Good morning, ladies and gentlemen, and welcome to the Perrigo Second Quarter 2021 financial results Conference Call. All participants will be in a listen-only mode. [Operator Instruction] Please also note today's event is being recorded. At this time, I'd like to turn the Conference Call over to Bradley Joseph, VP of Inventor Relations and Communications. Sir, please go ahead.

Thank you. And good morning, everybody. And welcome to Perrigo Second Quarter Fiscal 2021 Earnings Conference Call. I hope you all had a chance to review the press release we issued this morning. A copy of the earnings release and presentation for today's earnings discussions are available within the Investor section of the Perrigo.com website. Joining today's call are President CEO Murray Kessler, and CFO Ray Silcock. I'd like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for Shareholders and investors and Safe harbor language regarding these statements in our press release issued earlier this morning. A few notes before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the RX business, which is accounted for as discontinued operations in the second quarter. In addition to other non-GAAP adjustments as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from both periods, certain costs incurred to support the operations of the RX business, which are reported in continuing operations. See the Appendix for additional details and reconciliations of all non-GAAP financial measures presented. And second, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. With that, I'm pleased to turn the call over to Murray.

Thank you, Brad. And good morning, everyone. Self-Care continues to be front of mind for our consumers and customers. And now that our portfolio configuration to a pure-play consumer Company is complete, we believe Perrigo is in a great position to capitalize on this trend. I'm proud of how the Perrigo team has successfully adjusted during these challenging times, which have impacted channel dynamics, sales mix, input costs, and consumer behavior. The good news is that the business and markets we're in are normalizing with sharp rebounds and consumer takeaway, as the world is slowly and steadily reopening. Barring a broad scale step backward due to new COVID-19 restrictions, I believe Perrigo's broad diversity of product lines and geographies has helped the Company, weather this unprecedented storm. Let's look at the metrics. Perrigo's net sales for the second quarter were $981 million, 3.4% higher than a year ago with organic net sales up 0.5%. Second-quarter growth came despite comparison to the prior-year demand surge in April. And the residual impact of this year's historically weak, cough/cold season. A couple of big takeaways on net sales. It was a solid quarter for all of our businesses XP impact of cough/cold and customer inventory adjustments, which I'll detail in just a moment. The rest of the portfolio and favorable currency covered the entire negative impact of those two issues. And the quarter got stronger and stronger as it progressed, lead by a strong consumer takeaway. This top-line growth did not translate to earnings growth for three reasons. First, advertising and promotion. As you will recall, our teams pulled almost all A&P spending in last year's second quarter as the world locked down. There was no point in advertising to empty shelves in Q2, and in the face of massive uncertainty, we prioritize…

Thank you, Murray. And good morning, everyone. Before we get into the quarterly results, I would like to echo Murray's comments on the strong business trends we saw develop during the second quarter. Although we experienced some turbulence this quarter, which made for a difficult comparison to the prior year, as Murray explained earlier, I too remain encouraged by the sequential monthly top-line Growth trends. We had improved Growth versus the prior year in each month of the quarter. In addition, we saw a continued normalization of consumer takeaway in the quarter. This is not an easy operating environment, but our team performed exceptionally well in managing the various and evolving trends across our businesses. I would like to thank all our colleagues for their dedication and continued efforts in driving our business forward. With that, let's take a look at our second-quarter results. As a reminder, all the figures presented today are from Perrigo's continuing operations and exclude the RX business, which was divested on 07/06. The RX business was accounted for as discontinued operations in the second quarter. On a consolidated basis, the Company reported a GAAP loss from continuing operations of $112 million for the second quarter of 2021 or a loss of $0.84 per diluted share. On an adjusted basis, consolidated Net Income from continuing operations was $68 million, and adjusted diluted EPS from continuing operations was $0.50 a share, a 15.3% decline compared to the prior year. The adjusted EPS decline versus the prior year is primarily because we reinstated advertising and promotion spending in the quarter to pre - COVID-19 levels. Lower cough/cold volumes were partially offset by strong performance across the balance of our Portfolio, while unfavorable overhead absorption was offset by operating expense reductions. We also had a higher effective tax rate in the quarter, 23% as compared to 18% in Q2 last year. Last year's adjusted ETR was favorably impacted by the passage of the CARES Act. Non-GAAP expense adjustments of $179 million included impairment charges of $159 million, primarily from the Health for Sale Latin American business. $54 million of amortization, which we always add back, $13 million of unusual litigation expenses, and $9 million of restructuring costs.

