Good morning, ladies and gentlemen, and welcome to Perrigo First Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Tueday, May 7, 2024. I would now like to turn the conference over to Brad Joseph, VP Global Investor Relations. Please go ahead.

Good morning and good afternoon, everyone. Welcome to Perrigo's First Quarter 2024 Earnings Conference Call. I hope you all had a chance to review our press releases issued this morning. A copy of the releases 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'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 releases issued earlier today. A few items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. Continuing operations for the quarter include the HRA Rare Diseases business, which was classified as held for sale after the quarter end and does 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 removed 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 reconciliations of all non-GAAP financial measures presented. And with that, I'm pleased to turn the call to Patrick.

Thank you, Brad. Good morning, good afternoon, everyone. I'd like to begin our call today by emphasizing the important strides we've made to further our One Perrigo strategy, deliver on our purpose to make lives better through trusted health and wellness solutions accessible to all. Let's start by recapping our quarter 1 results against the expectations that we discussed in our fourth quarter 2023 earnings call. First, we plan the actions to augment and strengthen our infant formula business would have an impact on our first quarter EPS and they did. While infant formula actions drove an EPS headwind of $0.30 versus the prior year, first quarter EPS was approximately $0.06 ahead of our projection due to timing of infant formula shipments to customers. Actions taken in infant formula were impactful, but necessary. The significant progress we have made sets us up well to achieve a quality controlled, reliable manufacturing environment, though there is much more work to be done. I believe that the quality and compliance actions and investments we have taken will strengthen our competitive position in the industry over the long term. Also, as expected, SKU prioritization actions in CSCA weighed on quarter 1 organic net sales and EPS growth. However, these actions had multiple benefits, including gross margin expansion of 50 basis points across the enterprise in quarter 1, greater focus and more profitable areas of our portfolio and provides additional production capacity as we build out our blended branded business. Next, as highlighted in our last earnings call, U.S. OTC retail inventories were above average entering quarter 1. As expected, retailer inventory destocking led to lower shipments of product to customers compared to prior year. Encouragingly, consumption across Perrigo's U.S. OTC business remained healthy at plus 1.9% over the last 13 weeks ending March 24.…

Thank you, Patrick. Good morning and good afternoon, everyone. Looking at the first quarter financials, starting with the GAAP to non-GAAP summary. The company reported GAAP net income of $4 million or $0.03 per diluted share. Adjusted net income was $40 million and adjusted diluted earnings per share was $0.29 versus $0.45 in the prior year. Primary adjustments to our first quarter non-GAAP P&L were: first, the removal of $113 million tax benefit, primarily driven by an $84 million benefit related to the planned intercompany sale of intellectual property; two, amortization expenses of $59 million; and three, restructuring charges of $44 million primarily related to our Project Energize and supply chain reinvention programs. Full details can be found in the non-GAAP reconciliation table attached to today's press release. From this point forward, all financial results discussed will be on an adjusted basis unless otherwise noted. As highlighted, first quarter results were heavily impacted by the actions we are taking to strengthen and augment our infant formula business and SKU prioritization access to enhance margins. This led to an operating income decline of 22%. Excluding the impact of infant formula, adjusted operating income from the rest of the business grew mid-teens percent. Let's dig into additional details. Looking at our segment performance during the quarter, CSCI continues to perform well, highlighted by plus 7% organic net sales growth. The strong top line performance was driven by growth in Compeed and the absence of distributor transitions that unfavorably impacted the prior year. CSCI gross margin was impacted by lower volumes, partially in the cough/cold category due to supply constraints and lower seasonal incidents across Europe. However, operating margin expanded 290 basis points to 19.7%, driven by expense reductions resulting from synergies and ROI-focused advertising and promotion spend as part of Project Energize.…

Thanks, Eduardo. Operator, can you please open the call for questions?

[Operator Instructions] Your first question comes from the line of Susan Anderson from Canaccord Genuity.

