Perrigo Company plc (PRGO) Q3 2021 Earnings Report, Transcript and Summary

Good day and welcome to the Perrigo's third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist [Operator Instructions] after today's presentation, there will be an opportunity to ask questions. To ask a question, [Operator Instructions] on a touchtone phone. To withdraw your question, [Operator Instructions], please note this event is being recorded. I would now like to turn the conference over to Brad Joseph, Vice President of Investor Relations, please go ahead.

Thanks, Tom. And good morning, everyone. And welcome to Perrigo's third quarter fiscal 2021 earnings conference call. I hope you all had a chance to review the press release we issued this morning. A copy of the earnings release and presentation for today's earnings discussion, are available within the Investor section of the Parago.com website. Joining today's call are President and CEO Murray Kessler and CFO Ray Silcock. I'd like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our press release issued earlier this morning, a few items. Before we start first, unless stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the divested Rx business which was accounted for as discontinued operations prior to its sale. In addition to the other non-GAAP adjustments as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, excludes from the prior-year period, certain costs incurred to support the operations of the business, which were recorded in continuing operations. See the appendix for additional details and reconciliations of all non-GAAP financial measures presented. Decade organic growth excludes acquisitions, divestitures, and currency in both comparable periods. And third, Murray's discussion will be focused solely on non-GAAP results. And with that, I'd like to turn the call over to Murray

