Good morning, and welcome to the Perrigo Fourth Quarter and 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please be advised that this call is being recorded today, Tuesday, February 27, 2024. I would now like to turn the conference over to Bradley Joseph. Please go ahead.

Good morning, and welcome to Perrigo's fourth quarter and fiscal year 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 the 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 release issued earlier this morning. A couple of housekeeping 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 measurement 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. And with that, I'm pleased to turn the call over to Patrick.

Thank you, Brad. Good morning. Good afternoon, everyone. I'll start the call with a few opening comments. First, I'd like to thank all of our 9,000 plus strong Perrigo team, who work relentlessly to deliver world-class self-care products to consumers. I truly appreciate all that you do each and every day. We ended 2023 with our international business firing on all cylinders, while our US OTC business is performing well as well, amid a normalizing consumer environment as store brands continue to gain market share from national brands. In addition, our accretive initiatives with synergies from the HRA acquisition and our Supply Chain Reinvention Program are adding value and remain on track. We were proud to also achieve a multidecade effort to win FDA regulatory approval for Opill, the first women's contraceptive to be available over the counter in the United States. During 2023, these positive benefits offset the impact of evolving regulatory guidelines in our infant formula business. 2024, our team is working to quickly implement a new action plan to augment and strengthen our infant formula business amid these evolving regulatory expectations. We now expect stabilization during the second half of 2024, slightly later than previously planned. Now looking at the fourth quarter and our 2023 financial highlights. Net sales in fiscal 2023 grew nearly 5%, driven by our international and core US OTC businesses. In addition to benefits from acquisitions, which more than offset headwinds in the legacy infant formula business. Organic net sales for the year increased 2%, including an unfavorable 2 percentage points from SKU prioritization actions. Gross margin, which has been a major focus for improvement expanded 260 basis points to 38.8% and operating margin expanded 130 basis points to 12.3% for the full year. Fourth quarter EPS grew 15%, leading to a full-year…

Thank you, Patrick. Good morning, and good afternoon, everyone. Looking at our fiscal 2023 financials, starting with the GAAP to non-GAAP summary. Company reported a GAAP net loss of $4 million or a loss of $0.03 per diluted share. Adjusted net income was $352 million and adjusted diluted earnings per share was $2.58 versus $2.07 in the prior year. Primary adjustments to our 2023 pre-tax non-GAAP P&L were: first, amortization expenses of $272 million; second, a $90 million goodwill impairment charge related to the HRA rare disease reporting units in the CSCI segment; and third, restructuring charges of $40 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 financial results discussed will be on an adjusted basis, unless otherwise noted. Turning to our fourth quarter and full year P&L on Slide 20. I'll cover sales, margins and EPS on the next few slides, but first, I want to briefly touch on the 2023 tax rate. The effective tax rate for 2023 was 12.7% compared to 18.5% in the prior year. This 580 basis points decline was primarily due to the favorable impact of $12 million associated with the release of reserves related to the prior year audit settlements, which are not expected to repeat. Now to net sales for the fourth quarter and full year. Organic net sales for the fourth quarter declined 0.6%, which included base business growth of 1.7%, driven by performance in Healthy Lifestyle and Digestive Health categories. This growth was more than offset by 2.3 percentage points from SKU prioritization actions in CSCA. Reported net sales were flat as the positive impacts from currency translation and acquisitions were offset by exited products. Full-year organic net…

Thanks, Eduardo. Let me now turn the call back to Patrick for a few last remarks.

Thank you, Brad. The first thing I want to start with is, of course, infant formula. After five months in roll in late November of 2023, it became abundantly clear to me that we had to make an intervention in our infant formula manufacturing, GMP, and quality assurance for the good of the company. We need to take the actions that we've outlined today. We need to get on a different course. The path we were on was costing us a lot, approximately between $80 million to $100 million OI drag over 12 months, through a combination of lost production, scrap, and higher operating costs. We had to address that. More importantly, we were not getting to where we needed to be from a compliance standpoint. This was evidenced by another FDA 483 in late November at Wisconsin. Now we have significantly increased and accelerated our investments to change the compliance performance of our three sites. It's absolutely the right thing to do in this supply-constrained environment. Wisconsin has been through this reset successfully, and we're on a path to come out of this disruptiveness there. We now need to replicate that at our other two sites and are in the process of doing that. You heard today that we are facing costs of about $200 million. I wanted to expand on that from a cash cost standpoint to reassure you they truly are one-time in nature. In infant formula, we're spending $40 million to remediate and eliminate the disruption we're currently seeing in infant formula. On Project Energize, we have about $80 million of one-time people severance costs. And then in our supply chain reassurance, we have out-of-pocket expenses of about $20 million as we execute our supply-side reinvention. They are the three largest cash cost elements of that…

Great. Operator, can we please open the call for questions.

Certainly. Ladies and gentlemen, we will now conduct a question-and-answer. [Operator Instructions] Your first question comes from the line of Susan Anderson from Canaccord. Your line is now open.