Non-GAAP adjustments to the tax rate for the quarter include the $11 million of tax expense arising from the pre-tax non-GAAP adjustments, 62 million from the intra-Company transfers of intellectual property as a result of the RX divestiture, as well as the effective evaluation allowance release in the U.S. Full details of these and other adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward in this presentation, all dollar numbers, basis points, and margin ages will be on an adjusted continuing operations basis, unless stated otherwise. Since Murray has already covered net sales for the second quarter, I will begin with our gross profit. Consolidated gross profit was $4 million higher than the prior year, primarily due to favorable currency translation, partially offset by adverse plant overhead absorption. Increased material costs, including resin and inbound freight, would largely be offset by pricing and procurement actions taken in the quarter. Consolidated Gross Margin for the quarter was 38.4%, 90 basis points lower than the prior year, primarily due to that lower overhead absorption, and also to a less favorable product mix as compared to last year. Consolidated Operating Income for the quarter was $118 million, 14 million below the prior year, primarily driven by the reinstatement of the advertising and promotion spend. Now let's turn to the segment results, starting with the CSCA. Gross profit in the quarter the CSCA of $197 million was 9 million lower than the prior-year as the impact of new product introductions and a strong performance in oral care, were more than offset by lower plant overhead absorption and lower sales in OTC, as well as by raw material cost inflation. Procurement actions helped offset increased freight, enrollment serial costs. Importantly, we were able to take…

Ladies and gentlemen, at this time, we'll begin the question and answer session. [Operator Instructions] [Operator Instruction] Our first question today comes from Elliot Wilbur, from Raymond James. Please go ahead with your question.

Thanks. Good morning.

Good morning, Elliot.

Good morning. The first question for yourself, Murray, just want to go back to some of your comments in connection with first-quarter results and specifically looking at your expectations for the recovery of cough/cold based on the IQVIA FAN data, assuming you're still relying on that tool to gauge your expectations to some extent, I wanted to know if there's been any meaningful change in IQVIA 's outlook for second half volumes. And given that they had expected such a significant increase, I think they expected volumes to roughly double in the current year cough/cold season versus last year. Wondering if even your guidance was indicated to be conservative. You're still looking for recovery of roughly half that. It still seems like a significant increase in volumes versus what we're currently seeing. Just want to know how good your line of sight is into customer orders for the balance of the year? Or do we really need to see these actual cough/cold numbers turn in terms of incident rates?

Well, I think you rightfully characterized it a little bit complicated. I think all the IQVIA numbers versus the first quarter are trending right in the same direction. The bigger issue, Elliot, for me is, our consumer takeaway numbers and our shipment numbers are normally within a point or two of each other. Look at the second quarter, our cough/cold consumer takeaway was up 40% and our actual factory shipments were still down. I don't have the exact number in front of me, but 30% or something like that. It's like a 50 or 60 point swing, which is unusual. And again, when you're looking at shipments versus consumer takeaway, they always come back to it, always. There will be periods of time when it's up and down and that's what I tried to show in that one graph. There was a period of time when our shipments were outpacing consumption, they caught up, and now it's reversed itself. And consumption, fortunately, is leading the way. So to make our projections the way the consumer takeaway is trending, then we'll hit our projections easily. I'm not going to say there's upside at this point, but it's -- our consumer metrics on all of our businesses are exactly what we forecasted. The lag in shipments is coming back a little slower than looked like some inventory adjustment. And it feels like, when you look at it cumulatively over the past 7 or 8 months, they've now come to -- pretty darn close to even. Other factors, they -- will there be -- the buy-in be as high, or there -- will there be a little more caution? But that could result in the retailers, that it's a good cough/cold season, scrambling to order more later on. So we'll see how it plays out. But this has been a heck of a ride for the last two years, and we're still trying to get back to normal and manage our way out of what's been a lot of volatility, and certainly a dynamic marketplace.

Okay. And if I could follow up that question and your response with just a query into the reduction in overall customer inventories. Was it pronounced in any one channel more than another? And on the RX side of course you -- most companies have fairly good insight into Inventory held by the big 3. Imagine that's not necessarily true for you guys, but how good is your line of sight into actual inventory levels that your biggest Brick-and-mortar customers?

Well, two things that -- we're normally very good as well, but it is not normal times. So normally, you're just looking at the patterns that are consistent. But what's happened over this last year is you had a complete shutdown last year of drugs channels, as an example, and then shifted to e-comm and it shifted over to grocery stores. And now it's shifting back from grocery stores, back into the normal store traffic levels. Some get back into e-commerce. Still growing, but it gets back to where it was last year. So there -- certainly, your normal patterns don't apply and inventory relative to the customer and the way they are managing it and the way we track it, has a numerator and denominator is just not how much they have in the warehouse. You have to divide that by the consumer takeaway, right? So as that's coming up, with no change their weeks of inventory comes down and they are trying to adjust for that. So as long as the consumption continues to grow, the way it's going, we should be fine, but it is -- it's been an interesting one to track versus what has been something we're historically very good in, and then we would have to be good at.