Thank you, Brad and good morning, everyone. In [Indiscernible] we had major accomplishments, Company changing accomplishments, the kind that will switch your Perrigo a bright year for years to come. Unfortunately, we also experienced some very significant challenges this quarter related to the global supply chain disruption experienced by many companies in multiple industries. I'll come back to those in a few minutes. But first, I want to remind everyone that during the third quarter, we completed our transformation to a consumer self-care Company by first closing the generic Rx divestiture transaction for $1.6 billion, which dramatically lowers volatility at makes self-care our sole strategic focus. And second, announcing our agreement to acquire HRA pharma, and it's leading portfolio of consumer self-care brands for €1.8 billion, which we estimate will add $400 million in revenue and a $150 million in operating income in 2023 during the quarter. We also dramatically reduced the tremendous uncertainty that has been an overhang on Provider go for the last three years. This was accomplished by favorably settling the headline €1.6 billion Irish tax Noah for a much smaller. And while we believe Perrigo had a very strong case of the tax appeals commissioned disagreed. This tax assessment could have cost the Company $3 billion or more when including interest. We settled for €297 million in total with cash payable up €266 million net after we receive credit for prior payments. This issue is now completely resolved and behind us. And even better, we paid for the settlement from a €355 million award we received during the quarter through binding arbitration arising from the Omega transaction. The result, Perrigo is now a focused consumer self-care Company, poised for strong growth unencumbered by the major overhangs of the past. Our long-term future has never been brighter. Let's shift back to Q3 business performance. Results were below year-ago mainly due to under-absorbed overheads and higher input costs. For net sales, supply chain disruption was the culprit. This led to an inability for Perrigo to meet very strong consumer demand in the quarter. Absent this. Supply chain disruption, net sales growth would have been in line with what we had projected. Higher costs for freight, other input costs, and lower operating efficiencies in the form of unabsorbed manufacturing overhead attributed to last winter's historically weak of cold season also negatively impacted earnings. Let me provide a bit more detail. But net sales, as forecasted, the strong consumer takeaway in Q2 to translated to higher factory orders in Q3. This was highlighted by a 21 % year-over-year growth rate in our cough cold sales in the U.S., and continued double-digit growth in e-comm, plus 36 % year-over-year globally. Consolidated net sales increased 4 % versus year-ago, despite a supply chain disruption impact of $43 million with the bigger impact in the U.S., $38 million causing a 5.5 percentage point drag. On CSC A Q3 net sales performance. Had those orders shipped under normal patterns. CSCA shipment growth would have been very close to the strong consumer takeaway growth observed in the quarter. Let's take a look at those market trends for CSCA. Importantly, category consumption grew briskly in the categories we compete in, for all 3 of our U.S. business units. The total OTC category was up 18.1% versus a year ago. Total nutrition, which for us is infant formula and electrolytes, was up 29.9% and Oral Care was up 9.7%. It's worth noting that total store brand OTC lost market share to national brands during the third quarter, about 1.5 share points. But this is not a reason for concern. The share loss was attributed to buyers of national brands increasing consumption, rather than buyers of store brands switching to national brands. I repeat, the growth did not come from private label buyers switching to national brands. And that's good news. As. The national brands drive category growth, that becomes a revenue source for us in the future. In our CSCI division, market share with stable in Q3, like the U.S., the categories we compete in showed a very strong rebound in consumer takeaway and they grew briskly. Total CSCI consumer takeaway was up nearly 10 % over a year ago. But TSC factories shipments lagged consumer takeaway and were basically flat for the quarter. We believe this trades to a light pre -cough, cold season buy-in by pharmacists across Europe who were worried about getting stuck with too much inventory. If the cough cold season doesn't rebound. But that worry appears unfounded as the cough cold season in Europe is in fact off to a very fast start. Consumer takeaway was up 36 % in Q3. We expect this to translate to strong cough, cold sales in Q4, as pharmacy inventories are low, as I just stated, and we already saw that begin to occur in the month of October. That has strong cough, cold sales. Turning to the third quarter earnings, EPS fell short of our internal projection and was $0.15 below year-ago. Supply chain disruption negatively impacted EPS by an estimated $0.08. Lower operating efficiencies and higher input costs impacted by $0.17. And separately, we had two product recalls that had a $0.05 negative impact. Tight management of expenses offset some of these negatives. Looking towards updated guidance, we expect consumer demand to remain very strong in Q4. However, we also expect higher input costs, supply chain disruption, and the impact from under absorbed overhead to continue. Based on Q3 results in those continuing trends, we've lowered our API. That's guidance range for the year to $2 to $2.10. This new annual estimate includes a total year negative estimate of $0.79 per share for COVID-19 related external factors, which is obviously quite significant. And again, that's what we experienced so far plus the fourth quarter estimate. I place these factors into three buckets as follows. First, Costco, the impact of a historically weak season