Good day and welcome to the Perrigo First Quarter 2022 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. Good morning, and welcome to Perrigo's first quarter 2022 earnings conference call. I hope you all had a chance to review the earnings press release we issued this morning. A copy of the earnings release and presentation for today's discussion are available within the Investors section of the perrigo.com Web site. Joining today's call are President and CEO, Murray Kessler; and CFO, Ray Silcock. I would like to remind everyone that, during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and safe harbor language regarding these statements in our press release, issued earlier this morning. A few quick items before we start. First, unless otherwise 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 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. 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 focus solely on non-GAAP results. And with that, I am pleased to turn the call over to Murray.

Thank you, Brad, and good morning, everyone. With our three-year transformation to a consumer self-care company now complete, Perrigo is moving into a new phase, which we're calling, optimizing and accelerating. The Perrigo team is hyper-focused on optimizing and accelerating our self-care platform through, one, supply chain reinvention to improve efficiency, productivity, and customer service. Two, successful integration of our scale HRA Pharma acquisition. And three, gross margin recovery via pricing and portfolio consolidation. I will also note that this will be accomplished as we also continually strengthen our organization and culture, and contribute to the world we live in by making our products and facilities more sustainable. With that in mind, I'd like to share a few words [technical difficulty] announcement we issued this morning. First, I'd like to thank Todd Kingma, our General Counsel for the last 19 years, who just announced his retirement, and Ray Silcock, who I've worked with, on and off, for at the last 30 years, and who previously announced his retirement. Both were incredible contributions to the company and our self-care transformation. While they will be missed, I'm very excited to share who will be filling their roles. First, Kyle Hanson has been hired from Wolverine Worldwide, and will serve as our EVP, General Counsel and Corporate Secretary. And second, Eduardo Bezerra, most recently from Fresh Del Monte Produce, has been hired as EVP and Chief Financial Officer. They represent the next generation of Perrigo leaders who will help drive the newly transformed Perrigo organization. They both have the passion and seasoned and relevant experience that embodies the Perrigo advantage. And I'm confident that their diverse perspectives and deep experience will make valuable and immediate contributions to Perrigo's success. Turning to HRA, I am also pleased to say that we closed the HRA…

Thank you, Murray. Good morning, everyone. And yes, this is my last Perrigo earnings call as I am going to be retiring from the company. It has been a privilege to work with the talented Perrigo team over the past 3+ years. And I am excited about the path ahead for the company. Currently I am working diligently to ensure a timely and smooth transition to Eduardo who with his deep experience will be a great new CFO for Perrigo. Now let’s review our first quarter financials. On a consolidated basis, the company reported a GAAP loss from continuing operations of $1 million for the first quarter of 2022. A loss of $0.1 per diluted share. On an adjusted basis, consolidated net income from continuing operations was $45 million. And adjusted diluted EPS from continuing operations was $0.33 per share versus $0.50 per share in Q1 last year. The decline in adjusted EPS as compared to prior year was primarily due to onetime headwinds in CSCA. These included higher customer service claims related to unfulfilled customer orders and lower profitability on contract manufactured product for the now divested Rx business. We also had higher planned advertising and promotion expense in CSCI in support of our strong top line growth there. And as Murray noted, the inflation impacting cost of goods sold and transportation cost were offset by increased sales volumes and higher prices. Also, unfavorable foreign currency movement hurt adjusted EPS by $0.4. And we experienced an additional $0.2 EPS impact; half from lost business in Ukraine and Russia and half from product donations we made in Ukraine in line with Perrigo’s corporate charitable philosophy. Moving on to nonGAAP adjustments. In the first quarter, pre-tax non-GAAP adjustments totaled $71 million. Major components included amortization of $49 million. HRA acquisition and…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Chris Schott with JPMorgan. Please go ahead.

Hey, guys.

Morning, Chris.

Good morning. Just a couple ones for me here, I guess first on the gross margin front, and there's may be a couple different pieces to this. I know you touched on this in the remarks, but I'm still trying to get my hands around the step-down in CSCA gross margins when I look at kind of second-half '21 to 1Q '22, I think that came down about 250 basis points sequentially. And can you just spread a little bit more color of, I guess, how much of this was one-time? What were the one-timers exactly, and then I guess how much of this just kind of sticker supply chain inflation type stuff that you're going to have to work through as a year goes along?

Yes, it's 100% one-timers.

Okay.