Okay. And then maybe the last question for me. I understand many of the factors as to why gross margins underperformed external and internal expectations for the quarter. We still expect improvement in the second half of the year in both CSCA and CSCI. But trying to get a little bit better sense of what you think is now a good number in each of those segments or lack of a better term, sort of an aspirational target. I know we talked about 33% in the CSCA business. In the second half of the year, that may be a little bit more challenging to reach in light of some of these issues that we're talking about today, but is that still your longer-term expectation? That's kind of a good baseline number to improve off of. And a similar question on the CSCI business.

Yes. I mean, I'll answer it's and Ray feels free to jump in. The factors, as Ray said, we had a big bump in input costs in numerous areas, right? You can take the a -- if you're looking at Operating margin or versus Growth margin, just take the A&P, it's coming out of the fourth quarter when the second quarter just reversing itself from last year back to 2019. But the bigger issue is with a weak weak cough/cold season, now you're feeling on margin -- first off, those are high-margin items, so I'm actually, I know this may seem, a bit odd, but the reality is to have 20% of the business take a massive hit and still grow our franchise and hold it the way we did. But for the move in advertising and promotion, I think is pretty good. And it -- while we're weathering the storm because if you add that back in, we were relatively flattish at the Gross margin line. You don't produce as much you have, or you don't have as much bought in and cough/cold of a high-margin item. So you hit the -- the hit there on the top and then you lose it again in unfavorable plant absorption, right? Because we have certain plans that do nothing but run cough/cold products. So that's a negative hit. Your question about whether that is permanent. Of course, it's not permanent when the cough/cold season comes back, the throughput goes through the plant that on an absorbed overhead and is no longer a factor in future years. And you get the margin back, the Gross margin back on the sale of the cough/cold products. So there's a number of those that are temporary in nature like that. The longer-term input costs when it comes to freight difficulty getting some things out of China for oral care and others. Our purchasing people, originally, when we built the plan believed by the third quarter, we would be back to normal. Now they're saying, early next year, and that we would be all the way back to where it was before. We may give up a little bit of margin there. We're pushing harder on cost increases and don't lose sight of the fact that Ray said that for the first time in years, we were actually able to pass through price increases, which has not been the case. So our customers are working with us and some of those will start to affect it. That's a long way of me saying, I'm not backing off our margin goals. I don't think we'll get there in the second half of this year, but we will get there. Anything you want to add to that, Ray?

No.

We cover a little bunch more.

All right. Thank you.

Thank you.

Our next question comes from Chris Schott from JPMorgan. Please go ahead with your question.

Hi. This is actually Katarina on for Chris. Thank you so much for taking our questions. And actually, I'll jump on your price increase comment. I think you've mentioned it this year for the first time in a while. Can you elaborate a bit more on the customer relationships and broader market dynamics that are enabling you to take price increases? And then my second question would be, can you talk a bit more on the demand trends that you've been seeing across consumer categories in July and maybe the first two weeks of August? Any early visibility into what 3Q could look like there? Thank you so much.

Okay. Well, on the latter part of the question, we did show through the first couple of weeks. Now we're on July --

Yes, currently 11.

[Indiscernable] of July 11, so that data that we put in a pill a couple of days ago, said through the middle of June, and we got in the latest period, so we brought that in. I'll just say that it moved those numbers up a little bit, not down. So from right now, the data that we have in consumer takeaway is through July 11. And through July 11, that trend accelerated, not -- it didn't slow down. So that's good news. That's the most encouraging thing, right? Because the shipments have to ultimately lineup and catch it has just taken a bit longer. Remind me, with the first part of your question, was the price increase, right?

Yes

Yes

The Price increases. We normally, when we started this and I joined in the Perrigo 2 years ago, we were -- every quarter or a year, we were -- we had moved from a minus 1% to 2% price erosion the year-ago, about a 2% to 3%. Our goal was to get it back to minus 1 to 2 in the quarter on almost a year, it's flat so far. So that's a pretty big swing versus what we normally plan on a year because we would have budgeted, it'd be down 1% to 2% and that's help offsetting some of the volume reduction. So, you basically had a good job by the organization that had higher input costs of almost $19 million, $20 million that was completely offset by the purchasing group working their side. Then on the other side, you've had lower volume offset by pricing to some extent and by -- and the input costs. So all of those coming together and -- but for the A&P move would have had our EPS flat versus a year ago -- roughly flat versus a year ago. A few tax implications as well.

As it goes to customer relations, our customers, they're partners. On a normal circumstance, if they thought we were coming in just to take price increases for margin, or to boost our bottom line, they would resist that heavily, and in fact, push the other way under normal circumstances. When -- they're not blind. They see what's going on in the world and input costs, it's affecting them, it's affecting everybody. They see what's happening to their national brand competitors who have been taking price increases. So yes, they have partnered with us and have accepted these price increases as good partners.