Hi. Good morning. Thanks for all the details this morning on the infant formula business. I guess maybe just to clarify on the top line. So it sounds like you expect first quarter top line for infant to be the worst. And I think you're cycling the recall from last year too. I guess should we expect it to incrementally get better from a top line perspective as we go throughout the year? And then also maybe if you can give some thoughts on just what you expect the annual run rate of the business to be longer term?

Yes. Thank you. Thank you, Susan. So you're right. So the first and the second quarter on nutrition, we expect to be below last year. And remember, last year we had the first quarter that recall, but also we had significant accretion related to the acquisition of the Wisconsin facility. And then in the second half -- second quarter, we have also very strong performance. Looking to the second half of the year is when we started to see the major impacts related to adapting to the new regulatory guidelines and some of the other impacts that we talked before. So this year, we're expecting the opposite. First quarter is going to be a strong impact as we have outlined and Patrick mentioned about Wisconsin facility has gone through a major site wide reset and so that has a significant impact in volume and also pricing. That continues a little bit into the second quarter. We expect it to be flat to last year and that the majority of the recovery we expect in the third and the fourth quarter.

Okay, great. And then just on operating profit, so I guess you guys expect to get back to historical profit levels, prior to the FDA regulations? Or is it going to be a lower profit business going forward now?

Well, so remember, as we mentioned, we're talking about on a run rate business, this should give us about $140 million away. That's really our ambition and aspiration to get back to those levels. And remember, originally when we talk in November, when we talk about the recovery of those $0.35, we are expecting to get back to close to those levels, and we do not expect that to happen in 2024, but we should expect that to return into normalcy next year. And we are assessed the phasing of that during the year as some of these developments unfold.

Okay, great. That sounds good. And then if I could just add one more. So on Opill, I guess, maybe if you could talk about how -- how should we think about the rollout to stores and online? I guess, is it going to be what stores will it be available in? And is it a nationwide rollout? What online sites? And then how are you thinking about the revenue ramp there as we go through the year?

Yes. Hi, Susan. It's Patrick. It's nice to hear from you. We are a couple of weeks away from starting the rollout. You'll find it in every store and you'll find it everywhere online. We have very high ACV distribution plan for this, very strong retail launch plan, very strong online, very good digital program, very good communication. This Opill launch has really improved commercially over the last six or seven months as we've built in new brand building capability, new agency partners, etcetera. So I'm hopeful you're going to see a world class CPG launch. In terms of revenue ramp, obviously, we'll have initial pipeline, then we get into consumer off-take. About half of volume expected is from those moving recovery on the product through Rx, of course. So you will see quite an initial surge and then probably somewhat of a flattening as we get -- dampening, not a flattening of that offtake curve as we get into quarters three and four, just because you picked up the full switch volume earlier on. We will be reading the effectiveness of this program literally weekly and as it's possible now in this digital environment. So we frankly optimize our A&P spend. But we're excited about this. It looks very good.

Great. That sounds exciting. Thanks so much. Good luck for rest of the year.

Thank you.

Thank you.

Your next question comes from the line of Chris Schott from JPMorgan. Your line is now open.

Great. Thanks so much for the questions. I guess maybe just first one Patrick, just on Nutritionals, what is your level of confidence that these issues are going to fully be behind Perrigo once you complete this remediation effort? So just -- it seems like it's been kind of a bumpy ride over the last year. And I just wanted to make -- just trying to get just, like, overall level of comfort that this is kind of the last iteration we're going to be kind of seeing on Nutritionals.

Yes. Hi, Chris. Thanks. And I understand and have thought about the question. I've been here before in regulated industries including in food, okay, where actually the manufacturing process was remarkably similar to this. We were also facing some regulatory hurdles in that particular business. And I worked with some outstanding GMP remediation experts. At the end of November when it became apparent to me that we needed to make a more significant definitive intervention, I reached out to the same partners and actually the same person. That person did two site remediations with me in a different company, which were highly effective. And really step change the reliability and the compliance of those parts at that moment in time. As I've looked at what we've done at Wisconsin, it's a very significant intervention with a different level of protocol, corrective actions, preventative actions, quality assurance application, and environmental monitoring and cleaning and sanitization. What I'd say is, so far so good that site is up. It's a different level of adherence from the team on the ground there who've been through extensive training. And I am confident that that farm is absolutely on the right track. Okay? I need more time. Alright? Because this is a recent restart, but I'm confident and we will continue to learn our way there, working in combination with the FDA who we update monthly on our progress. I certainly think this is our best shot, and it is a different level of GMP and quality assurance to what we were historically on the path towards. So I'm as confident as I can be at this stage. I just need a bit more evidence.

Okay. I appreciate the color there. And then just in terms of the competitive landscape here, just how do you think about share loss? And once you've completed these efforts, kind of the willingness of your customer base to kind of reengage with Perrigo?

