Good morning, ladies and gentlemen. Welcome to Perrigo Q2 2025 Financial Results Conference Call. [Operator Instructions]. This call is being recorded on Wednesday, August 6, 2025. I would now like to turn the conference over to Bradley Joseph. Please go ahead.

Good morning and good afternoon, everyone. Welcome to Perrigo's Second Quarter 2025 Earnings Conference Call. I hope you all had a chance to review our press release issued today. A copy of the 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'd like to remind everyone that during this presentation, participants will make certain forward-looking statements. Please refer to the slides for information regarding these statements, which are subject to important risks and uncertainties. We will reference adjusted financial measures that are non-GAAP in nature, See the appendix to the earnings presentation for additional details and reconciliations of all non-GAAP to GAAP financial measures presented. Two quick items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. Second, organic growth excludes acquisitions, divestitures, exited products and foreign currency fluctuations in both comparable periods. And third, Patrick's discussion will focus solely on non-GAAP results, except as otherwise noted. And with that, I'm pleased to turn the call over to Patrick.

Thank you, Brad. Good morning, good afternoon, everyone, and thank you very much for joining today's call. I'd like to start with a quick overview of the progress that we have made against our Three-S Plan, to Stabilize, Streamline and Strengthen One Perrigo. We've accomplished a tremendous amount of work over the past 18 months to evolve into a more focused, agile and scalable self-care organization. We've aligned our strategy and added top talent where needed. This work sets the foundation for our Three-S Plan, and we have taken significant steps in the second quarter to accelerate our progress. In Stabilize, our infant formula business net sales grew 9%, led by store brand formula. In store brand OTC, we continue to see encouraging results as new business awards overtook previously disclosed lost businesses, and our offerings are gaining volume and unit share in the market, enabling us to outpace competition. In Streamline, Project Energize and our Supply Chain Reinvention program remain on track and continue to deliver significant benefits. These accretive initiatives are enabling more investments into our innovation pipeline and our A&P for future growth. Additionally, we recently announced an agreement to sell our Dermacosmetics business for up to EUR 327 million with EUR 300 million in cash upfront. This transaction, which is expected to close in the first quarter of '26, sharpens our strategic focus on our core portfolio, including our high-growth brands, which are expected to deliver $100 million to $200 million in incremental net sales in 2027. Expected proceeds will be prioritized towards strengthening the balance sheet and accelerating our net leverage goals. In Strengthen, we are scaling our category-led market activation growth model designed to unlock the full potential of our portfolio, and our upgraded brand-building activities are beginning to deliver results. We are moving…

Thank you, Patrick. Hello, everyone. Looking at the second quarter financials, starting with the GAAP to non-GAAP summary. Primary adjustments to our non-GAAP financial results were: one, amortization expense of $57 million; two, unusual litigation of $50 million; and three, restructuring charges of $9 million, primarily related to Project Energize and Supply Chain Reinvention. Full details can be found in the non-GAAP reconciliation tables attached to today's press release. From this point forward, all financial results discussed will be on an adjusted basis unless otherwise noted. Second quarter gross profit of $403 million declined $30 million year-over-year, primarily due to an $18 million impact from divestitures and exited businesses, partially offset by favorable currency translation. Organic gross profit declined $23 million, largely due to the previously mentioned isolated production variability in infant formula. This production issue led to scrapping of approximately $11 million of inventory. Additionally, we experienced lower plant overhead absorption in OTC and Oral Care. These factors more than offset benefits from our accretive initiatives, Project Energize and Supply Chain Reinvention, which continue to deliver meaningful efficiencies. Second quarter gross margin was down 250 basis points, stemming from: one, 70 basis points from divested businesses and exited products; two, an unfavorable impact of 110 basis points from the isolated infant formula scrap I just mentioned; and three, a net unfavorable impact of 70 basis points from the rest of the business, mainly due to overhead absorption, which was partially offset by accretive initiatives and favorable store brand mix. Looking at the gross margin on a sequential basis, we were expecting a decline of approximately 250 basis points related to lower plant overhead absorption. Said differently, our first half gross margin of 39.5% is in line with our plan, and we remain on track to deliver full year gross…

Thanks, Eduardo. Operator, can we please open the line for questions?

[Operator Instructions] Our first question comes from the line of Keith Devas, Jefferies.

Maybe just starting with what you're seeing on the infant formula side. Any context you can add maybe just from what you're hearing from retailers as well as how competitors are responding? I think on the last call, you mentioned competitors also engaging in promo activity and some pricing. So how have your second half expectations changed? And how should we expect kind of the recovery to play out for the balance of the year?

