Good morning and welcome to the Perrigo First Quarter 2023 Financial Results Conference Call. All participants will be in 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 Brad Joseph, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you Anthony. Good morning, everyone and welcome to Perrigo’s first quarter 2023 earnings conference call. I hope you all had a chance to review our release we issued this morning. A copy of the earnings release and presentation for today’s discussion are available within the Investors section of perrigo.com website. Joining today’s call are President and CEO, Murray Kessler and CFO, Eduardo Bezerra. 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 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. Second, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. All comments related to constant currency remove the impact of currency translation versus the prior year by applying the exchange rates used in the comparable measurements in the prior year's financial statements. And third, Murray’s discussion will focus solely on non-GAAP results, except as otherwise expressly noted. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. And lastly, I want to share my deep appreciation for Murray during his tenure at Perrigo and a warm felt congratulations on his retirement. Murray, your mentorship and leadership has been invaluable and you have set this company on a path for long-term success. On behalf of shareholders, thank you. Now for the last time, it is my pleasure to turn the call over to Murray. And with that, I'd like to turn the call over to Murray.

Thank you Brad and thank you everyone for joining us this morning. Many of you likely attended the virtual investor day we hosted at the end of February where we provided details of the next phase of our strategy what we are calling optimize and accelerate. This was my second investor day since joining Perrigo and I believe this was a critically important event for our company. My team shared specifics on how we expect to generate a significant amount of value for shareholders and the feedback we’ve received has been overwhelmingly positive. Now after four years of transforming Perrigo into a consumer self-care company the management team is focussed squarely on operational execution and consistent delivery of results. To that end we made meaningful progress on many of the initiatives discussed at investor day during the first quarter of 2023. We’re on track with the integration for the HRA and gateway Good Start brand acquisitions and are already realizing significant benefits from both. We are progressing faster than I expected on supply chain reinvention and have seen some exciting results in the early stages, more on this in just a moment. And I’m proud to say that Perrigo’s women’s health team is starting it’s presentations at the FDA advisory committee today for a potential first-in-class Rx-to-OTC switch of the Opill oral contraceptive. Underpinnng the progress across our strategic initiatives, our strong financial results and business fundamentals. To echo comments from my general managers that are reportedly business reviews, after two years of unprecedented volatility we are seeing our business become more consistent and predictable again. That predictability manifested itself in the first quarter where Perrigo achieved double-digit growth on top and bottom line, meaningful growth and margin expansion driven by both the base business and acquisitions and retained to…

Thank you, Murray, and good morning, everyone. For this morning's call, I will provide some color on our Q1 financial results, walk through the drivers of our gross margin expansion, highlight our cash flow and balance sheet metrics, and then wrap up with our 2023 guidance. Starting with our GAAP-to-non-GAAP summary, the Company reported a GAAP loss of $1 million for the first quarter, or a loss of $0.01 per diluted share. Adjusted net income was $61 million, and adjusted diluted earnings per share was $0.45 per share versus $0.33 per share in the prior year quarter. A few adjustments to the quarter pre-tax non-GAAP P&L totaling $71 million were amortization expenses of $66 million, acquisition and integration-related expenses of $4 billion, mainly related to the HRA and gateway facility, and restructuring charges of $3 million, primarily related to our supply chain reinvention program. Full details can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward, all dollar numbers, basis points, and margin percentages will be on an adjusted basis unless stated otherwise. Since Murray already provided details for our top-line results, I will begin my comments that consolidated gross profit, which grew $84 million, or 23.3% in the quarter, with our gross profit margins expanding 400 basis points versus the previous year quarter. Growth was driven by acquisitions, strategic pricing actions, and favorable volume mix, which were partially offset by inflation, two voluntary recalls, the impact from the HRA distribution transition, and the unfavorable impact of currency translation. Operating income increased $33 million, or 38%, driven by favorable gross profit flow-through, which was partially offset by higher operating expenses due to the inclusion of HRA and the gateway facility net of divested business. Interest and other expenses increased $15 million due…