I guess maybe just to start out on the infant formula business. So I think it was maybe a little bit better than expected, I think, due to some early shipments. I'm curious, is that going to take away then from second quarter? Or should we expect kind of still a sequential improvement there? And then I think you noted that the back half sales volumes will return. I guess, I'm just curious with the plants now back up and running, why wouldn't -- we wouldn't see kind of a sequential recovery in those volumes? And then also just on the cost for the infant formula business, is that still in line with your original expectations?

Susan, Eduardo here. Thank you for your question. So I'm going to answer your first piece, and then I'm sure Patrick is going to cover more on the other side, right? So I guess the first thing is, as we planned on the quality release of our products, some of those products we were expecting to take place in the second quarter. So as we continue to make progress on our quality processes, we were able to release those products in the first quarter and get to customers that's so much needed. So that's just a timing issue. It doesn't change our overall production plans between Q1 and Q2.

Susan, this is Patrick. Thank you for your question. I guess, in a nutshell, the interventions to get to quality compliance and reliability have gone well across all 3 plants. Probably as importantly, the start-ups and the ramp-up volumes and the throughputs are at slightly ahead of expectation, but we are in the early stages of executing frankly, a new set of GMPs. It would be premature to take up financial outlook given we're still really in learning and reacting mode. But so far, very good.

Okay. Great. That's helpful. And then so I guess on the destocking in the U.S. then, it sounds like you said across all categories, but really, I guess, mainly in cold and cough. It sounds like it's complete now. Is that correct? And then I'm just curious how inventories ended and particularly in cold and cough if they're kind of in good shape as we look into like the fall season.

Yes, Susan. So the way we're looking at and that's what we shared about the CSCA of the business, right? So we believe that the majority of that 2.3% reduction is really tied to that destocking, right? As we talked in the beginning of the call, we're seeing that across multiple categories. But most importantly, as you're aware, with a very light cough and cold season, that's something as well that impacted that. Yes.

Susan, on top, which I think you may have heard from the team here is the consumption is up nearly 2 points, while the sell into the retailers from us, so shipments were down. So you have essentially kind of a [ 2.5 ] point swing between those 2 and that's kind of a good way to think about.

Okay. Great. And that's just really because of the late start to the season, so the retailers were already stocked and it just wasn't strong enough to have to restock.

Exactly. Correct.

Okay. Great. And then one more just on the international business. I was curious what drove the growth in the skin care and personal hygiene. It looks like that was the strongest performance. And then upper respiratory was weaker. Was that also due to similar issues internationally with the weaker food season?

Yes. So the skin care is -- it was very strong on Compeed, right? So -- and this is aside from the lapping of the distribution transition, we had a very strong growth in the first quarter, which is very good also with the extension of Compeed [ the spots], right, that increase the overall category that we're playing on. But on the cough and cold, the same that we saw in the U.S. with a lighter season happening in Europe as well. So that's why you saw upper respiratory, including cough and cold, let's say, a reduction in volume there.

Okay. Great. And then if I just add one more on the VMS category. It looks like it was weak both in Americas and international. I don't know if it was the same drivers there. Between the 2 regions, but then also, are you seeing consumers move away from BMS at all after a pretty strong focus on their health and wellness during COVID and post-COVID?

Yes. Just looking at the bigger picture, Susan, as we go back and look at SARS and other major events that disrupted VMS. You saw an immediate typically 10% to 20% increase in consumption during the SARS or indeed during COVID. You then saw a slight regression in the category for 1 to 2 years post that, but stabilizing at a level that was still 5% to 10% higher than pre the pandemic. And that's been true for about the last 3 events over the last sort of 20, 25 years. So I think what you're still seeing is some normalization, but we continue to see strong consumption and outlook on those businesses. There was also some very near-term sort of phasing promotional activity that sort of impacted us as well. But I would say, underlying strong consumption trends, these categories are markedly bigger than they were 5 years ago but just impact to some phasing activity as well.

Got it. Okay. Great. If I could maybe just squeeze in one more. I'm curious what you're seeing on the trade down to private label in the U.S. And then I know international is a little bit dip, but are you seeing anything at all internationally that's impacting the branded business?