significantly impacted our first quarter net sales in earnings, as well as continuing to have a negative impact on manufacturing efficiencies through under-absorbed overhead for the balance of the year, total impact estimated at $0.49. Higher input costs is the second factor of spiking costs that has progressively escalated throughout the year, including freight and other input costs are estimated, has a total impact for the year of $0.09. And then finally, supply chain disruption, both inbound and outbound logistics that became a major issue beginning in Q3 is estimated to have a full-year total impact of $0.21. We believe this large reduction in 2021 net sales and EPS for these three factors is not indicative of the underlying progress the Company has made and that they can progressively be recaptured over the next two years. Let me address each bucket one at a time to explain how we believe that will happen. First, the historically weak cough, cold season that dramatically impacted one net sales was clearly a one-off. Illnesses are up according to IQ via cough, cold consumer takeaway was up 61 % in the US and 36 % in Europe during Q3 and October cold/cough sales for Perrigo remained robust. While we aren't yet forecasting a full recovery to the 2019 level, cough/cold sales are expected to be up dramatically in the first quarter of 2022 versus 2021 as that higher volume runs through our plants, the negative absorption impact will come back to us, albeit that will take 12 to 18 months to play out. But we have a very high confidence in getting this full $0.49 back. Second, the $0.21 impact from supply chain disruption is also expected to be temporary. The global supply chain is forecasted to gradually improved by mid-next year. But in the meantime, we've taken a series of actions to improve the current situation, including outsourcing highly complex product lines to a third-party logistic provider, allowing more room on our trucks for higher profit OTC products. Also adding regional carriers for challenge shipping lanes, hiring additional distribution center personnel, which allows us to change our order delivery scheduled will account for the many no-shows we've experienced. And finally, increasing the purchase cycle for ingredients and packaging and alike, from 30 to 90 days to make sure we have sufficient lead times for delivery. These actions have resulted in a 25 % increase in daily shipments for the month of October as compared to the third quarter average. And not all of the actions that have even been fully implemented yet. Some of these changes will remain in place until the larger U.S. supply chain normalizes. Some of these changes we intend to leave in place as a hedge against future disruption. And third, as for the input costs, $0.09 from the second half of this year. And any flow-through impact in the first half of next year will be addressed by raising prices on 70 % of our product lines in CSCI, and 75 % in CSCA. U.S. retailers have been more accepting than usual up price discussions, as they understand the massive cost increases, we, and frankly everyone else are facing, [Indiscernible] national brands are also raising price. And we will continue to maintain a tight focus on discretionary costs, and remain focused on achieving at the least, the final 30 million of Project Momentum cost savings. Several other actions have also been put in place to get earnings growing again. We've made several management changes in the U.S. to refocus the team on core OTC market opportunities of which there are many of which have already resulted in some significant customer wins. Second, our successful and growing e-com business, which is up 25 % year-to-date, remarkably on top of last year's more than 100% growth, has been reorganized internally to allow focus and added resources to further accelerate growth. And of course, the previously announced acquisition of HRA will have a dramatic positive impact on financial results, and the growth trajectory of Perrigo. The transaction remains on track to close mid-next year. So, to reiterate, despite the best efforts of my Perrigo colleagues, and they've been remarkable. The COVID-19 pandemic has raised excessive challenges, which began in 2020, and continued through 2021. The impact has been real and our response has been real as well. We believe that the negative business impact of the big three drivers in 2021, a historically weak cough cold season, supply chain disruption, and higher input costs will be mostly recovered and or be offset with pricing and Project Momentum cost savings. And we remain on track to close HRA mid-next year, which will substantially increase net sales, operating income, and margins for years to come. We therefore still believe we can get at least close to our original 2023 EPS targets we shared with you back in May 2019. And again, during the HRA announcement, just a few months ago. So, from our perspective, this is not a reset, it's just a very big bump in the road. In conclusion, we've come a long way over the last year, three years with the most massive elements of the transformation plan having come to fruition. In this most recent quarter. The volatile generic Rx division has been divested. The HRA acquisition is on track and is expected to add approximately a dollar of EPS in 2023. And the Irish NOA and the uncertainty created over the last three years is gone. Perrigo is now a focused consumer self-care Company determined to be a world-class consumer software Company that consistently delivers profitable growth over the long term, consistent with industry peers. And while COVID-19 has created many unforeseen challenges in 2020 and 2021, big challenges, we work through them as they occur, and we will not let them deter us from making our vision to reality, nor hitting the ultimate growth plans we originally established. With that, I'll turn the call over to Ray Silcock, our Chief Financial Officer, to discuss the financials in more detail. Ray.