And we got hit with about [technical difficulty] million of one-timers, part of it is cleanup. There was a number of things. One, in the system as cold/cough business came roaring back, we had a bunch of customer claims, which we're working through and reversing right now. So, it may not only be one-time, we may actually recover a fair amount of it, but there was about $7 million of claims that were automatically kicked out when we agree on a -- to fill a certain level of orders and don't pay -- take deductions. And in -- and there are boundaries that guide it, but it automatically happens in their computer systems and ours, and we have to manually go back and challenge those, which we're doing. So, we went from, I'm going to give you just an example, if the forecast was for a 100, I mean it's obviously different than that for cold/cough. All of a sudden, about first week of January, it shot up to 10 times that. We were able to fill two or three times that, but not the remaining seven times. And there was, then automatically kicked into the system, these claims. And it was -- like I said, it was worth about $7 million. That number will come down millions, if not completely go away versus the past. So, that's one piece of it. Another piece of it, unfortunately, is, as part of one-timers, even though we were short of cold/cough inventory this year from a year, almost two years ago, the inventory that you made for the '21 season back in 2020, right, so for the inventories for that, and with no cough/cold season, we had a little bit of clean-off of write-offs that needed to take place for that. We -- when Ukraine and Russia came along, we made a number of product donations and charitable donations that were one-offs that we believed was the right thing to do. Those are just -- and there was, I think -- and Ray can help me, but I believe it was a $5 million or $6 million royalty rate catch-up on one of our suppliers that the accruals just needed to be adjusted. None of that -- that's a couple of 100 points. Basically, I am telling you that the gross margin on CSCA, absent those one-timers, was exactly what it was in the fourth quarter. And I'm actually feeling very optimistic about gross margin this year to our plans. And I know you guys had us into the -- a higher level, but we actually hit our plans despite a couple 100 gross margin points of one-timers, if we hit our internals despite currency working against us, despite a new wave of cost increases that we offset with pricing. And most of our remedial actions, like 90% of them are still to come, like pricing and things like that, which we can talk about.

So, sounds like based on answer, I know that you laid out the second-half margins for us, a nice step up. But just when I think about just sequentially for 2Q, should we be thinking about kind of 2Q, let's just stick on the Americas business and pre HRA, kind of more in line with what we were seeing for the second-half of '21 or is this kind of like 25.5 -- 25 level over, where are currently kind of like a good proxy for 2Q? I just want to make sure I'm kind of getting the -- just the special focus on that number, just the gating as we go through the next few quarters?

Yes, I mean, but HRA is going to factor in. But go back -- what was the period you were trying? Are you -- sequentially, it's going to increase.

That's what I was trying to get my hands on.

Right, I --

Yes, [indiscernible] basically, I think we were like 27.5 second-half of '21, is that like a reasonable level to think about like 2Q, before HRA?

I think it'll be around -- well, you're talking -- I'm looking at consolidated. Give me a second to get down to that --

Sure, [indiscernible].

To CSCA, yes, I think that's sort of thinking about it the right way.

Okay.

I mean, if you're doing it pre -- I -- yes, well, I'm -- actually I've got to go -- give me one more second. Yes, I think that's right.

Okay, perfect.

[Indiscernible] corporation, I'm kind of sticking my neck out here, but I think we're going to recover almost all of the gross margin loss this year. I'm looking at 400 to 500 gross margin points of recovery by the fourth quarter.

Okay, perfect. The other topic I just wanted to talk a little bit about, HRA, it looks like it had a pretty -- a very strong 1Q. And I know, I think you were planning on talking a bit more about this later this year, about the HRA growth targets. But if I just go back to, I guess, the 2021 results and kind of bridging out to where you're thinking about for '23, I think it assumed something like a mid-20% annual growth rate. Can you just -- again, just remind us of the growth drivers that are enabling that type of step-up in HRA growth for the next few years? This I know is a question that came up quite a bit post the proxy, and would just love just a bit of a reminder of just kind of how we think about the drivers of HRA these next kind of two years or so?

