Good morning and welcome to the Perrigo Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bradley Joseph, VP of Investor Relations. Please go ahead.

Thank you, Chad. And good morning, everybody and welcome to Perrigo's fourth quarter and fiscal 2021 earnings conference call. Hope you all had a chance to review the earnings press release we issued this morning. A copy of our earnings release and presentation for today's discussion are available within the Investors section of the perrigo.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 quick housekeeping notes. 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 it's sale. In addition to the other non-GAAP adjustments as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from the prior year period certain costs incurred to support the operations of the Rx business which were reported in continuing operations. Please see the appendix for additional details and reconciliations of all non-GAAP financial measures presented. Second, 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, pleased to turn the call over to Murray.

Thank you, Brad and good morning, everyone. First and foremost, I'd like to start this call by acknowledging and thanking the Perrigo team, 10,000 strong. No matter what COVID-related adversity has been thrown their way over the last two years from lockdowns to multiple COVID variants to cough/cold impact to supply chain disruption, they kept our organization running, providing society with essential products. And they did so without having to shut down a single shift during the last two years in any one of our manufacturing facilities worldwide. Incredible. I also want to take a moment to acknowledge our Ukrainian colleagues that are in the midst of the horrible unprovoked invasion by Russia. Our hearts and support are with you. They were part of the entire Perrigo team that helped us complete our transformation to a consumer self-care company in 2021 despite pandemic disruption by accomplishing our three largest strategic milestones. First, selling the generic Rx business for $1.6 billion which dramatically lowers volatility and places consumer self-care as our sole strategic focus. Two, redeploying the Rx sale proceeds by announcing our agreement to acquire HRA Pharma, a rapidly growing consumer self-care company with a portfolio of leading brands for €1.8 billion. We estimate HRA will add €400 million in revenue and €150 million in operating income in 2023. And three, favorably settling the €1.6 billion Irish Tax NoA that had been a significant overhang on the company since I joined three years ago. This tax assessment could have cost the company $3 billion or more, including interest and penalties. We settled it for €266 million and this issue is now completely resolved and behind us. And we paid for the settlement using the proceeds from a favorable €355 million arbitration award. As a side note, we have some late-breaking…

Thank you, Murray and good morning, everyone. Before starting, I would like to reiterate Murray's earlier comments about the very significant milestones that Perrigo team accomplished during 2021. These accomplishments would not have been possible without the hard work of our colleagues all across the globe. A sincere thank you to the Perrigo team. I'd also like to add to my own heartfelt concern over the situation in Ukraine and repeat that we will continue to support our Ukrainian colleagues and their families. Now having achieved these major strategic objectives, we are intently focused on driving long-term profitable growth. So with that, let us take a look at our fourth quarter and full year 2021 results in greater detail with a focus on the full year. For the fourth quarter of 2021, on a consolidated basis, we reported earnings from continuing operations of $32 million, $0.24 per diluted share. Q4 adjusted net income from continuing operations amounted to $82 million or $0.60 per diluted share. For the full year, on a consolidated basis, we reported a loss from continuing operations of $131 million for 2021 or $0.98 per diluted share. On an adjusted basis, consolidated net income from continuing operations was $278 million and adjusted diluted EPS from continuing operations was $2.06 a share, down 11.6% as compared to the prior year. The adjusted EPS decline versus prior year is primarily from lower operating efficiencies due to adverse plant overhead absorption as a result of lower volumes, in particular, lower volumes of cough/cold products as well as higher material and freight costs in the year. These results were partially offset by lower operating expenses, including reduced advertising and promotion spend and ongoing Project Momentum cost savings as well as price increases. 2021 pretax non-GAAP adjustments totaled $97 million primarily from…

[Operator Instructions] And the first question will be from Chris Schott with JPMorgan. Please go ahead.

Good morning.

Hi, good morning.

Hey guys, what’s going on. Just a couple maybe to start with on the gross margin dynamics. I guess the first question I'm having is just on the second half margin improvement and your line of sight on that. Can you just talk through a bit what still needs to occur for results to improve in the second half versus the first half versus, I guess, the actions you've already taken or some of the things like the volume increases you're seeing today that will imply second half margin improvement? I'm trying to get a sense of what are the kind of pushes and pulls we need to watch that could impact, I guess, that rate of margin improvement during the second half? And then I have a couple of follow-ups after that.

