the number of innovations we're doing.
Speaker Change: We've about tripled the size of those individual innovations, the MPVs are dramatically better as I'll talk about in February And they're focused on those brands that we want to focus on
Speaker Change: But we can scale them across more brands, more countries, and just get much better payout for those, as well as them being better for consumers.
Speaker Change: In terms of innovation rhythm, generally I'd say there has been a slowdown over the last few years.
Speaker Change: That's not good for the consumer, it's not good for category growth rates.
Speaker Change: I know
Speaker Change: We will be bringing bigger, better innovation, obviously I don't know on competition, but we will talk about innovation as a key growth driver and performance driver for us in February.
Speaker Change: Thanks, Daniel.
Speaker Change: Thank you.
Speaker Change: Thank you. There are no further questions at this time. I will now hand the call back to Patrick for the closing remarks.
Patrick Lockwood-Teller: Yes, thank you very much, and thank you for joining us today. We do feel it was a strong quarter, and we hope what you see is
Patrick Lockwood-Teller: The internal structure of this company getting demonstrably better and stronger and positioning us for more reliable growth going forward. We think the blueprint, perigo sustained growth, is now becoming clear.
Patrick Lockwood-Teller: We can categorize it under the 3S model of stabilizing four parts of our business, continuing to streamline our structure, our operating systems, and our manufacturing.
Speaker Change: and then strengthening those key growth vectors that we see for the long term and maintaining disproportionately our branded growth.
Speaker Change: We've made a lot of progress this year, and it was a challenging year, on stabilising important parts of our business, including Infant Porno, whose recovery is excellent and fully in line with expectations at a lower cost than we had first outlooked.
Speaker Change: We are back to a competitive position in our U.S. store brand business. As we mentioned last quarter, we are winning tens of millions of dollars of business, and we will see that growth playing through in 2025, in the second half.
Speaker Change: This work of stabilizing these core businesses I'm pleased to say is now largely behind us.
Speaker Change: We continue to progress actions to streamline and simplify our business to improve cost, cash and operational reliability. We are approximately halfway through this work.
Speaker Change: That is all cash upside and positions as well.
Speaker Change: There is more work to do to strengthen our business, to maintain the excellent branded growth that we're seeing in international, to sustain that and to ensure that we're achieving that in the US.
Speaker Change: This really is the third component of getting to sustainable value accretive growth.
Speaker Change: We remain hyper-focused on delivering and de-levering through 2025 to improve operational financial reliability. Cash flow generation. Cash flow generation remains our top priority. We think the 3S strategy will significantly improve cash efficiency that I will outline with Eduardo in February.
Speaker Change: We are delivering on our commitments in 2024 through both improved financial steering and operational reliability and improved in-market competitiveness.
Speaker Change: We of course operate in a dynamic and competitive market, but we will continue to address the daily business challenges as they come up on our journey to realise the full potential of our significant asset base.
Speaker Change: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.