Yes, you know, I'm in a funny location giving this earnings call to you, Chris. I'm actually in Europe. I'm at -- I've been going back and forth. I'm at HRA integration meetings, I was at HRA headquarters two days ago, going through each general manager that leads all the hubs around the country -- around the world, actually, Europe export, U.S., where there is an incredible high level of confidence in them saying, this is the best start the company has ever had, that they're -- people are traveling again, et cetera. So, you -- the first thing you have this year is the numbers that we published out in the 8-K, that those were COVID numbers. Compeed was hurt dramatically by COVID, like our cough/cold business, no one was out traveling, hiking, needing plasters. I mean, they weren't out wearing high heels going to work, you know that those are all the drivers. So, you have this ramp up besides the normal growth of them adding countries, converting on ellaOne, they are continuing to switch different countries around the world to -- from Rx to OTC. In future years, you have the entire line, they have their Hana line, which is the everyday pill that is a birth control pill that is, if you've been reading the articles around the controversy of Roe versus Wade, there's also been articles [in Politico] [Ph] about one of the best-positioned companies being HRA who has a solution with an everyday over-the-counter pill, that we hope to have in by 2023 will be a growth driver. And applications are going into additional countries around the world for that. They are broadening the usage of the brand. Have already extended -- tremendously successful from just-- from wounds and heals, to adding, right now, fever blisters, and there is just a whole wave of ways to build that brand, to build out the product portfolio, expanding into the United States is a big priority and driver of growth. I mean I was just blown away by both the confidence in that team, the capability, the sophistication of the marketing, and they're -- they strongly believe in those numbers. What's that all add up to? I think you're talking about on a -- about double-digit top line growth continuing without any revenue synergies. And you're talking about the -- going to $150 million in operating income next year, or in 2023, excuse me. So, you -- Brad talked to you about operating income. I've gone back and forth, even in the deal model we were talking EBITDA and the European version of EBITD, but we're converting it back into our operating income numbers. So, I mean, right now it feels like the sky is the limit. And again, we raised the synergy number from €30 million to €40 million. So, it -- this is going to come back -- this will be the best acquisition I've ever done in my career.

Excellent, appreciate the color. I will jump back in queue. Thanks.

The next question comes from Elliot Wilbur with Raymond James. Please go ahead.

Thanks, good morning.

Hey, Elliot.

Hey, Murray, how are you?

Good.

Thanks. Just maybe a high-level question on macro trends in the U.S. store brand market seeing relatively strong growth metrics. But wondering what you may be seeing in terms of potential consumer trade down in the quarter over the last year, just how things have trended from a market share perspective in the categories in which you compete in. And then, more specifically on the nutrition business, strong performance in the quarter, obviously, a lot of factors behind that, but just wondering if we could sort of maybe tease out the incremental lift from some of the organic initiatives that you've talked about over the past couple of quarters versus the benefit from overall supply issues resulting from developments at one of your competitors?

Yes, well, let me do the second one first, because that's where you finished. And it -- it only -- the recall only happened in like the last week of March. So, it has a -- we had a bigger week that one week, whether that was a few million dollars or -- it wasn't massive. It is big in the second quarter though, it just is. We are -- I could run double what we have. We're running flat out as much as we can. Well, will that be sticky? We hope parts of it are sticky again in the test, but the -- and we don't know how long that situation is going to be and in place. So, it could be a while. It could be a long while, and we're looking at ways to potentially increase capacity at the request of the FDA. We're doing whatever we can. I will tell you, part of it that will be sticky is in the face of the cost increases and shortages; our customers were more than understanding that we needed to adjust the price of this product, and then no price gouging or any of that, but it had been hard to do in the past few years, and we were able to do that, so that's a positive. So, yeah, I mean first quarter, barely anything. Second quarter, it'll be meaningful. Turning to the first question, we haven't really seen much trade-down. It continued -- I believe that is going to be -- and I listed it on one of the slides as an upside for Perrigo. But the national brands have spent a lot of money and [in AMP] [Ph] to restart their businesses, to restart their advertising. They clearly had some new products out there…

Okay. Just following up on that, I think in the text, with respect to CSCA, it's mentioned that roughly $34 million of cost headwinds hit the operating profit line, absorption issues, and freight costs, and the like, of which all seem to be more transitory. Just wanted to confirm, in fact, if you believe that pricing actions and procurement actions in and of themselves would be sufficient to offset that drag in the second-half of the year?

Yes, I think it'll be enough to offset the drag for the total year. But there was a delay -- a lag; we're not like a national brand, where I can go in, take a price increase on Friday, and it's up on Monday; we have to negotiate those, when the stores are being reset. Many of those price increases are just going into effect now. Many of -- went into effect late in the quarter or in the beginning of the second quarter, but some were in place. But call it, if we had, roughly, $0.15 of material and freight inflation in the first quarter, we probably offset 80% of that -- something like that in -- with pricing alone, and then the rest got offset by volume. As we go forward, you're going to offset all of it or even, possibly, a touch more. And, listen, the big unknown for us, no one said it, but we had a big currency impact on the business.

[Technical difficulty] And then I wanted to circle back to the gross margin issue. And we've obviously touched on this many times over the past 12 to 18 months. But within your prepared comments this morning, you talk about optimize and accelerate, and refer to supply chain reinvention. I mean that that sounds more like a facelift than a Botox injection. So, I'm just wondering if you could kind of give us maybe some early insight into terms of what you're thinking. I mean, is this an actual alteration of the physical footprint here? Is this more about just having better processes and procedures in place, and material planning strategies so that we don't kind of see these huge swings in inventory and just -- we've got just better line of sight into production? Just trying to understand exactly what you're kind of thinking, at least in this early stage when you talk about the supply chain reinvention?