Okay. I mean, listen, there's a number of them that are just going to occur, right? So like we lost 100 basis points from the sale of Rx which, as we said before, was simply it was an intercompany transfer before. It's sales now but the profit was already there. You'll lap that in the second half. So that negative drag goes away. So that's one. If you look at the impact of the lower productivity and depending on how much we keep pace with it, those costs get built into our inventory. And as you work through that, you have a lag. So that's why the last season's cough/cold hit us so hard in the fall. And so we will -- we'll work through that inventory. And now that the plants are running full out again with cough/cold, you'll pick that up. So the leading indicator of that was the volume and we got the volume. The material price increases and freight, they've come back a little on the freight but we'll see how that plays out. But we have significant pricing actions out in the marketplace. And unlike a national brand, we can't just do it and then take a price increase today and it's up and running. We have to work with our customers and I'm primarily talking about the U.S. We have implemented our price increases internationally. But in the U.S., we have to go and we have to show them the increases and by contract, we are -- we have the ability and they have to accept a price increase if it's truly cost related. And as you know, typically, we would have years where we'd be down a couple of percentage points in pricing. And that began to stabilize to be up a little…

Okay. So it sounds like a lot of these, I guess, processes are either in motion or you've got line of sight on getting to that recovery is what it sounds like from these various kind of drivers. I guess the second question was just elaborating a bit more on the 2023 kind of EPS range. I know that's something you're still striving towards. But obviously, it seems like the world is in a little bit different place than it was a few years ago with supply chain and everything else. So just give us a sense of, I guess, how reasonable is that target? And just how are you thinking about kind of '23 overall in terms of, I guess, the ability to recover some of the kind of impacts that we saw in '21? Like is it reasonable to get a lot of that back in '23? Or could that be a little bit more of an extended process for us?

I mean, from -- I've been very clear on it. Now if I get 100% back of it or not but I'm not backing off that mid-$3 EPS number for 2023. And the big components of that are cough/cold coming back. It is, right? So if you carry the second half gross margin forward, you should get a big productivity benefit in 2023 above and beyond the underlying 3/5, right? So, when I model it in the way if I was you and I was modeling it, I take our core businesses, I'd say 3/5, that was our 3/5/7 model from the beginning. I'd layer in a cough/cold rebound, then I layer in HRA which by 2023, we said is $150 million of EBITDA, we believe. And that's getting close to $1 of EPS. So you take our estimates of where we're going to finish this year and you have -- or the base level estimates, grow at 3/5, add $1, you're starting to get into that neighborhood. And then the big pieces above and beyond that become our ability to get HRA synergies above and beyond and our supply chain reinvention project I talked about. We are given an opportunity of bringing this big company in to take a look at our entire global supply chain which has not been the focus of the first three years. It was getting the portfolio, right? And we believe there are significant savings opportunities there to close that like if you're following me in the math, that less $0.20 or $0.30 we would need in 2023. And again, I hope to lay all that out before the end of the summer, early September, somewhere around there and a full Investor Day that shows the details of this progression and staying pretty close to our original expectation.

Appreciate all the color. Thank you.

And the next question is from David Steinberg with Jefferies. Please go ahead.

Good morning, David.

Hey good morning. Thanks. A couple of questions. The company showed pretty strong G&A management this quarter. And I was just curious, are there further opportunities there? And related to that, with lower R&D levels, can you sustain your pipeline of new products efficiently at these lower levels? And then, the second question -- related question is just on your leverage ratio. Can you update your thoughts on your leverage ratio post close of HRA and then for fiscal year '23? Thanks.

Why don't you do the leverage ratio? I just want to just quickly look at the number that David was referring to.

Yes. On the leverage ratio, we see -- once we complete HRA, we see significant positive cash generation, increased cash generation over where we are today. And our target would be by end of 2023 to be back into 4x leverage, a little over 4x. And quite frankly, by 2025 to get our leverage down into our sort of target range which is in the mid-2s in the 2.5x range.

Yes. And I'm trying to get to the R&D number that you were talking about. I mean, we're still right around 3% of net sales and it was part of Project Momentum overall. Every department had to give back a bit of operating expenses but it was a difference of a couple of million dollars year-over-year, right? And if I look at R&D for the total year, it was the same as it was.

Not changing.

Yes, it hadn't changed at all. I got to tell you, the -- I'm pleased with that how well the company worldwide managed operating expenses over the past couple of years as part of Project Momentum. But I do want to put in perspective, you're talking about $100 million of savings on what was like a $300 million, $350 million pool of operating expenses. Now our focus as it should be because the world is concerned about gross margins, especially on the way it's gone, now you're talking a couple -- $2.5 billion, $2.6 billion target to go after on efficiencies. And I think you'll see by the time we get to you in September, that is a meaningful opportunity for Perrigo.