Thank you, Murray, and good morning, everyone. Firstly, with respect to the major strategic initiatives completed this quarter and outlined in this morning's press release, I'd like to reiterate Mary's comments that these achievements do indeed lay the foundation for our bright future. But as Murray also said, the operating environment in Q3 was challenging and had a significant adverse impact on our quarterly results. So, I would like to thank the team at Perrigo for all their hard work, navigating through them. With that, let us take a look at our third quarter results in greater detail. First, let's review our GAAP to non-GAAP adjustments. On a consolidated basis, the Company reported a GAAP loss from continuing operations of $54 million for the third quarter of 2021, a loss of $0.40 per diluted share. On an adjusted basis, consolidate net income was $61 million, and adjusted diluted EPS from continuing operations was $0.45 per share, a 25 % decline compared to prior year. The adjusted EPS declined versus last year is primarily due to one lower operating efficiencies, primarily overhead under-absorption as a result of lower manufacturing's from the week 2020, 2021 cough/cold season. Two, higher freight and materials costs due to global supply chain disruptions. And three, the impact of two product recalls. One in Europe and one in the U.S. pre -tax non-GAAP adjustments this quarter totaled 311 million. Primarily, these were from our excluding the positive benefit of the $395 million Belgium arbitration award we received in Q3. We also added back 53 million of amortization expense, as we always do, and $25 million in acquisition, and unusual litigation expenses. Full details of these and other adjustments, can be found in the non-GAAP reconciliation table attached to this morning's press release. The principal non-GAAP tax adjustments for the quarter with a $309 million Irish Noah's settlement and $108 million in tax arising from intra entity transfers of intellectual property due to the RX divestiture. These led to an adjusted effective tax rate for the quarter of 21.3% down from Q3 last year's adjusted effective tax rate of 24.6%. The reduction in our adjusted effective tax rate was primarily due to the release of state uncertain tax position reserves, partially offset by the big tax expense this year. From this point forward, all dollar numbers, basis points and margin percentages will be on an adjusted basis unless stated otherwise. Consolidated net sales for the quarter increased 4 % driven by e-commerce, by contract sales to our recently divested our RX business from price increases and also from improved U.S. cough, cold season sales, which have started to turn around in Q3, as compared to Q3 2020, but are still down versus last year on a year-to-date basis. Net sales also benefited from $9 million of favorable currency and $5 million from acquisitions. On an organic basis, excluding the effects of currency and acquisitions, net sales grew by 2.6%. Consolidated gross profit in the quarter was $35 million lower than last year. Primarily, as a result of lower operating efficiencies and higher material and freight expenses, as well as the $9 million cost of 2 product recalls, all partially offset by $6 million in favorable currency and acquisitions. Consolidated gross margin in the quarter was 34.4%, 480 basis points lower than prior year, driven by the same factors. Consolidated operating income in Q3 was a $112 million, $29 million down from last year. Operating expense reductions, including Project Momentum. savings, helped partially offset the unfavorable gross profit flow-through. Measured as a percent of net sales, consolidated gross profit in Q3 was 34.4% down from 39.2% for the same period last year. Global supply chain disruptions which caused higher material and freight costs were 130 basis points of this impact, while overhead under-absorption from the historically weak 2020, 2021 cough, cold season, principally in the first and second quarters were another 150 basis points. In addition, we experienced those two product recalls, which costs 80 basis points. These headwinds, together with unfavorable mix in our base business, driven by contract sales to the recently divested our RX business, and lower sales in CSCI's weight loss category resulted in a year-over-year gross margin decline of 400 basis points in the quarter. Lower operating expenses of 80 basis points partially alleviated these effects. We expect the gross profit headwinds to gradually reverse over the course of the next year or so. As the cough cold season returns to its historical levels, and overhead absorption levels in our plants normalize and such supply chain disruptions ease. Now let's turn to the third quarter segment results, starting with consumer self-care America's. Net sales for the quarter increased 4.6% driven by e-commerce, third-party sales to the divested Rx business, and better cough cold sales, excluding favorable currency of $2 million organic net sales grew 4.2% in the quarter. Gross profit in the quarter was $193 million, $29 million below last year, driven by unfavorable plant overhead absorption, higher material and freight expenses, and a product recall. In the energy category, these factors led to a year-over-year gross margin decline of 570 basis points. Operating income for the quarter was $106 million, $28 million lower than prior year, driven by unfavorable gross profit flow-through, partially offset by operating expense reductions, mainly R&D, and administrative costs. Moving onto -- excuse me. Moving onto consumer self-care International. Net sales grew 2.8% driven by favorable currency and acquisitions. Performance in the UK store brand business. Greater demand for our smoking cessation products and improved pricing. Excluding the benefits of currency and acquisitions, organic net sales decreased 0.6%. CSCI gross profit was $166 million dollars, 3 % down from last year, a 280 basis points decline in gross margin. Unfavorable mix from lower sales in the weight management category, together with the cost of the recall, were only partially offset by favorable currency and acquisition The operating income was $46 million, $6 million lower than prior year, primarily due to the impact of the product recall. Moving now to the balance sheets and operating cash flow, cash on the Balance Sheet as of October the second was 2.1 billion and included $1.6 billion from the RX divestiture plus $418 million from the Belgian arbitration award. Operating cash flow in the quarter was $350 million, including the Belgian arbitration award. As a reminder, the cash outlay for the Irish tax settlement, and the legal fees for the Belgian arbitration award were made after the end of the quarter. In closing, our third quarter results were significantly impacted by the macro environment in which we operate, which is reflected in our updated full-year adjusted EPS guidance in the range of $2 to $2.10. We remain confident in our plans to deliver long-term profitable growth as we recover from this quarter's temporary adverse impacts and move forward with the successfully closing and subsequently integrating the HRA acquisition. Operator can you open the line for questions, please?

