Good Day and welcome to the Perrigo Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. 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, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good morning, and welcome to Perrigo’s second quarter 2023 earnings conference call. I hope you all had a chance to review our release 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. For the time, I would like to introduce and welcome Perrigo’s newly appointed President and CEO, Patrick Lockwood-Taylor to the call. Take note, as a shareholder we are thrilled to have you at Perrigo. Your consumer self-care experience and expertise will bring fresh perspective and help inspire the organization achieving the greater height. Again, welcome. Also joining this call this morning is Perrigo 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, exited product lines 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, Patrick’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 with that, I'd like to turn the call over to Patrick.

Thank you for the warm welcome, Brad. And thank you everybody for joining us this morning. And nearly 40 days into my Perrigo tenure, and I greatly appreciate the warm welcome I've received from my Perrigo colleagues. Their pride and excitement for our business comes through in every interaction. And I'm very energized to join them in the next phase of Perrigo’s growth. I also want to recognize and thank Murray Kessler, our outgoing CEO for his leadership in positioning Perrigo as a major player in global self-care. I'd like to start the call today by sharing what excites me most about the opportunities at Perrigo and also provides thoughts on our framework for building long-term sustainable growth. I've actually followed Perrigo for several years now, and I have always believed this is a truly unique business. It's well positioned in the right industry with numerous strengths. And let me highlight a few of those. It has tremendous manufacturing scale in the US, the ability to produce over 50 billion doses every year, across a wide range of formats, including tablets, liquid, sprays, lozenges and creams to name but a few. This manufacturing capability translates into nearly 1,600 doses produced every second of every day. That's incredible consumer reach. As a global company, Perrigo has strong customer relationships with a Top US retailer, in addition to strong pharmacy relationships across Europe, with over 100,000 direct pharmacist partners. Perrigo embodies a solid focus on cash and cash flow mindset, which helps generate an annual cash conversion ratio of approximately 100% driven by several actions including prioritization, simplification, standardization and pricing. Finally, Perrigo has a strong innovation engine and ability to fast follow across nearly every major OTC category. In fact, Perrigo has more approved OTC ANDAs than any other company, a…

Thank you, Patrick. And good morning, everyone. Before diving to the quarter, on behalf of our entire operating committee, I would like to welcome Patrick to the Perrigo team. His joining has brought a tremendous amount of energy and knowledge to our business. And we look forward to working with him as we continue to execute on our self-care strategy. Now, of course, it's music to my ears. When I hear Patrick talk about our intense focus on cash. Starting with our GAAP to non-GAAP summary, the company reported GAAP income of $9 million for the second quarter, or GAAP earnings of $0.06 per diluted share. adjusted net income was $87 million and adjusted diluted earnings per share was $0.63 per share versus $0.43 per share in the prior year quarter. Adjustments to the quarterly pretax non-GAAP P&L include a net total of approximately $70 million driven primarily by amortization expenses of $70 million, restructuring charges of $6 million and the removal of $10 million of legacy royalty income received in the second quarter. 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. Total Perrigo reported net sales grew 6.4%, organic growth was 80 basis points, including an unfavorable 2.7 percentage points impact from proposal SKU prioritization actions to enhance margin. For CSCA, organic sales declined 2.7% including an unfavorable 4.1 percentage points impact from the SKU prioritization I just mentioned. Light allergy season in the US also impacted organic growth by negative 1.8 percentage points. Within CSCI, organic growth remained robust of 7.1% compared to the prior year, as our brands continue to resonate with consumers. Gross profit increased $52 million…

Thank you, Eduardo. Shavi, can we now please open the line for questions.

[Operator Instructions] Our first question comes from Chris Schott with JPMorgan.

Hi, great. Thanks so much for the questions. And Patrick, great to have you on the call. Maybe the first question is you mentioned several areas of focus in the framework for sustained growth. Could you may just help us a little bit understand in terms of your top priorities moving into this seat. Which of these are kind of biggest opportunities you see for Perrigo as we think about, it's just about -- it's some of the performance issues that companies had, is it about portfolio, is it about the focus, is it consistency and manufacturing, is maybe, help us think a little bit about how you're prioritizing those initiatives.