Keith, I'll take the first part of that question and then for the more detailed financials, hand over to Eduardo. The market is, I would describe, quite fluid, quite volatile. Brands are promoting quite heavily to gain share. We've seen a number of new products being launched. And I would say that our placement at the shelf is not optimal at certain retailers. There's also probably opportunity in some of our packaging claims as well. Store brand infant formula volume, it does continue to grow. But as I mentioned, new volume has entered the category, and that has dampened our share growth versus our expectations a few months ago. I'm confident that we're putting into place the right steps to grow value share above our historical norms. And we really expect to continue to ramp up in the second half. We still have 20% of our SKUs that we were launching this year to be placed in the market, but we are stepping up our demand activation activities, our new mom targeting programs, et cetera. So slower than expected, but largely on track in a market that's really been more dynamic than we've seen probably previously. Eduardo?

Yes. Keith, Eduardo here. So a couple of comments there. So first, starting with the second quarter, right? So we saw an important increase in our revenue, about 9%. That's mainly driven by store brands. We're seeing, not unexpected, Good Start having a low pickup, a slower pickup versus we originally expected because of the relaunch of the brand that we had at the beginning of the year go under the Good Start, Dr. Brown's, right? But the new SKUs, the 80% that we launched in the second quarter are starting to pick up. They're all on shelf across the major retailers, and it's a matter of pickup velocity. We're putting all the actions in terms of promotion to make sure we achieve our expectation in the second half. In light of some of the softness that we saw in the second quarter, we're more prudent and instead of seeing a 25% growth versus last year, we're more expecting to see a 25% increase in the second half versus the first half of the year. And that's what we're positioning right now. I think, Keith, just to make sure we don't lose the large sight on the big picture, right? So as we look into our performance in the first half of the year, so we were able to grow earnings per share by $0.34 as compared to last year. And so when you look into our midpoint of the range between $2.90 and $3.10, and as you compare to what we need to deliver in the second half is just a 3% increase in earnings per share, right? I know that gross margin and some of the infant formula, it's a big question on people's mind, but I want to make sure we put that in the right context…

Great. That's very helpful. I think you touched on a lot of points that I was going to get to in the follow-up, but maybe just confirming some of the building blocks you laid out in the second half to get to guidance. I think originally, you called for 60% of the EPS to come in the second half. It looks like a little bit more now. Maybe just talk about the visibility that you have in some of the building blocks you called out earlier to get there despite the top line coming in a little at the low end of the range. Anything you can add just in terms of actual...

Yes, I just want to address the point you said that we don't agree with. The EPS requirement for the second half is exactly in line with our guidance. It is not an increased burden in the second half. It's being executed per our financial plan and our financial guidance. But to go into a bit more detail on the other part of your question, Eduardo?

Yes. So on organic sales, right, so second half versus first half, it's high single digits that we expect. We don't expect significant contribution from CSCI, because you know CSCI last year had a strong position. And because also we have the divestments that are lapping significantly in the mid of this year. We do not expect significant change there. The majority of that growth comes from CSCA and 75% of the growth is coming from OTC, right? It's all about the new contracts, the wins versus losses, which, remember, it was a negative impact in the first half of this year, and it's going to be a positive in the second half. So you need to consider, in total, it's a significant amount of growth in the top line we expect to see in the second half. Second, cough and cold season assumptions as well. Remember, last year, we had a very late start. So we are assuming that we should see a pickup there. And all the demand generation activities that Patrick highlighted and focused on the velocity and all the partnerships, like the example he gave on allergy, and we're looking to similar ones in other parts of the OTC business, give us the confidence we're going to be able to deliver on that. And the remaining 25% comes from Nutrition. And again, it's basically those 4 points that Patrick mentioned, it's the 20% of the remaining SKU, it's the ramp-up of the 80%, it's all the demand generation activities that we're doing and making sure that we have the promotion of what they need. When we look into gross margin, in the first half, we delivered 39.5%, right? And one thing that I don't know if it was exactly clear in my comments, but we planned…

And your next question comes from the line of Susan Anderson with Canaccord Genuity.

You talked about taking strategic pricing. I guess maybe if you could talk a little bit more about what that will look like? Will it be across both the branded and private label OTC? And then I guess in private label, I'm just curious the conversations you're having with retailers around potential pricing. I guess, are they open to kind of increased prices there?

Eduardo here. Your question is mainly related to the impact on tariffs, right? So again, as we mentioned, for this year, we expect a small impact between $10 million and $20 million, mainly in the fourth quarter of the year. But we're having very good discussions on both OTC and Oral Care, and the impact is evenly split amongst those 2. Some categories are very clear and customers are accepting that. Sometimes they challenge on the volumes of the business. But so far, we're pretty well on track on our expectations to fully offset those impacts, not only this year, but also next year. And remember, about 2/3 of that is going to come from pricing actions and the remaining are related to supply chain, either in sourcing or other actions that we're taking.