Just a question on new product flow. On the last call, I'm thinking about Rx, OTC switches and how the landscape looks there. And on the last call, you discussed potentially this major opportunity that you're starting to see in the U.K. and hopefully transferring to the FDA with a once-daily birth control pill. Can you update us on that? And then anything new on some of the lower-hanging fruit like Sklice, Flonase, etcetera, say, in 2022 and 2023?

Yes. I mean, Brad in a follow-up call can give you the specifics of some of the smaller ones. I think the point -- the first one which is the HRA one, is still in the process, moving along. Remember, we're in an FTC review period. So we are bound by gun-jumping laws that we can't get too deep into any kind of planning or future planning until we get final FTC approval which we're optimistic will be soon. But there's no reason to think that's not on track and a huge opportunity for the company to have the first daily oral contraception. They continue to have -- continue to win switches around the world on their L1 product which is similar to Plan B here in the U.S. But I think the more encouraging part is you should look at the slide I put up there and see the fruits of a lot of our labor on innovations and moving from national brand equivalent to a national brand different to national brand better, first capsules, the Burt's Bees, natural line infant formula, numerous ones, a contract back on sort of the hottest infant formula out there winning the new Product of the Year Award from a major customer on oral electrolytes to NASONEX launching which is our own switch happening in this year to just -- and probably 15 more in the expansion of Probify [ph] line of probiotics in Europe and the launch of Nervisin [ph] and XLS Forte 5. So I mean, across the board, we have a robust portfolio. My point on Rx-OTC switches from the beginning is, I was told when I joined Perrigo, they weren't going to be anymore. And that's just not true. I mean, we've had Voltaren. We've taken on some of our others and I don't know the exact timing. I do know I read a press release yesterday on GSK's separation of their new consumer health company. And they made it quite clear that they expected above-normal growth and some of that future growth was for the next couple of years to come from two Rx-to-OTC switches. So, I think what's happening in the industry with J&J spinning off their consumer health, GSK spinning off their consumer health, Sanofi spinning off their consumer health. You're creating a $150 billion segment and that will now be a focused major consumer segment that will be -- need to be growing and driven by innovation. And in the U.S., that presents a lot of private label opportunity as well as us to compete on a branded front. So I think gross margins are an issue. Top line, we've been proven we can do it. We'll continue to do it. We've got HRA that will even carry us probably a nice double-digit growth for the next few years. And this company needs to -- we all need to dig in and focus where we are on getting those gross margins back.

Great. Thanks very much. Helpful.

[Operator Instructions] Next question is from Elliot Wilbur with Raymond James. Please go ahead.

Thanks, good morning. First question for Murray just with respect to your relative growth outlook or organic relative growth outlook for the whole business of 7% to 8% in 2022. Just wondering if you could provide a little bit of color in terms of the relative growth profile of each of the two segments, CSCA versus CSCI? CSCI being smaller, I would expect that maybe it has a slightly higher growth rate than that all-in number but just want to get a little bit more color behind that? And then specifically with respect to the performance of infant nutrition in the U.S., maybe just some commentary in terms of sort of what led to the relative share gains in some recent media reports around some issues that a competitor of yours is experiencing. And just wondering if, in fact, that may be something you're seeing a net benefit from or you just really don't overlap in terms of product offerings?

Okay. Well, the last one, we were benefiting for the last four or five months by -- we gained two or three share points and it had been years of decline. So the business really turned around. It was both offensive on our plan, right? We had planned on launching Hypoallergenic a year earlier and we couldn't because of COVID but we did get it launched. We have a branded product that we packed for that's direct-to-consumer, that's doing incredibly well and has been in a lot of the new shows and morning shows. And we're the sole packer for that one in the -- and helped develop it. So I mean, that's been a positive contributor. At the same time, you're right that national brands were having service issues. And these numbers are before what's most recently which is the largest or one of the big two in infant formula has had a product -- a significant product recall in the past few weeks which has every customer in the country calling us for additional volume and even the regulatory agencies saying, "You need to do it. You can help out to make sure babies are fed." And we're doing what we can, given our relative size. So there's a lot there but I don't want you to think it's all like their weakness. It's just as much all the positive things that we're doing. As you look at the overall business, I don't have CSCI versus CS [ph]. They're not that far different next year. I think the big components of it is, even though it sounds like a big number at 7% or 8% when you break it down, the underlying is still the 2% to 3% that it's been. And then you layer on top of that cough/cold. And then you layer on top of that a meaningful number in pricing over top of that. And then you layer in another six months of the Rx divestiture of Perrigo is coming in. And all of those factors are sort of what build up to the 7% or 8%. But again, if you peel it back, the core products are still at that 2% to 3% but we're growing our cough/cold business. Right now, north of it's consumer takeaway is like 60% or something.