Yes, certainly, more focused on the U.S., which is 90-plus percent of our business. In the last one week or so, we've seen about a 50 basis point gain from store brand store brand volume share gain is actually about 150 basis points. So we are definitely seeing a better understanding of what these propositions are, what the molecule is, that bioequivalent but a tremendously better value. So as I think consumers continue to fill the sort of pinch in the U.S., we are seeing good increase in store brand business, which is, of course, very good for our business.

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

This is Sarah on for Korinne. On Opill with the expanded coverage, can you guys touch on how this has shaped your view on total revenue potential this year and then over the longer term? And then are you currently baking into guidance from Opill? And if there's potential that this could be less dilutive to EPS now?

Thank you for that. I'll give some high level on the insurance coverage that you've heard about and you're right to pick up on and then Eduardo more on the sort of near-term financial impacts. This was very good news from CVS Caremark, obviously by far the largest insurance coverage there. We are still modeling through that only recently announced. We're still modeling through the impact of that, how quickly consumers will convert the degree of awareness of that, et cetera. It's a fairly sophisticated piece of modeling, and that's not complete. So I can't tell you what the revenue impact will be, but undoubtedly will be significant and accretive. We are also seeing states starting to provide coverage as well. You would have heard of Wisconsin. We expect others to follow both the state and CVS has moved, which we were very, very encouraged by really just improving accessibility only for this category. I think in terms of the more near-term effects ...

Yes. So I guess, are important to mention is, we're going to see Opill as margin accretive in 2024. But we continue with -- because all the investments that we're putting behind not only the brand but also as we think about how women's health, the whole category will evolve, we want to feel to be the carry of this brand for the future. So we want to make sure that the awareness is pretty strong. And so we continue our plans to see on an EPS be dilutive, the effect of Opill over the next 12 to 18 months. Okay?

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

Can I just come back to the infant nutritional business? I guess now that we're just -- we're another few months into the process, what's your level of confidence that the have remediations have solved issues with these segments? I'm just trying to get my hands around, were these plant shutdowns, the most challenging piece of the process? Or is it the work going forward to make sure you can kind of stay in compliance, representing the biggest hurdle and showing a sense of just like level of confidence of where we are? And then maybe as just part of that, if you could comment at all on just what portion of the $0.65 or so of impact from the remediation, do you think you're going to be [ patient ] to regain as we look out to 2025, I just have one follow-up after that.

Yes. Thank you, Chris. Good to hear from you again. I'll take the first part and Eduardo on the outlook. Each of those 3 blocks that you went through and characterized very well are equally critical, but they're sequential. You can't do the second one without the first, the third without the second obviously. The big intervention in terms of root cause analysis, corrective and preventative actions the translation of that into new GMPs, protocol, staffing levels, et cetera, is largely done, okay, across the 3 sites. As we executed in Wisconsin, we were able to accelerate the application of that know-how to the other 2 facilities and all facilities back in production mode, okay? So -- and as I suggested in my commentary, really putting start-up times and throughputs at or slightly ahead of our expectations. So we're very encouraged by that. To the point you might flip back is a permanent watch, and we have to make sure that our environmental cleanliness, monitoring, and GMPs keep us at all-time quality compliance. So we're not getting any positive hits and therefore, having to stop production. We're not and we're not. So that is extremely encouraging, okay? But we're having to continue to learn of what needs to be true such that those factors stay true and we maximize production and not seeing the very disruptive interruption to production that we did historically. So good, very early. I could not be happier in terms of where we are. It is too soon to say we have a 100% reliable model, but we are entering closer to that.

And Chris, to your question, right. So remember, we're talking about our expectation to get the infant formula business on an annual basis should contribute about $140 million, right? So that's about the $35 million quarter. And so everything that we're working right now is to make sure that in fourth quarter, we can achieve those levels. And that's why it's so critical, we may not set fully between Q2 and Q3, but we expect by Q4 to be at the debt run rate that will give us the confidence with all the actions that we're taking to make sure that from a production from a quality standpoint, reliability, market share, we can really consistently deliver against that $140 million of objectives, okay?

