Good Day and welcome to the Perrigo Third 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 also note this event is being recorded. At this time, I would now like to turn the floor over to Bradley Joseph, VP and Investor Relations. Sir, please go ahead.

Good morning, and welcome to Perrigo’s third 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. Joining today’s call are President and CEO Patrick Lockwood-Taylor and CFO, Eduardo Bezerra. 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 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 noted. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. As for today's agenda, Patrick will cover our solid quarterly financial results and strong business fundamentals. He will then discuss the evolving dynamics in the infant formula industry followed by our excitement for the anticipated launch of Opill. He will then round out his comments with reflections after four months of CEO, provide an update on our strategy to build a sustainable and value accretive growth engine, and end with area of focus to close 2023. Eduardo will then walk through the financials, including our updated guidance. And with that, I'd now like to turn the call over to Patrick.

Thank you, Brad, and good morning, everyone. We delivered another quarter of solid financial results, highlighted by gross margin and operating margin expansion. Net sales grew 2.2% compared to the prior year. Organic net sales declined 1.2%, including an unfavorable impact of 2.8 percentage points from discontinued lower margin SKUs and HRA distributed transitions, both designed to expand margins. Year-over-year gross margin expanded 300 basis points, including a 70 basis point benefit from our supply chain reinvention program to 39.5%. Operating margin expanded 130 basis points to 13.4%. For the fifth consecutive quarter, Perrigo has delivered double-digit growth and gross profit, operating income, and earnings per share. This performance puts us in the top quartile of our peers. Digging a little deeper into quarter three, net sales of our global cough, cold, and pain products increased 7% compared to the prior year, excluding portfolio optimization efforts, driven by seasonal selling, which was particularly strong in Europe. Within CSCI, organic net sales grew 6.2% as we held market share and growing markets and categories. In addition to cough, cold, and pain, growth was broad-based, including skincare offerings and high single-digit growth in our U.K store-brand business. In CSCA, organic net sales declined 5.1% as favorable pricing, the acquisition of Gateway and new products was more than offset by legacy infant formula, 3.6 percentage points from the discontinuation of low margin SKUs, normalizing consumer consumption, and a comparison to the strong and an early cough cold season last year. Importantly, store-brand OTC dollar, volume, and value share grew during the last 13 weeks, as consumer-seek high-quality products had a good value. Turning to infant formula, the background, and for over two decades, Perrigo has successfully and consistently produced high-quality, safe, and effective infant formula as the leading player in store-brand. We have…

Thank you, Patrick, and good morning, everyone. Looking at our financials, we're starting with our GAAP to non-GAAP summary. The company reported GAAP income of $50 million for the third quarter, or earnings of $0.11 per diluted share. Adjusted net income was $87 million, and adjusted diluted earnings per share was $0.64 per share versus $0.56 per share in the prior quarter. A few adjustments to the third quarter pre-tax non-GAAP P&L totalling $88 million were, first, amortization expense of $68 million, second, restructuring charges of $15 million primarily related to our supply chain reinvention program, and third, unusual litigation expenses of $3 million. Full details can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward, all dollar amounts, percentage, and basis point changes are on an adjusted basis unless otherwise noted. Since Patrick, over net sales, I will begin my comments at gross profit. Both gross profit and operating income achieved a strong growth compared to last year, driven by pricing actions and contributions from new products. I will cover margin expansion in a moment. Our adjusted effective tax rate for Q3 was 19.2% versus 21.8% last year, due to changes in the jurisdictional mix of earnings and the impact of benefits not realized on certain pre-tax losses in 2022. These factors led to double digits adjusted EPS growth of 14.3% year-over-year. Year-to-date, EPS has expanded 30.3% compared to last year. Look at a margin expansion in more detail, total Perrigo gross and operating margin increased 300 and 130 basis points respectively versus the prior year. In CSCA, gross margin expansion of 430 basis points was driven by strategic pricing and winning portfolio actions, productivity savings, and the addition of the higher margin gateway acquisition. This led to a 90 basis…

Thank you, Eduardo. Can we now open the call for questions?

Ladies and gentlemen, at this time we'll begin the question and answer session. [Operator Instructions] Our first question today comes from Chris Schott from JPMorgan. Please go ahead with your question.