We will now begin the question-and-answer session to ask a question, press star then one on your touchtone phone.[Operator Instructions]. And the first question comes from Elliot Wilbur with Raymond James. Please go ahead.

Good morning Elliot.

Thanks. Good morning. Murray, despite all the cited factors over the last couple of quarters that explain various aspects of the Company's performance. No one can figure out what's going on with gross margins. I followed this Company for a long time. And frankly, I feel a little bit lost right now. I don't know where the bottom is, and we keep coming in well short of the Company's expectation. So clearly it seems to be something beyond just merely supply chain issues and logistics issues, because obviously over the course of the pandemic, numbers have been volatile, yet margins have been certainly relatively close to historical standards, and certainly well above where we are today, it would be very helpful if the Company could somehow provide a bridge between. Margin performance, gross margin performance, CSCA in the current quarter relative to historical levels, so we can have sort of some understanding of what's happening outside of these one-time issues.

Sure. But it's primarily -- I mean, these are massive one-time issues and most of them come back, but listen, I get it right. Inflation freight materials, 180 margin points this quarter, under absorption, 150 basis points this quarter that's 330 by themselves. We sold the Rx division. We get credit for the sales. That's not a real margin deterioration, like we just have to report what was contract sales that we had the profit before you lose 100 basis points on that. I mean that really comes off, but it's no change to the. Profitability for the Company and you had a little bit of an offset of 50 basis points on price and be ticked up a 100 basis points on the operating margin line from, from cost savings, primarily in tight management of our operating expenses. But I mean, the big issue is you have to 300 400 points that came on roaring on strong from having no cough, cold season, and from massive supply chain disruption than massive increases in freight. I mean, we have got a big business like I'm Oral Care that buys a lot of its product from China and a container worth $6,000 is now $26,000. I mean hopefully -- everyone believes that will come back again. But those are -- when you translate that out over a longer period of time. Those are big numbers. The good news is we're out and been able to put in pricing. So, I think when you recover the cough cold, which we're clearly doing already, that's real. You're going to get that back. You're going to get that overhead back. Supply chain will pay more for us, so it will hurt for a little while until prices start to come down again. Input costs offset by pricing. We've gotten more pricing approved and into the marketplace. I don't know when the last time that's happened for the Company, but our customers recognize that. But it's not liked a national branded business when you take the price increase on variety and it goes up Monday. We have contracts and that gets filtered in, but we have 75 % of the business being a price decrease over the next period of time. So, it was clearly a hit to gross margins. I get it. I just think these short-term hits undermine the great work that had been being done on product mix, on discontinuing unprofitable products on SKU rationalization. I mean, we're focused on margins, but I get it from where you are seeing -- you don't see it right now, but I think you will.

No. I don't see it, and it's difficult to see. I think it would be helpful for the Company to shed some additional light and put some additional clarity around all the key items that used [Indiscernible] positive, and then obviously kind of what we're seeing in the reported numbers. But again, I mean, if I gave you the benefit of 300 basis points in terms of some of these one-time issues, I mean, you're still looking at gross margins in the CSCA business, which are 30.8% and that's still a 152, 100 basis points below what people believe, what's the bottom here. So, I think this issue you need some additional clarity going forward. I do want to ask about the absorption issue. The impact in the quarter. I mean, it just seems like with cough cold, clearly bouncing back at least in the quarter to 2019 levels and presuming that you are continuing to see relatively high order rates. I'm a little surprised, I guess debt, you know, absorption seem to have the impact, at least in the quarter that you cited, and not sure necessarily why that would occur if it's just product being produced in the warehouse, but not put on trucks. I would assume a lot of that unabsorbed overhead is in fact actually allocated to product costs. It is not impacting unabsorbed overhead and we're also not seeing that necessarily in terms of inventories increasing. I understand there's a lot of moving parts there that could impact the inventory line, but inventories were actually down in the quarter. So, I'm trying to reconcile a couple -

[Indiscernible] Sure, but [Indiscernible] you're selling the inventory that you made expecting a down but not a nonexistent cough cold season. So, when those -- you're paying for the unabsorbed inventory now, for what happened last January and February, right. So, it gets put onto that inventory as it as it gets put up. And as you work it down, you're working down inventory with a higher-cost to it. And then it's like a six months lag in our costing system that works through and it will continue on through the fourth quarter -- a little bit into next year. Then it will slowly start to reverse itself. And all of a sudden, you'll get huge windfall.