Thank you, Eduardo. That's really kind. A few comments on my retirement announcement before we move on to Q&A. As you know, I joined Perrigo almost 5 years ago to lead the transformation of the company from a health care company to a consumer self-care company. Leading that transformation has been one of the most exciting assignments of my career. From 14 M&A transactions to reconfigure the company's portfolio, the near complete elimination of the company's $4 billion accidently legal overhang to the strategic path put in place to create value for the future. I am proud of what my team and the Board support has accomplished. The fact that this all happened in the face of a global pandemic, global supply chain disruption, the Russian invasion of Ukraine and the highest input cost inflation in decades makes the transformation that much sweeter. All the pieces are now in place. Perrigo is growing its top line robustly. We've added over $1.5 billion in revenues to our consumer businesses since the beginning of the transformation. Perrigo is growing and expanding its margins and is set up to continue to do that going forward and it's growing its bottom line. In the first quarter, I think we were right at the top or nearly at the top of our consumer peer group. It has a strong plan in place to produce leverage and the company has a clear strategic path for sustained long-term growth. Now it's the right time for someone else to take the reins to Perrigo and relentlessly drive the execution of our strategic plan for years to come. I truly believe that we collectively have set up Perrigo for a bright future and to create tremendous values -- tremendous value for investors. Remember, despite strong results, Perrigo continues to trade at almost a 50% discount versus its peer group. And that's why even though I'll be retiring and I will sell a portion of my Perrigo Holdings to diversify, I intend to remain a large individual shareholder of Perrigo and will continue to be very tight to the success of the company. I've set the target retirement date of the end of July, and I'm working with the Board on identifying a successor and ensuring a smooth transition. Lastly and most importantly, I'd like to thank the Perrigo employees who have supported me through the transformation. You are truly amazing, and it's been an honor to lead you. And with that, operator, we'll now take questions.

[Operator Instructions] Our first question will come from Susan Anderson with Canaccord Genuity. You may now go ahead.

Hi, good morning. Thanks for taking my questions and Murray congratulations on your retirement. You've done a great job setting the company up for future success.

Thank you Susan and good morning.

Yes. So maybe just I wanted to drill down a little bit first on the gross margin, the 400 basis points. I think you said 130 bips from the recalls with the HRA distributor. I guess, how much of that was the infant formula? And then also, if you could maybe just give a little bit more color on the rest of the drivers there between pricing, mix, maybe currency, etcetera.

Okay. why don't I take Eduardo the first part. Yes, which I just want to sort of talk relative to the gross margin and the [indiscernible] across the businesses and then you can break up the individual drivers. So yes, the gross margin from last year to this year was on CSCA, 310 gross margin points. So I think if you look at it, the important parts are -- excuse me, it was up more than I had 310. OTC was up 450, so it went from 25% last year to a 30% gross margin. Oral Care went from 25.3% to 28.9%, up 360, but Nutrition had a significant decline and it has even a bigger decline from the fourth quarter to the first quarter, and that was related to the recall. I mean, you had a big hit on that. CSCI actually had a 480 basis point increase. So every part of our business expanded significantly from a growth margin standpoint, and it's progressing just as we expected, but you had hits and Eduardo can quantify these on purposefully with the HRA not recall of moving from distributor to our own sales force and then you had 2 recalls that hit $17 million or roughly $0.10 of the business was so strong. It covered it. But I want to be very clear our margin programs are working beautifully. They're not pricing driven or some in recovery, but they are all the kind of things that you want that will continue to expand and grow over time, especially as we have our highest margin businesses are growing the fastest in the company. Now Eduardo will get to your specifics on the drivers. Go ahead.

Yes. So talking specifically there, Susan. So between the GoodStart impact as compared to last year, we had about 50 basis points there. And also on the inventory transition on HRA about 40 basis points. And we also had around 40 basis points related to the OTC recall that we announced there. And so on the flip side, pricing had a positive impact of about 300 basis points and volume and mix about 160 basis points positively. And those combined more than offset the impact we had on inflation and input cost that was about 230 basis points.

Okay. Great. That was really helpful. Thanks for all the details. And then on the infant formula business, I guess, do you expect there to be a sales impact, it sounds like the rest of the year or two with the changes from the FDA? And then also, how much will this pressure be on sales and margin and how long will it take you to get back in stock. And just in terms of raising prices, do you guys have an idea of what that will be and the timing and then I guess pricing does increase across the category. I would assume this is actually helpful to your private label business, correct?