Hi, this is Ethan Brown on for Chris Schott. Thanks for taking my question. To start off, you mentioned, I believe, a $0.33 impact to the original 2023 guidance from lower infant formula sales. And just hoping you can talk about the progression through 2024 for that franchise. More color on how you expect to recapture that EPS impact and maybe what normalized sales look like for that franchise going forward? And then I have one more follow up from there.

Okay. Hi, Chris. This is Eduardo here. Thank you for a question. So as we highlighted and do our numbers, so we saw this impact that's mainly happening in the third and the fourth quarter. So, as we highlighted there, Q3 was our first full quarter, operating under the new FDA guidelines. So we shortened our production campaigns to perform more frequent major cleanings and we implemented the handset product testing and quality procedures. And because of that we were unable to replenish our safety stocks. We're now really focusing on rebuilding those safety stocks for our highest volume SKUs and productions improving week-by-week. So we anticipate our operations to normalize by the mid of next year. And then we expect to recapture most, if not all of the $0.35 EPS impact by mid of 2024.

Okay, great. And then my second question is just - now that we're a couple of quarters into the margin recovery, can you talk about the expected gross margin progression from here, and how to think about sequential trends for the overall and America's business? And then how do you think about normalized margins longer term for the company?

Yes. So as you were able to see, we're pretty proud of the progress that we have been doing as we highlighted in our Investor Day, we're expecting about 200 basis points improvement. But as we share today, we expect we're going to outpace that, given all the focus we have done, both on the winning portfolio, exiting low margin products, but also, really improving the overall margins through strategic pricing and continue to work on the prioritization of our portfolio. So we expect that to go beyond the 200 basis point this year. So as we look into 2024, we continue the same trajectory. So that we originally mentioned we would be achieving 40% gross profit margin by 2025, but given the pace that we're seeing today, we most likely are going to be able to outpace that objective.

Thank you. That's it for me.

Thank you, Ethan.

Our next question comes from Susan Anderson from Canaccord Genuity. Please go ahead with your question.

Hi, good morning. Thanks for all the details this morning. It's very helpful. I was curious. I had a question on the slide on the store brand versus national brand, the latest 13 weeks, the point seven share gain. Was that, I guess overall, or was that in your categories? And then, I guess, just looking at the categories that you play in, did you see share gains across all of them? Or were there any categories where you saw some losses? And then, I have a follow-up? Thanks.

Yes. So Susan, these numbers that we shared are across the, the categories overall, right? So we're seeing a consistently over the last 13 weeks a 0.7% there into volume share gains of store brands. And from a dollar standpoint, as you know, because of national brands have been more aggressive on pricing, as we look into the dollar share, we see light gains. As we continue to track that into the latest information that we got in October, that continue the friends. And we believe that's very, very positive. So it means that, consumers on a volume basis, they're really trading down. We're not seeing that extensively because of the differential on price increases. But the positive thing is, as compared to last year, where you remember we had some challenges on having enough inventories, this year we're in a much strong position. As the cough and cold season continued to progress now, as we saw a little bit slow start, but we're starting to see a pickup on that. We are at the highest level of the last years on liquid cough and cold. So if the strong season, strong cough and cold season confirms, we're very well-positioned to capture additional volume and value versus our current estimates.

Great. And did you guys say how much of an impact to the top line the U.S. nutrition and then the branded OTC products in the Americas had?

Well, to Q3, we would say two-thirds infant formula, one-third the delay on the season is what we saw in the third quarter versus the original expectations.

Okay, great. And then if I could just add one more, so you mentioned the price increases I was curious how much did you raise price and was it across all categories or what categories did you see price increases in? And then also I'm curious just how the retailers and then the consumers are responding to those price increases.

Yes. So overall, we have almost 5% price increase. I would say the significant portion of that is in the infant formula business. Remember, because of the FDA guidelines and the changes in the operations that we had to do, we talked with retailers about that. And so, we implemented those actions in July, as we talked before, and we haven't seen any pushback. Of course, we would hope to see more of that benefit, but because of the supply chain challenges to adapt to the new FDA guidelines, we haven't been able to fulfill the volumes there. But we expect that pricing benefits continue. And also next year, we should see the leap effect into the first half of the year.

Okay, great. Thanks so much. Good luck the rest of the year.

Thank you.

Our next question comes from Daniel Biolsi from Hedgeye. Well, Please go ahead with your question.

Hi, thank you. I wanted to follow up on the phenylephrine products. I was wondering how long it would take for you to change the production of the combination drugs, like how much of a lead time it would take to hit retail shelves?