Okay. Understood. Thank you. And I guess just last question is, given some of the changing dynamics in the OTC space and taking pricing in the like. Could you just talk about where the Company's relative market share position is across the private label segment where you're gaining share, where maybe share has slipped a little bit, whether or not you think that the price increases will in fact have a negative effect on share. But could you could more than make it up for in margin. Just trying to understand what some of the moving parts there are in terms of competition from other private label players, as small as they may be versus just changing share dynamics versus national brands tax?

Yes. That's a great question by the way, Elliot. Because at first glance, people are going to look at the national brand of the store brand level. I gave you the panel data that shows that's just from them advertising more and getting consumers to buy more, and that has no effect on our business right now. Within store brand, we had some big challenges. We got hit with last year. Nicotine, some competition and dosages at an SMA and day approvals in omeprazole and that resulted in some share loss this year. Now, our businesses on across-the-board. we're still lot of being growing across those, but they could have gained more, and I don't accept ever losing share. When it's actually sourced and coming from you. I would tell you that I made some changes in management and some other structural areas and we have won a lot of business in the last 30 days. So, did we lose some short-term share within store brand to the extent that we can read it, right. Store-brand gets provided. And we told you a few months ago we were able to start to break it out ourselves. It's not something that had historically reported by IRR. We are now starting to get that data. And as soon as I'm comfortable with it, probably in the next investor conference, we will do -- we'll really break that out for you, but your point is a correct one. So where do I think we gotten hit on some? Little bit on digestive health, meaningful competition and nicotine replacement. I will also tell you that those are the areas where we've had the most wins recently, and where we have a lot of innovation coming. So, but great, great question. Those are normal things. Those are the things that I'd like to be talking about on a conference call. Not shocked that we had unbelievable orders and all of a sudden, we couldn't ship them Because we wouldn't be having half the discussions we're having right now. had we just been able to ship the orders that we have. But good question.

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

Great. Thanks so much for the questions. I know you addressed a little bit of this in the prepared remarks, but I'm just trying to get my hands around bridging from the $2 to $2.10 this year to those 2023 goals. So, I guess the heart of it is beyond cold, cough demand, normalizing. What else really has to happen to get to that 2023 target to give you confidence to still be sticking with that, just given that the results we're seeing here -- just want to make sure I'm clear. It feels like this is mostly cold, cough normalizing, but just help me walk through the other kind of key assumptions, I guess to go into that bridge over the next few years and then a couple of follow-ups from there.

Okay. Well, listen, I've got work to do to finish it, Chris, but let's over simplify it. If you are 2 to 210 and you get back $0.49, $0.50 cents on cough cold, which we believe, which is the combination of the volume impact and the absorbed the manufacturing efficiency. Now you're at 250 to 260 and you will add a dollar for HRA, you're at 350 to 360. And the numbers were 365 to 395 that we were originally talking about. So, at the bottom end of that range, you're off $0.10 or $0.15, and you say, okay, out of excluding cough cold, the rest of the world, the rest of the business, the other 80 %, if you can grow that sort of 5 % to 10 %, or you can recover some of these other costs with pricing, etc., cost-savings. You're only 15. It sounds $0.20 short. So, the components, 205 at about 305 that get back to 50 on Kafka all 3553060. And you got to get 15 $0.20 out of the rest of the business over two years.

Okay. Perfect. And then just -- I don't know if you can quantify, I think you mentioned you're taking price on a good percentage of the portfolio. I know that's something you historically haven't been able to do as much. Just any flavor on just how much price are you able to get on the portfolio just to help offset some of these supply chain pressures that you're seeing?

Well, I mean historically we've been -- I've been out there saying in the U.S. that there have been 2 to 3 % erosion, we've been able to improve that to 1 to 2%. And then last quarter that had flattened out in this full quarter, for the first time that was positive. So, we had obviously swung it by a couple of percentage points because it really wasn't mix. And that was only with 1/3 or so. I don't know Brad if we are -- have a specific forecast yet, Chris, because the way we go out with -- again, this is very different than a national brand that just takes the price increase.