Yes. I mean, we're dealing in the most sensitive of categories. Alright? This we have a moral and business obligation. Obviously, this is safe and effective product. We're talking about infant formulas. Everybody shares that. Everybody wants that. And finished product testing alone, okay, cannot be sufficient to confirm product safety. There has to be a final indication of a quality controlled manufacturing environment. With this investment, there is no doubt that that moves us to that. It's what all parties want. And we are working with our retailers to explain what we're doing, try to minimize that disruption and retain our partnerships obviously with them. This is not a standard just at Perrigo. This is a standard to any provider internationally or nationally. I know what we've had to do. I think we were operating at normal industry standards. I think what we're doing is probably ahead of what is being done by many other manufacturers. So I hope at the end of the day, our customers will allow us to do this and will then come back to a high value quality assured manufacturer of infant formula.

And just one final question for me. Just can you just comment on the broader kind of Perrigo 2025 targets? It seems like the business ex infant nutritional is really on track and we've got some good momentum there. And it sounds like directionally you're hoping that this is something that you can recapture some of these earnings. So I'm just trying to get some perspective on like should we still be thinking about those 2025 targets or is that something we should maybe hold off until the Analyst Day later this year? Thank you.

Yes. Thank you for the question. Chris, as you heard from Patrick and I, we really must execute these actions on infant formula and Project Energize. Those are our critical priorities. And in parallel, we are revisiting our portfolio to make sure it's going to be sustainable in the long term, right. So as we shared before, we're expecting to have a much more clear view on our growth perspectives in the fall when we expect to do an Investor Day. And so, we expect to share more by that time.

Appreciate all the color today. Thank you.

Thanks, Chris.

Your next question comes from the line of Korinne Wolfmeyer from Piper Sandler. Your line is now open.

Hey, good morning team and thanks for taking the questions. On Opill, can you just discuss how much selling benefit there may be here in Q1 as you're selling the product into the retailers before it hits the shelves? And then can you just touch a little bit on the kind of like supply chain processes you have in place to ensure minimal disruption of getting product to consumers once it is launched?

Yes. So thank you for the question. So again, Q1, we're just about to do the first the launch now in the coming weeks, so that's mid to the end of March. And so, we expect from a margin standpoint, gross margin is going to have a benefit. But remember, the first year there will be a dilutive effect because we're really investing in the brand and we're going to see significant investments mainly at the retailer and online in the second quarter. So we'd expect a minimum accretion at the bottom line in Q1, but an improvement in gross profit margin Unfortunately, that is significantly offset by the infant formula impact that we just talked about. On the supply side, second part of the question, actually very good. We've ramped up extremely well. We've shipped. The product is here, waiting to be distributed. All batches for year one consumption have been produced, which is good. And we have buffer for upside as well. This is a very well tested supply chain.

Very helpful. Thank you. And then can you touch on some of the SKU rationalization efforts you're undergoing? Is that mainly in the past right now? Or is that something you're going to continue to do going forward, both this year and over the longer term?

Yes. So we expect that to have an impact in 2024 and that should be it, right? Because remember, last year we talked about 1,000 SKUs that we were rationalizing and so we expect another 1,000 this year and we should be done by that. The majority of the other benefits coming from the supply chain reinvention are mainly on the planning process and how we work in our facilities through our Perrigo work systems, but that should be it.

Yes. And Karen, this is Brad. So for the impact on the top line to take what Eduardo has said, it's about a 1 point impact to organic growth to 2024.

Very helpful. Thank you.

Great. Thank you.

Your next question comes from the line of Daniel Biolsi from Hedgeye. Your line is now open.

Thank you. So are the headwinds to the CSCA oral care still the SKU rationalization efforts and then the promotions?

Yes. That's mainly it. But important to say, we're seeing the business on a positive trajectory, right. So remember, we had significant impact in 2022, mainly because of the disruptions after COVID and additional logistic costs. All those things have been significantly addressed during 2023. And also importantly from a cash standpoint, the team did an amazing job and had contributing almost $50 million on reduction in inventories at the end of 2023. So I would say the health of the business has improved significantly. We need to continue to work there to make sure that our portfolio is in line with our customers' wants and we even on that side on the branded, we had exited some brands that didn't make sense for the long term.

Thanks. And if I can squeeze one more in. On CSCI, the cost of goods inflation, are there pricing actions being taken? Or are we sort of nearing the end of this inflationary impact?

So that's a great question and that's a great point. So we're seeing very positive pricing actions taken. I think it's because the inflation is still -- while in CSCA, we saw significant deceleration during 2023. In the beginning of the year in CSCI, that's still taking longer. And so we're taking a benefit of that and we're seeing very great momentum that continues from Q4 into Q1 in our international business, mainly fueled by pricing increase.

Thank you.

There are no further questions at this time. I will now hand the call back to Brad Joseph. Please continue.

Thanks, Sean. Thanks everybody for your interest in Perrigo. Looking forward to catching up soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.