Yes. Those were a lot of questions. So let me turn over if I don't get to every piece of it, just ask it again. But let's just go back here a little bit. I think it's really important to say that this letter was sort of a shock to the system. It's very well intended. I'm not sure whoever wrote it and fully understands the impact of manufacturing and output for the industry especially during a period of time when there are shortages. But I want to be very clear that the Perrigo quality control system did not break down during the first quarter. If it had been 3 weeks earlier, prior to this letter coming out, there would have been no recall. So the quality control measures that were in place of how much product to throw away, etcetera, if you get any variation that had been in place for decades, there would not have been a recall. Okay? The FDA given what happened last year and pressure from Congress and others have tried to raise safety up to another level, very admirable, but it has an input, and that's what you're talking about now. So we -- full plant sanitizations and shutdowns, there'll be more of them, it will have a negative input on product, but all of that including the sales will be offset by the pricing, okay? So what you lose in a little bit of volume, you're going to gain an additional pricing in cost, and then we still see it as making our original plan on the infant formula business, it will just be a little bit more back loaded. Pricing here, we don't -- we're not pricing relative to the competition. We're pricing to offset this higher cost and lower productivity. And -- but it just so happens that after the pricing that is necessary to do that will be about 25 -- on our price value business store brand business will be about 25% cheaper on an absolute unit. We give away a couple more ounces. So on a cost per ounce basis, we'll actually be at a 40% discount after the pricing. Customers hate price increases. I just spent 5 days of NACDS, our biggest conference. They all understood this. That -- they understood that there was a change that we have to be able to produce and make a margin, and they understood that we weren't expanding margins on this. We were just literally addressing this regulatory change. So I think it will be very well supported. Nobody likes pricing when you're a value competitor. But in this case, it's absolutely necessary and we'll sell that through. I'm not worried about that. So yes, I think I've answered all your questions.

Yes. That's great. Thanks. And then just really quick on your inventory levels and then also at retail. I guess are there certain categories you had more of? And how has your ability then to get back in stock quickly?

Depends on the category. We're making progress, but I've heard of -- and I heard at NACDS, 2 I heard of a lot of categories out there where they're fully back in inventory or even inventories could be a little high. That's not the case for us yet. We're -- we shipped a little bit more than we that was consumed during the first quarter, but we're still a week -- 1.5 weeks on average of low in inventories out at the retail level. And that's before we begin to build our own safety stock. So listen, it's really right now for the company, our productivity is doing beautifully in the manufacturing facilities. We are running at record levels we have two issues in terms of getting our inventories back off gold. And that's because, again, last year, we had an elevated cost call season right through the summer, which is supposed to be our down season where we build inventories. We're running again at record levels, especially on liquids and pediatric liquids was an area of concern over the past 4 or 5 months. Based on the way the illness trackers are going and trending we should be back in business with safety stock for the full cough and cold season next year. The other business, as I said, is nutrition and a nutrition basis, there's going to be some working through this new regulatory guidance. It is with additional full plant sanitization and longer quality holds in order to comply. It will take some time before we can get inventories back. So that's been a challenge for the last 18 months it's probably been now extended. I can't put a time on it, but I don't see an end in sight yet. So when we are fully back in a safety stock position on Nutrition. But the good news is we did buy the other facilities. So we have a lot more product to work with. And we are making those investments. We're not backing off those investments. And within another year, we should have an additional 7 million pounds of capacity. So -- and on the rest of the business, we're back up to service levels. And service levels are not a concern in Europe. We're in the '90s in the U.S. Other than nutrition in cough/cold, I think we're back in the most recent weeks back into the '90s again. too. So everything is going in the right direction.

Okay. Great. And if I could just ask 1 more on the week's AdCom on Opill. Curious, just any thoughts you could give around that on how they're going to think about this? And then also, if it is approved, your thoughts around just the market opportunity in the U.S., is this going to basically add to the market? Or will it take some of that share? And then any color you could give on the time line to launch and impact to the P&L? Thanks.