So, thank you for the question. So the first thing is today, our exposure in the overall portfolio is about 2% of the total company net sales. So, so far, the impact has been very small to all retailers. And it's only of all single entity phenylephrine products, right? So we do not expect any action of combination of products given the safety and potential for shortage. So we are already working to reformulate our phenylephrineproducts with other active ingredients if needed. So we are pretty well on track with our plans for the next season.

Okay, thank you. And then, I was wondering if you could comment on the effort recently in the Senate to have the OTC birth control covered by insurance, how that would even work and what Perrigo thoughts are on that?

Yes, hi. Good morning. This is Patrick. We are aware of those efforts. We support those efforts. We're still in discussion to also include the FSA and HSA support. And I'll describe it at the moment as work in progress. And hopefully we can give a favorable update soon.

Okay. And then finally, I can see when we're in, I was wondering more of an open ended question, but what has been the response from your customers about the SKU rationalization efforts? What are your learnings to date? Has it been mostly one-off decisions where one decision to not produce a product has not had any sort of impact on anything else? Or have you learned that things are interconnected and a little more complicated than it seemed at first? Thank you.

Yes, I'll respond first and then Eduardo with a bit more detail. Actually, generally, well received, I mean, both in terms of elimination, everybody understands that it's important for mutual value creation. We see movement into other SKUs. And also as we've done SKU standardization across retailers, because we saw changes in pack sizes, lid sizes, labeling, font sizes, all of which was driving tremendous complexity that just wasn't serving the consumer or driving preference. So this basically has allowed us to create more value without really any risk or trade out. So I think so far, the effort has gone extremely well. We continue to be very focused on the U.S. to the question earlier about gross margin expansion, the opportunity for further pricing. And we continue to work that through with our retailers, even looking into 2024.

Yes, and just to compliment to what Patrick mentioned is, as we highlighted, so we achieved already 750 of the 1000 SKUs planned for this year to be simplified. And so the reaction has been very positive in that sense. And we continue to our conversations with them to progress in those areas. So I think that's been very well implemented and very well communicated with the retailers at this stage.

Thanks, Daniel.

[Operator Instructions] Our next question comes from Keonhee Kim from Morning Star. Please go ahead with your question.

Hey guys, thanks for taking my question here. I wanted to follow up on Opill. I assume the launch of that product will be maybe a little bit dilutive for some time through marketing and SG&A spending. But it'll eventually get to neutral or even accretive. And so I was wondering how big of a headwind should we expect from this launch, if any?

Well, so the way we were, we were thinking about Opill, on the launch, so we expected the selling to take place in Q1, maybe because we wanted to make sure there is continuity on the product supply based on the anticipated customer repair changing levels. But as you know, it was highlighted, we want to make sure that we invest in the franchise of the whole women's health category. We expect that to be dilutive in 2024.

It's an important question that I think is probably going to come up at some stage. Have we considered that in our balance earning per share growth for 2024, yes, and yes, we have. We still strongly outlook performance in the 2.90 to 3 range. So even though this will be dilutive, that's standard of any brand launch, the program continues to build well, but it's just part of a sort of balance set of investments and opportunities as we continue with double digit earning per share growth.

Great, that's really helpful. And just one more from me. Can you talk about how much more SKU prioritization is left over? And should we expect any of that for 2024? Thank you.

I'm sorry, SKU prioritization. We will continue with these efforts of driving growth margin by focusing on more value of creative offerings. So I would expect some effect into 2024. But I would expect less revenue impact as we balance that with growth initiatives to a greater extent than we have in 2023.

Yes, just to compliment there, as you remember, in 2024, we have additional benefit from the supply chain reinvention program. That's mainly because of the other pillars that we have there into our plans.

And ladies and gentlemen at this time, I'm showing no additional questions, I'd like to turn the floor back over to the management team for any closing remarks.

Thank you for joining us today. We actually feel very good about the improving structural health of this business. The revenue impacts that we've seen are essentially infant formula disproportionately in the U.S., and a slightly slower start to the cough-cold season. This means that the great majority of our programs are on track, in line with our expectation producing upper cordial performance. And we look to continue that in 2024 and 2025 and we feel very good about our long-term growth algorithm as well. More of our growth in the future will be branded both in the U.S. in the international and we're currently working through those portfolio choices and we hope to share more with that in the weeks and months ahead. So we feel good about our performance and we thank you for your support.

Ladies and gentlemen with that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines. Thank you.