Sure.

And then you have a -- you have to say, well, what's going to stick relative to consumers buying it, right? The what's the volume of left or the breadth elasticity impact on the volume. Here it's different. We have no impact on the retail price, that's a retailer decision. And there's massive gaps and the national brands are taking in many cases prices, then the retailers will make their decisions on price gap, will suggest things. But this is a question of our cost to them. And then there's negotiations and then we'll see what percentage. But so. far it's gone -- gone very well, albeit there's a lag for when that actually gets into the marketplace. But I don't know if I could quantify today whether that's 2 % to 3 %, somewhere in that range but --

Okay. Sequentially kind of continue to get little bit better than what we're seeing even now.

We're out there with a fair amount. It's got to offset those higher input costs, and freight costs, and give that. I can't continue to have that be negative for that little formula that I just worked for you, right? Pricing plus cost-savings has to offset future negatives because we're only 6 months through it, right? So, I got to offset that any first half impact with that to hold it to grow, that two to 210 and then add the dollar and then get some growth.

And then the final question I just want to make sure I'm getting fully understanding and get it as you are talking about $0.49 from weak, cold cough, I'm trying to understand how much of this was, I guess, already known in 2Q when you guided to the lower end of the range, versus kind of what's new here. High level, it seems like kind of demand is back, so I'm just trying to understand -- there's some offsets of lower-utilization, etc., from what happened earlier in the year. But I'm just trying to understand why the impact seems to be growing versus your expectations in 2Q, given the volumes we're seeing. So, walk me through a little bit of what -- what is going on this quarter versus what you had line-of-sight on, as of the August guide?

We had line-of-sight on the unabsorbed. The unabsorbed was already baked in. And when I sat there, when a set there on the HRA announcement We had the quarter. We were roaring in orders. I mean, we were -- the shortfall that we had in the second quarter, which was -- we had talked about inventory and said it mathematically, it had to come back, it came back. We had -- every day the orders were record orders above levels that we were seeing in demand during some of the spikes of COVID and by mid-August, I thought I had the quarter and then all of a sudden logistics is coming in and you're not shipping it, and digging into it, and if we normally are shipping 55 trucks a day, all of a sudden, we are having between customers not showing up to pick up, or customers not show -- coming for their pickups or drivers that were scheduled, not coming. 10, 12 trucks every single day, not showing up and we exit the quarter with the highest on-ship balance in the Company's history. I mean, you had $45 million. That's in another -- Gosh and another $45 million or $0.10, $0.12 on top of that. And there's some -- a big spike in freight costs that hit us as well. So, what didn't we have line of sight is that supply chain disruption, the inability to get some the inbound product to fill customer orders, and dramatically higher freight costs. But the absorbed in absorption was baked into the forecast in August.

Okay. Great. I appreciate all the color. Thank you.

[Operator Instructions]. The next question comes from David Steinberg with Jefferies, please go ahead.

Hey David. Thanks.

Hey Murray. Thanks, and Good morning. A couple of questions just continuing on with gross margins. I know you've said that you're re-pricing, I think 75 % or 80 % of the portfolio, but it will take some time because their contracts in place. So, thinking about the bridge to 2023, could you give us some sense of what you're thinking about gross margins in 2022, I assume that will include a lot of the price increases you mentioned. Will those gross margins be perhaps closer to this year, on the weak side, or more of what you're thinking for 2023? My second question relates to tax. Can you provide an update and all the ongoing tax issues. I know you settled the Irish tax liability case, but there's also an IRS case, which is linked to that, relates to the old that you are on Athena acquisitions. So, could you comment on the IRS tax case as well? Thanks.

Yeah. I mean, on the gross margin, Ray, I'm going to turn the call over to Ray. But I mean, I don't want to -- I haven't seen the fully baked out plans because the last change then a month and the teams are working through it, but a lot of the get gross margin benefit, as the absorption comes down to the volume runs through the plant. Later in the year. But you should get cough cold volume benefit, and sales benefit in the first half, but I don't have it. Final plan in front of me here

We don't have our final plan yet. But Murray said is basically

correct. We're going to see the effect of the cough, cold season being reinstated in the first --that was really what hit us hard in the first quarter, quite frankly more even in the second. We'll see that coming back in the first and second quarters. So, I don't really have a number to give you, but I think that we see that most of the profitability coming back to us by the end of the year. But it will come back gradually at the supply chain disruptions these both so we have to bear in mind that under our costing system, we have a -- it takes 6 months for the variances to work through the system meaning that our under-absorption in the second -- the first half of this year, we're feeling -- we're still feeling it now, and we will continue to feel it into, into the first quarter or so of next year.