Great. And just a bigger picture question. I guess, if you think about Perrigo going forward, thinking about kind of your 2026 and beyond plans. Do you feel like you have the right portfolio in place at this point? Or can we think about further refinements or divestitures as you look to focus the company on kind of some of the -- more of these growth objectives over time?

Yes. We will narrow our portfolio. We're much clearer on which categories and brands offer the most attractive growth of scalable growth, i.e., we can execute the same thing, the same innovation through the same production in more parts of the world. So we are completing that analysis now. I'm sure going forward, you will see a more focused portfolio for Perrigo and faster growth rates than at a higher OI. And we will share that thinking at the Investor Day late fall.

And your next -- last question comes from the line of Daniel Biolsi from Hedgeye.

So could you spend some time on the inventory destocking outside of cough/cold, like in sleep base, healthy, lifestyle, oral care? Is that permanent just timing or loss of shelf space?

So at this stage, we believe that there is an overall focus on retailers destocking the cost of that and also try to understand what the focus of consumers, right? So as we're seeing more and more consumer trading down [indiscernible]. I think retailers at this stage will be very careful. And given a year that they saw a lot of increases in 2023 and volume impact, they're trying to do more carefully about how they're going to manage their working capital as well as their inventories. And so I think that cross categories is not on specific to cough and cold, and so we're going to be watching that closely. But if there is an area where -- when consumers start to make those changes that we believe Perrigo has an advantage is really store brands. And we're seeing that coming along pretty well as we gained some share in the quarter. And so as consumers continue that direction, we believe store brand will continue to be very affordable opportunity for consumers to continue to take care of their self and so we are very well positioned in those categories.

But I think your quote is -- and your hypothesis is right. You're seeing more categories in self-care with a fixed amount of shelf space and an increasing focus by retailers on cash, return on working capital. And so I think you have seen some destocking. I think there is a natural floor to that for obvious reasons. Otherwise, they can't service their customers. We believe we're approaching that.

And then if I could ask one more. What should we expect for the gross margin impact from infant formula in Q2? If Q1 was a minus 520 basis point impact, and we got earlier shipments, what should we expect in Q2 and we're going to lose those shipments?

Well, so we expect in Q2 margins to be in a much better situation. Remember, we had the 2 key effects there, right? So we had first is lower shipments, but also we had the variances that impacted because we had some stoppages in our manufacturing operations. We do not expect those onetime impacts take place in Q2. And so our margins should rebound significantly versus Q1. As compared to -- as we look into that into the second versus last year, volumes are not going to be at the same level of last year, but we should see an improvement on margins on a gross profit level as compared to what we did last year.

I think the quarter 1 gross margin decline overall for the business was [ 90%], and that included a 280 basis point impact from infant formula. That was the calculation for Q1.

But that's what I'm saying. In Q2, we do not expect a magnitude impact into the improvement as compared to what we saw last year.

That ends our Q&A. I will now hand the call back to Mr. Patrick Lockwood-Taylor for closing remarks.

Thank you very much. So versus what we outlooked in February, what we said is what happened, what we said what we're going to do is what we've done and where we thought it would net out is where it netted out. So we feel we're on track to hit our '24 commitments. As we've talked several times today, the infant formula recovery is progressing per our critical path. Our start-ups and throughputs are encouraging versus our financial commitments. Additionally, we have -- and we have not talked much about it today, but Energize -- Product Energize was extremely well executed, and we're on or ahead of our targets there. Opill, it's very early, but we should be encouraged. It's a new standard for Perrigo in terms of launch excellence and much to learn and reapply from that. We remain laser focused though on executional excellence of our key '25 priorities heading through the financial commitments we've made. Thank you very much for joining us today.

Thank you. That concludes our conference for today. Thank you for participating. You may all disconnect.