Good morning, Chris. Thank you for the question. I've worked through in detail, the strategic plan for the company. Job Number one is we had to deliver those priorities, they're going to have the most impact on cost and cash and our OI growth. They include the supply chain reinvention, the integration and that's both HRA and the new production facility that we have. We bought from Nestle in Wisconsin. So call that landing the big strategic initiatives, right, and those are foundational to the 2025 growth algorithm that we've committed and I see no reason to challenge that. Second part of focus for us, is really just getting to operating, a greater level of operating discipline. And I'm starting to see that and that's particularly needed in the US business. So the second tranche of my focus is in primarily in the US. And that does involve really looking at our portfolio and where we need to double down where we have the greatest right to win, and it's the most attractive financially, that works happening now. Then we need to look longer term, and it's continuous work of sustainable growth. So as we then look to the future, starting to look at within our categories, which are the most attractive, within our brands, within our country brand and combinations, and where do we see the greatest opportunities for growth? And what is the investments and the capability that's needed to support that? That block of work we'll probably start later on in the fall. And that will really guide where we focus on the future. So planning initiatives, drive what I call the one Perrigo operating system and discipline, and then really make sure we're focused on what it takes for sustainable growth.

Perfect. And just as part of that answer, it sounds like it's my second question was just on the 2025 targets that the company provided earlier this year, it sounds like you're comfortable with those ranges that were provided.

I am comfortable, I've worked through them as you would hope and expect in detail. I think they're very well considered; I think we have the right action plans and governance in place, but they have to be delivered. And I will stay on top of that governance, personally, to make sure each of them is on track and how we help the teams to stay on track.

Right. And then my final question was just a little bit more color on how you're thinking about Opill, in terms of both the investment needed to build that market and how large of an opportunity, so I guess specifically, I know you've mentioned it’s not going to be an earnings contributor in the first 12 to 24 months, but I think investors have been worried this actually could be a meaningful drag on results in that timeframe. So just any color that would be appreciated. And then if you're willing to share a peak sales forecast for that product will also be of interest. Thanks so much.

Thank you, Chris. I’ll let Eduardo talk more to the financials. We're deep in the commercialization process of that. We will start to ship later on this fall on shelves early ‘24. And the commercial package for that is really what you would expect for any CPG brand launch. As I look at the plans, that they're solid. It's a complex sell to consumers, given the nature of the category. And we're doing a lot of work on what is that awareness to trial conversion process, what investment and consumer touch points are required, and how long that it takes. So at this stage, I think until really that work is completed to a detail that I'm happy with. I wouldn't want to predict what the sales are. But I certainly will have a much better idea at the next earnings announcement. But for further financials, Eduardo?

So thanks, Patrick. Just a complement, Chris, what Patrick mentioned. So as you heard us saying so in the second half, we're going to have an important investment to fund these activities. And we're using the tax benefit that we found -- that we realized in the second quarter to fund that. And important thing is, we do not expect at least in the first 12 to 24 months for the Opill to be accretive that we build the brand nationwide to make sure this is going to be a successful launch for the long term.

Our next question comes from Susan Anderson with Canaccord.

Hi, good morning, Alec Legg on for Susan. First welcome, Patrick, and congratulations on the new role. So you're welcome. Just a quick question on the US business. What are you seeing with the inventory levels at retail? Do you think you're back to more stabilized levels there or are there still categories that have some pockets of restocking opportunities left?

Yes. Thank you for the questions, Eduardo here. So as we look into the inventory levels at the retail now, we see them pretty normalized, right so after last year that we had a very strong cough and cold season that went up to Q2, and we saw depletion of inventories this year, we saw in the first quarter a strong pick up but very normalized season in the second quarter. So we believe that this is giving time to have more normalization of inventories on the retail channel. And, of course, we expect that for the ’23-’24, cough and cold season in particular to be a normal season. So we do expect that there should be a pickup on sales in the third and fourth quarter that were built in our guidance that we shared this morning.