As it relates to the tax we're not even -- I mean, those are a very long way out. The first portion of that IRS tax, is -- it's still becomes down to double taxation from the Company's perspective. And there is agreement between Ireland and U.S. who has the right to [Indiscernible] so that is a battle right now between Ireland and the U.S. at the competent authorities jurisdiction, I forget the name of like the MSA and they have arguments, embrace and on both sides and that will occur over presumably the next year or so and Italy, they're completely go away. Or then we'd begin the arguments and we think our arguments are very strong in those regards to whittle those down if they survived a debt-to a much smaller number and I'm going to stand behind the success I had with Ireland on the massive one. And my years in the tobacco industry of being able to work through these issues. I know we're challenged on gross margins on the business, but I think I've done a pretty good job here of taking out $2 billion to $3 billion of risk for the Company along with our strongly legal team, and we'll work through these as well. I don't I don't see these nearly up the magnitude that we were dealing with, and we will get through those just fine, but it will be a few years.

Okay. I just have one follow-up, and that regards the potential for new products. So many years ago, the Company grew rapidly based on RX to OTC switches and PPIs, cough, cold, allergy, and that kind of ground to a halt. And I know you've called out [Indiscernible] coming up, but also the possibility of some other switches like CLS, Glides, Tamiflu, and just curious when you said that you hope to get back to your original 2023 forecasts. Are there any meaningful RX - OTC switches built into that? And do you think we're going to see any in the foreseeable future?

Yeah. I just had a present closure of this by the group. In the immediate term, I think we have building out the Diclofenac line, launching of Nasonex, launching of slice products, help me out-of-home wrong on that, Brad. There's probably nine others being worked on that will phase in over the next 3 or 4 years, but that 2023 numbers don't depend on that. And then when we closed the HRA deal, you have some massive ones and that's one of the things I'm excited about. They just got the switch on a daily birth control pill in the UK, which and they are in the process with working on the process with the FDA, which could be -- and they are well along the path. It could be just a massive opportunity for the Company. And then the equivalent of L1, which is not that particular molecule is not approved in the U.S. that'd probably be bit of a harder fight, but it is one that HRA has 1 in 35 countries around the world which would represent another one because plan B is probably, it's already on the market that Company has something like north of 90 %. They basically have a monopoly on the market and it's one of the biggest SKUs out there and OTC and fast-growing and that represents an opportunity. So, I think you're going to see switches come back to be a very big and important part of our business going forward. But it's not critical to make the 2023 plan. Recapturing the costs on the gross margin where this call has rightfully been focused. And the pushback is fair. That's where we need to recapture those numbers, get that volume through those plants, get their costs out of the system. I accept that feedback because that's where I look at the numbers and I see it the same way, but we believe we'll get all that back.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Murray Kessler for any closing remarks.

I just wanted to thank everybody for their interest in Perrigo. I fully understand that this was a bit of a punch in that stomach here relative to the cost situation. I don't think it's Perrigo to specific. I think it is the macroeconomic trend that the world is facing and it's real. The teams have responded, and we'll be able to ship more products. I've already seen that with a nice strong month of October and we will -- we believe will recapture and get back to those 2023 numbers. And I'm not the type to back off those, we need to do that. But I don't want anybody to lose sight of the fact that we put this deploy $2 billion are in the process of that's going to add 400 million in sales to the Company and over a dollar of EPS that we have shed. What was the riskiest and most volatile business for this Company. We made a $3 billion potential liability go away and we did it for free with $400 million arbitration win. So, a lot of good things still happen for the quarter for the long term. The short-term issues, my team and I we will work our way through. Grow it, get it, get it done, and work our way through this cobot. Challenges. With that, I will look forward to giving you updates in future quarters. Thanks.

Thank you, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.