Well, I think I read it in your note, but it is not -- and I think everybody knows it at Investor Day, it's not in our current modeling. It's not in our -- any of the guidance we've given over the next few years because it's you're talking birth control, and this is a big change having -- so it's only upside, and I think we've been giving a year one estimate of roughly $100 million in revenues. And by the time the FDA got into a position, I think that next 2 or 3 months or for them to make a decision once they review the data and what the advisory panel has to say about it. You're talking in the very end of the year, beginning of next year. I don't think we have a set date yet. It depends how the FDA when they come to their decisions and any implications of those. But like philosophically, though, this is a product that has been on the market since the 1960s. There is [indiscernible] of safety data on this. And when taken in a whole, we believe the FDA should approve this application period. There's a lot of pushback in there, which is their job and that's what they're supposed to do. And we have many -- will be testifying. And we'll see how it comes out. Ultimately, we believe this will get approved. And hopefully, it gets approved this time through. But again, it's not in our numbers this year, next year. It's all upside. But this is a big idea for the company, and we're really excited about women's health.

Great. Thanks so much. Good luck the rest of the year.

Our next question will come from Chris Schott with JPMorgan. You may now go ahead.

This is Ethan Brown on for Chris Schott. Thanks for taking my question. I guess, first off, you already talked about this a bit. But on the nutritional segment, just how do you think about sales growth for the rest of the year as we move past the infant formula shortages, the disruption this quarter and then with the FDA update as well?

Okay. Well, let's start with -- remember, last year, the way our business flow, we were stripped our safety stock last March and April. A little bit of February, but March and April were huge spikes. And then after that, once we had no safety sauce, and we actually had challenges as the year progressed, on our base business, keeping up and running what was -- we have on our Vermont facility, older equipment, it really pushed that, and we struggled in the back half of the year. So I think it just is going to be a bit lumpy, but I think this will be a growth year. And it's not like we're going to be giving back a ton when we went into buying Nestle, we had estimates of tens of millions of pounds of unmet demand, even with the Nestle facility in here. It's not a demand question. It's a question of how much can we make and how much can we make under the new regulatory guidance and the dollar. So I don't have the forecast in front of me right now, Brad, can give you those numbers later. But we are not backing off plan. But from a flow standpoint, the pricing a little bit sort of the middle of the year, the back half will get bumped up because of it. It was depressed in the back half of last year. So there are not some big growth rates from, we'll call it, May, June, July onward until the end of the year in infant formula, which is driving our nutrition numbers.

Thank you. That's great. And then on pricing outside of the nutritional segment, do 1Q results reflect most of the planned pricing actions or can we think about some further price opportunities as we move through the year?

Well, it's a 2-part answer, right? It is -- the second is, first is that it took us almost to midyear. We were a touch -- when you look at the traditional CPG companies on national brands in the U.S. And I'm only talking the U.S. here, our international business is similar to any branded company. But in the U.S., you have to negotiate with customers on store brands. And we lagged in the beginning because most of our price increases didn't go into the midyear. So you're going to still get a pretty strong benefit, I would suspect, in the second quarter of this year on most of ours. And then you'll start to lap some of those. The great news is we have learned through this whole crisis when we need to, to price for cost, we can get that done. So I'm not going to answer your question right now. You pay me as CEO to -- I have a toolbox, and sometimes I go to pricing and sometimes I go to cost and sometimes I go to new products and innovation. And sometimes I go to M&A and sometimes I go to supply chain reinvention and sometimes I go to capital structure, but we'll continue to look at which opportunities make the most sense to deliver on the guidance. I truly believe that Perrigo sitting at where it is in terms of its metrics at a 50% discount on valuation is all about credibility right now and delivering on the numbers. So we'll use any lever we have to, to try to consistently perform and deliver the promises we made for the year. And then I think everybody is going to benefit from that, including me and my lovely retirement.

And then maybe 1 last 1 for me. Can you just talk about the trends you're seeing on the private label versus national brands, given the current macroeconomic environment and anything notable to keep in mind there? Thank you.

Yes. Eduardo perhaps feel free to jump in here. But what I see is our volumes growing and their volumes declining. You don't see the dollar swing of down trading as much because they're more aggressive on pricing. I don't want to price if I don't have to. That's our competitive advantage. We want to have a good discount versus the national brand and with good gross margins and then grow market share over the long haul as partnership with our customers. So you see clearly, most national brands, etcetera, have priced more aggressively than us. But on the other hand, we used to be in a situation where we were having making price concessions. Now we've gotten first to stabilization and now our ability to price for growth when necessary. As a result of all of that, we are gaining market share in volume. Meaning consumers are down traded.

[Operator Instructions] Our next question will come from Daniel Biolsi with Hedgeye. You may now go ahead.

Thank you Murray, on your well-earned retirement, I take it, you're also retiring from the Board.