Perfect. And then just to follow up on the units first pricing dynamic in the US and internationally looks like pricing added, I think 4.8 points of sales growth in the quarter. Are you expecting more pricing to flow through the rest of the year? How are you thinking about potential price ticking the rest of the year and long term?

Yes. So the first half mainly on the OTC we had the pickup of the remaining price reactions that we had last year. And we continue to look into opportunities in the second half in the US. But very important, as we mentioned in the first quarter, because of the disruptions on the infant formula business, we had to take stronger price actions, and those were communicated early July. And so we remain on track on our price projections for the second half in the nutrition business, as well as in the international business, we continue to price to the value proposition of our brands. And we're more than offsetting inflation that we continue to see impacting our costs.

Thank you. And then last question on the European consumer, looks like they've held up pretty strong. And the consumption habits there have been trending pretty high, I guess. What else are you seeing over there? Is there any risk of trade down there? It seems like it's the opposite. Whereas in the US, we're not really seeing as much trade down to the private label. But it's the opposite and benefiting Perrigo over in Europe.

Yes, we continue to see a very strong pick up there. With our HRA brands as well, we're seeing a very good performance. And now it's starting in the second quarter. It becomes organic growth. But we saw also in several different categories, cough and cold, parasites, insect repellent and skincare. A very strong update in the second quarter. And we continue to see that. And we expect that to continue for the second half of the year.

And Alec, this is Brad, I just jump in on the US comment that you made. We're starting to see a little bit of that trade down impact you saw in the materials, the earnings materials from today that the volumes within the US store brand in particular, are starting to gain some share. Of course, there's a little differential on the dollars as some of the national brands may have taken more sizeable dollar price increases. But the volume is starting to pick up in store brand, which I think is just an important factor to think about going forward.

Our next question comes from Daniel Biolsi of Hedgeye.

Hi, thanks for the question. I was wondering if you could go into a little more detail what the early learnings from the supply chain reinvention program are? It sounds like you've seen some gross margin benefits, any reactions from customers about products that you're not going to make?

Yes, so two key things that we're seeing is, as you saw in the second quarter, we had about 40 basis points improvement in gross margin, tied to the SKU prioritization, that's really part of our winning portfolio pillar on the supply chain reinvention. So again, remember our first 1,000 SKU that we mentioned, we're going to focus on those were SKUs that we didn't have a major impact on overall on how we handle with the retailers. We're going to be moving soon to the next phase on how do we continue to simplify our portfolio and continue to drive more value in our OTC category mainly. The other thing is important to highlight is where on our Perrigo work systems. So Patrick mentioned about the number of lines that we are moving these new redzone equipment. And so we're seeing a very important improvement in the efficiency on our lines. So this is helping not only to expand the capacity for certain categories that are so needed, like in cough and cold. But also these will help us manage better our inventories and our working capital towards the end of this year, and years to come.

Thank you. And then could I also ask what you're seeing in the M&A in the consumer healthcare space? It seems like it's picking up and maybe you can remind us where deleveraging falls in as a focus for the balance sheet.

Yes, so, yes, we're seeing several activities going on in the marketplace with different companies trying to streamline their portfolios. As in terms of our guidance and our commitment, right. So we expect to be around 3x EBITDA in terms of net leverage by 2025. So our three main commitments in terms of how we're going to use our cash that's going to be generated over the next three years, it's making sure we reinvest in our business to make sure our supply chain renovation is fully successful. Also look into how we optimize our nutrition production capabilities, as well as returning value to our shareholders and reducing our debt. We have a trench of $700 million that matures at the end of next year.

And Daniel, this is Brad again, just to reinforce Eduardo's comment here. We've basically taken out through EBITDA growth over the last six months, almost a half a turn, has come out so the leverage is just sitting a little bit north of five here, 5.5 just about six months ago.

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

Well, great. Thanks, everybody for joining the call. We look forward to speaking with you soon. Thanks for your interest in Perrigo.

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