Okay. And I want to ask you a question with respect to cough/cold inventory in the U.S. at least. I know the number you provided in the deck indicates it's based on internal estimates. But I guess sort of just based on kind of walking around pharmacies and seeing sort of what occurred in December and January. I mean, I can't recall last time we saw such significant stock out of cough/cold products, at least based on locations we visited. So, I was sort of expecting that we'd see kind of more of an inventory benefit in the current year and maybe even a little bit higher stocking relative to last couple of years headed into the 2022, 2023 season. So maybe I was a little surprised to see things kind of indicated to move back to normal, just saw kind of given the strong demand and stock-out conditions that we have seen over the past couple of months. So I just want to get your thoughts on that observation.

Can I please make sure that I understand your question? Are you saying, you think it looks like we're being too conservative in our forecast, saying it's not all the way back to '19? Or are you saying you thought the fourth quarter numbers should have been higher? Which are you saying?

With respect to your forecast. It seems like replacement of inventories would have a bigger lift than what seems to be kind of implied in your guidance.

Yes. Well, I mean, it just depends how much of it was from Omicron that Omicron is tailing back off very quickly. You are right. That's probably an area we're conservative in our plan. But at 7% or 8% top line -- organic top line growth, I felt like that is a good, robust -- 3x our normal level is a good place to start to and let's hope that's a conservative estimate. But you're not wrong. If you do the math, that it could get higher.

Yes. And we're still -- we didn't put it in our forecast for the same level as we had in 2019, the last "normal year."

Yes, that's what he's saying.

Right. We agree.

Okay. And then just last question. So, we've continued to talk about the negative impact on gross margins from various manufacturing inefficient reason and this has kind of been going on for some time. And you sort of alluded to maybe a larger game plan in terms of addressing these going forward. You're going to detail later this year. But just thinking about this just conceptually, I mean, is this something that can be sort of remedied without sort of massive facility rationalization and restructuring? Or is this really something that you sort of need to spend -- it's like a multiyear plan that you need to really kind of significantly reduce your overall manufacturing footprint?

It's not a manufacturing footprint because our business is so complicated that you can't even look at it as one supply chain. We kind of have five very distinct supply chains and I don't see manufacturing rationale as a big point of it. But just given the complexity of our business, how this thing has swung. If you look at the level of SSSO, that scrap and obsolete inventories and things like that, they're way too big a number over the past few years. That's better planning. That's better demand planning. That -- say again?

SOP planning.

SOP planning, all of that. So there's north of a $50 million savings opportunity on planning. But you have to be able to get it down to the SKU level and with our customers and there goes along with that. I'm previewing you here a little bit but there's opportunities for SKU rationalization. We say yes to everybody. I don't launch you that item. 500 items later, we matched that one item. So I mean, I'm being literal. If they launch one, we launch 500. And there are ways to consolidate that amongst customers, etcetera, that increases efficiency, that increases service. There's a big number on service. My Head of Supply Chain and I just recently attended with a very small group of CEOs at Walmart in their new distribution center talking about the same issue for them, how much they're leaving on the table for service. And the same issue is for us of ways to get out of it. It's a big number on the unfulfilled demand that goes by every month, so getting after that. There is some opportunities on other kinds of rationalization and automation. And I've spent the last three years getting different parts of the company making the investments in IT. But on the plant floor, there needs to be an ability to be able to measure KPIs of productivity and the priority of orders that are coming in at a higher levels than they are now. That's my way of saying I think they're short-term, mid-term and long-term supply chain savings which we'll show you.

Okay, great. Thank you.

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

Yes, I want to thank everybody for your interest in Perrigo. At any of our Ukraine colleagues if you're listening which you're probably not given the circumstances but if you are, we're with you and you know you have our support. And my big message to everybody is, we have changed this company over the last three years, dramatically changed it. It is now a consumer self-care company and we have gotten the top line growing. We are fully aware of the gross margin issues and we're after it. The first job for us as a management team was to put this thing together and get out of businesses, get out of these billions of dollars of overhang. And we have done that. The job now with laser, laser focus is now profitability and profitable growth going forward and we believe we'll get there. And I am not letting go of those 2023 original of that objective. So, thank you for your interest in Perrigo.

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