Great. Thank you so much.

[Operator instructions] Our next question comes from David Steinberg, from Jefferies. Please go ahead with your question.

Good morning David.

Thanks. Good morning. Thanks. Thanks. A couple of questions first, in terms of new products low, I think you'd mentioned that you're expecting strong momentum in the second half. And so could you give us some flavor of some of the products you are launching? And then, further in the medium-term, thinking about potential RX to OTC switches. We discussed [Indiscernable] next coming up and you've discussed potential switches like Tamiflu, Cialis [Indiscernable] What line of sight do you have amidst potential switches and in fact could some big categories like dermatology or migraine break loose over time in your view?

Okay. Well, let's do the first one. First one, we have a number of new products that were recently launched, that are public. I'm not going to share anything that's not public. That's part of our move to be more of a consumer Company. We need to keep that confidential. But we haven't -- we've already shared with you that we have launched new versions of XL-S throughout Europe. We have launched Probify, which is a launch into probiotics throughout all of Europe a few months ago, and expect that to impact the second half of the year. We launched our hypoallergenic infant formula. We have signed deal with a meaningful new contract on a branded infant formula, that so far is looking incredibly promising. And we launched Burt's Bees infant formula. We had said that later in the year, Burt's Bees would be rolled out to a broader line of products, and that's happening as we speak. Those are just some examples. As it relates to Rx switch, I think the most relevant ones are relatively newer, You also have the combo product from Advil with ibuprofen, acetaminophen combination, Vasta Pro we're not through on having all the sizes on, our Voltaren equivalents yet. I mean, those are just a few. The big ones, whether -- when they come or not come, whether it comes at the Cialis and others will still continue to hear rhetoric as those companies are launching and spinning off their consumer divisions. So, yes, it's been a positive contributor and we expect that to continue.

Okay. Just some follow-up. So in thinking about cough/cold season, I don't know if this is good research. But as we believe so that Australia had the lowest historic levels of cough/cold in 2021, we're just coming out of the winter season, even lower than last year's, with zero hospitalizations. Do you see any view too in the Australian market into what has happened in the U.S. this fall and winter? And then just a follow-up on the price issue. I know you said you're finally taking price versus price declines in the coming -- in the last few years. And the question is if the price was better, why did margins erode? Thanks.

Okay. Well, the second one is easy. The price was just offsetting input cost.

Also inflation.

Yeah, for all of it, inflation. So that was flat, was the impact of that. Australia -- I think Australia is an example of what would happen if the world shut down, but that is not the norm. For Australia, and we have an Australian Board Member who is -- are still incomplete lockdown and complete mask requirements. And I caveated in my comments that, if we went that far backward again, sure, that would be a risk to our plan. As it's happening now and schools reopening and lockdowns are pretty much gone around the world with -- there are some exceptions, we think things will open up and we've already seen a higher level of -- a significantly higher level of illnesses. And you see it in the consumer takeaway numbers that are so dramatic. So if you want me to ask if there -- if the world was the Delta variant, or some other variant, was to shut the world all the way back down again, would it have an impact on our business? Of course, it would. But I think there will be some masking measures, but it doesn't at least feel that way to us that anywhere in the world is willing to shut it down that hard day. Everybody needs to get the world vaccinated.

Great. Thanks.

Ladies and gentlemen, at this time, showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Thank you. As I said, this has been a challenging 18 months, for sure, but I'm proud to say that the team continues to make the adjustments and has -- is literally very close to right on track where we were, where we set up about 2 years ago with the transformation. You've seen -- I'm not going to go through the wheel again, but to sit there are a couple of years and say, despite COVID, we have completely reconfigured this Company despite taking a hit on cough/cold, which is only 20% of our business and to be still growing. To be in a year with these challenges and have already sold RX, which I don't think the world expected it and now have those resources which we're working hard on to drive even stronger results in our 3, 5 long-term promise. And to be making major, major progress where we've -- we believe we've cut in half the biggest risk to the Company from an uncertainty standpoint.

The Company is still progressing and setting itself up long-term for ultimately making lives better through our self-care vision. So with that in mind, I like where we sit and I'm optimistic about the future and we just got to work our way through these inventory issues and input costs, which we will, but they don't change the fundamental strength of the Company and the long term trajectory and the benefits that we ultimately believe our investors will get from all of this hard work over the past few years. So I thank all of the employees who have helped make that happen, and I thank you for your interest in Perrigo.

Ladies and gentlemen, that does conclude today's Conference Call. We do thank you for attending. You may now disconnect your lines.