Yes, let me also be very clear. When I am talking about that, I am talking about accelerate, I am not talking anything about the 2023 or the 2022 forecast. I do have some assumption in 2023 as I build it. So can I -- if you don't mind, may I answer the -- I'd like to answer the question for you this year because I want to hit it over the head, that is a very clear path to recovery without that. When you add the absence of the one-timers in the first quarter sequentially, you're adding a couple 100 basis points. When the absorption issues go away that we carried into the year in the second-half, you add 120 basis points. When you remove Mexico, that was low gross margin and zero operating margin, $100 million in sales, you add a certain amount. When you add a 70% gross margin HRA business that's growing rapidly from a mix, you have 200 gross basis points, even if you don't get a single benefit of the pricing. So, those are the drivers between the -- to get you back to 400 to 600 points, and a growing portfolio with the top line growing double-digit and the EPS growing double digits, which is a pretty exciting place for us to be, and, oh, by the way, without $3 billion worth of tax risk. Okay, now, optimizing, accelerating; I'm starting to tease you with the ideas that I think can be very exciting for Perrigo going forward. We have done five divestitures, eight acquisitions, completely reconfigured this company to be consumer self-care. You had the Omega acquisition that was done a number of years ago, and the entire supply chain has never been optimized. So, the answer is, all of the above…

Yes, absolutely. Two quick additional ones for you, given all the external issues that the company has faced on logistic side and input cost side that have hampered gross margins in the U.S., I guess I find it surprising or relatively impressive anyway that the CSCI margins have held up substantially better. We’ve really seen very little margin compression there. How much of that is just supply chain related with respect to that business versus the ability to just take higher and more immediate pricing actions to offset whatever incremental cost you are seeing? And then as a closure, given that you now own HRA, the company has been working on a potential OTC switch of a daily oral contraceptive in the U.S. market for some time. Now, just wondering if there are any action or regulatory updates that are on the clock for the next 6 to 12 months? Thanks, Murray.

Okay. On the second one and the biggest one, the next step is the official filing, right? You go through all the questions and those [circle] [Ph], and with the FDA in the U.S. [indiscernible] should be filed here within next few months. So, that would be the next big hurdle. And then the cost starts ticking. But again, I would encourage you to read the political article from earlier this week. This is something that’s contrary needs. I mean there are 6 million abortions a year in United States. And 30% of women who can’t or had difficulty getting access to birth control -- and this improves accessibility which is what our company is all about, and, by the way, won’t be the only country that we are applying in. And we continue to apply for also for ellaOne in numerous countries. And we also have Nasonex that we got. And so, it’s lot of great things coming. CSCI, you answered your own question. It’s primarily pricing. But I mean that’s the biggest answer I have I think. In general I would say I’ll give credit to Svend Andersen who runs that group and team. They have done a lot of the portfolio reconfiguration that I have talked about. And 5 years ago, they were 1500 SKUs in our international business. Today, there is about 5000. Svend would tell me there are about a 1000 too many. So, there is still further opportunity, but that’s helped drive gross margins as well.

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

Like I said earlier in the call, I am over here in Europe. For the first time in two years -- over two years that to sit in front of a room of our sales force. And two days ago, I was in Paris in front of the entire HRA team. And I just can’t share with you how excited -- I'm not [how] [Ph] excited the people in our organization are about our future et cetera. Bottom line, we said we would start growing this company double-digits and earnings double digit this year. And this is the year to do it. We spent a year making it smaller and getting that cash and have really invested it now. And you’ll start to see those numbers showing very soon. It’s unfortunate that we got hit with the supply chain and some of the other freight cost and others. But, those weren’t Perrigo issue. You know that. Those were -- our gross margin hits are no worse than ConAgra’s gross margin hit, Procter & Gamble’s gross margin hit, core asset gross margin hit. I mean everybody -- TreeHouse’s gross margin -- I mean it just hit the entire consumer industry. And I think if you look, you’ll see that Perrigo probably wasn’t as bad because our teams have done an incredible job. And I think we will get it recovered with less pricing which we will then in an inflationary environment hopefully benefit the company in expedited trade down. So, the last time this happened, we gained about four share points when there was a meaningful inflation and a recessionary period of time. And I think you are going to start seeing volume for those national brands slowdown and not see volume slowdown for us. But, that’s just my prediction. Bottom…

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