Correct. That automatically happens, yes.

Okay. And then I was wondering if you could quantify the product shortage impact on the CSCA upper respiratory segment, like what that was? And if it was lost sales or you consider it just delayed?

No, they're lost sales. Right now, we were at trying to Brad, do you have a number list. I just saw this. We had forecast of, I think, about $25 million for the first quarter, we shipped about 25% more than that, but we had orders that we could have doubled that again. So I don't want to be too specific, but it could have been $25 million or $30 million additional in and on being really back of the envelope here. But the point is we had elevated levels and as much as we could have made, we could have shipped. Now people buy it for the cough/cold season. So they had to buy something. So again, our cough/cold numbers were up, and our production in the factories was up significantly. They did a brilliant job, but there was still more demand than even that. And that's why I'm so excited. We haven't really talked about it this morning. But that's why I'm so excited about the supply chain reinvention and what I talked about on the call of the simplification of over 1,000 and standardization of over 1,000 SKUs because what that does in combination with Redzone is it increases capacity because it wasn't -- we can continue to grow and build market share, but we're mindful of our return on invested capital. And we don't want to be just adding equipment and lowering prices than getting no return for that. So this is sort of an elegant solution to be able to where we see a path to 25% to 50% more capacity in our cough/cold business through this supply chain reinventing and standardization and simplification of less line changeovers and better operational effective in the welder throw away and all those good things that are part of this program. And -- and I'm excited to say in those 3 test lines we did in the first quarter, we got that increase in operational effect on this. So that's what we're pushing for. So -- do we get it back? We can get it back next cough/cold season when we play it out. It shows the potential is there, but it's not like it got pushed forward.

Right. Thank you Murray. And then just following up on that, what are your initial conversations been with your customers about reducing some of the SKUs? Has it been what you'd expected? Or have there been some pushback?

No, no, it's better than expected. But we're going for the low-hanging fruit first. And if you've listened to Eduardo speak on this, the low-hanging fruit is the part that is not consumer-facing. So in the complexity between customers, it will be a more difficult decision when you're talking about what consumers actually see in terms of the number of pills in the bottle or the size of the , etcetera. But 80% of the complexity we have now, believe it or not, is not consumer-facing. So it is one customer whose label is an eighth of an inch figure than another 1 but you have to -- and it's not even perceivable to the eye, but we have to stop the line and do a major changeover for the new label size or it could be a slightly different bottle size, where it really matters as corrugated. You've got the outer corrugated, the thickness of it, the dimensions of it might be a quarter inch and 8 inch, 0.5 inch inside. It could be packed shrink wrap together, 6 wrap together, 9 shrink wrap together, 12 shrink wrap together, where the national brands only get 2 variations. And over time, Perrigo being a specialist, a complexity and customization built all this complexity into its system working with customers, but sort of no one realized how much complexity it added. So again, I gave this example at Investor Day, but because of that complexity, we can't use automatic case factors. And it's the year 2023, that's not -- and everybody agrees they can get to like a standardized outer carton and at least that I've been in front of us and same thing with label size is and all of that, and they're like wow, we didn't even know we were different on those kinds of things. So that first 1,000 SKUs is easier. It will be years -- we'll be doing this for the next 2 or 3 years, where then we go back and say, Listen, everybody ought to be in 225 count set of [indiscernible], not some of you 200, some of you 250, we can still shrink that together and do bigger sizes, but we need to standardize as much as possible. And because we are a branded company, whether it's store brand or national brand at the heart of when we get to the consumer facing is a massive consumer study that we did that will guide us in what consumers want when they go to the shelf, which is, frankly, not to have to get out of calculator and do math. They want to look at and see the products know it's comparable to the national brand that it will work as well, be just to say and cost less.

Thank you.

That's all we have time for and marks the conclusion of our question-and-answer session. I would like to turn the conference back over to Murray Kuster, President and CEO, for any closing remarks.

Yes. Just once again, thank you for your interest in Perrigo. Thank you for support and investing in the business and believing in me whether it was here at Perrigo or Lorillard or UST, it's been a heck of a run, and I hope to see as many of you as I can before I actually say my final good buys, but I've worked hard for you, and I can tell you that everybody at Perrigo will continue to work hard for you and make your trust in us pay off then over the medium, short, long term, all of it. So thank you again for your interest in Perrigo.

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