Okay. Great. And then I was just curious on the private label side. Are you seeing any accelerated pace of kind of consumers trading down to private label at all? Or is it kind of pretty consistent with what we have seen in the past?

I think it's fair to say we have seen an acceleration. Store brand OTC is gaining share. We're gaining share of store brand OTC. We're seeing volume and now units accelerating as well. And the important point here is typically 70% to 80% of consumers, once they do move into store brands stay with store brands. So think of that as an annuity going forward. They get exactly the same, obviously, medical benefit for significantly better value. So we are seeing it. We are seeing and partnering with retailers to continue to invest and grow household penetration of the store brand OTC. I think the allergy program that I referenced in my comments is a very good illustration. And we have multiple similar efforts now being developed through execution in cough, cold into '26. We talked at the last call about this demand generation effort. I committed to give some commentary on that. We will see about $20 million of revenue that we're seeking to target, which will help us maintain sales in light of some category contraction and a multiple of that going into '26. Now that all needs to be part of our financial stewardship, of course, as we look to deliver margin and EPS expansion. But we've put a lot of effort into this incremental demand generation. I'm pleased with what I'm seeing. It's new work for Perrigo. It's new work for a lot of our retailers, but it's having a meaningful consumer impact, and we will continue to expand that.

Okay. Great. And then maybe just a follow-up on the previous question on just kind of like the back half, but more focused on the top line. I guess I'm just curious on, I guess, the step change in growth to the back half. I don't know if you can kind of parse it out by order of magnitude kind of the change. Is the biggest change in growth coming from infant formula, the private label OTC gains? Or maybe if you could just kind of expand on that a little bit.

Let me give some real top line, and Eduardo with a bit more detail. It's a fair question. You'll see about 9% approximately increase in second half versus first half. The international business relatively flat. So very encouragingly, we're starting to see a step change in performance in the U.S., which has taken a lot of work and planning. Order of magnitude, about 15% increase in the second half versus half 1 for the Americas business. And to answer your question, about 75% of that actually coming from OTC. We've talked about net wins and losses in store brand contracts in excess of $75 million from there. The cough and cold season was particularly weak last year. So you'll see tens of millions of improvement on that. I just talked about demand generation accelerating store brand OTC velocity. That's north of $30 million. And then about 25% coming from the Nutrition and infant formula business as we see consumption ramp-up in new SKUs and demand generation activity kicking in as well. So it's fairly broad. It's mainly centered in the U.S. business, which has been a key focus for us in terms of improving performance, and that's starting to land in the P&L now.

Okay. Great. That was very helpful. And then maybe just one last question on Opill. I guess, any changes in your longer-term expectation? I think you had previously said $100 million over the long term. Now I think it's been kind of under your belt for about a year now. So I guess, any change there, any learnings from the brand just in terms of how to manage it going forward? And then also, do you plan to continue to increase the marketing there to increase awareness?

Thank you. Increasingly pleased with the performance of Opill. We'll double consumption this year. We're seeing repeat rates now of about 55%, which is exceptional. There is growing awareness, growing trial. Repeat, as I say, extremely high. So we will continue to invest to build awareness. What we've learned is there are very particular cohorts that this brand appeals to. And so we're much more targeted now in our media and our communication and our trial programs against those 4 cohorts, and it's working well. I think the team is getting increasingly good at the brand building necessary for those cohorts. We're at a point where we believe we can now start to roll out an O brand architecture. We have 2 or 3 active projects now in our innovation master plan to continue to build out comprehensive women's health brand under the O brand across critical life stages, lifestyles and key need states. So encouraging, and we continue to grow the brand. It was slower than initially anticipated or forecasted in bases, but I'm pleased with how it's developing. What it does show is we can successfully manage a switch. We're able to launch a new category and create new brands.

And our last question comes from the line of Chris Schott with JPMorgan.

This is Ethan on for Chris Schott. Just starting off on infant formula. I was curious if you could give any color on what led to the increased product scrap? And then from here, what's your level of confidence that this has been addressed and won't continue to weigh on margins going forward? And then one follow-up after.

Thank you, Ethan. As you know, we implemented comprehensive quality assured manufacturing. This was an isolated production issue. The product was out of spec. Our quality systems instantly picked up on that. We made the prudent decision to scrap. Nothing was released into market. We have done a full CAPA on that, adjusted some of our processes, as you would expect, and a continuous improvement in manufacturing environment. And we are very pleased with the continued levels of quality assurance that we're achieving. So to answer the question, it was one-off. It was caught. We took the prudent step to scrap, and I do see it as isolated. And most importantly, reaffirmation of the quality manufacturing we now have in place.

That's very helpful. And then with the updated expectations on the infant formula ramp for the second half of the year, what does that imply for the share you're targeting to exit the year at? And then how does that -- or does that cause you to rethink your long-term guidance at all?

I'll take that and then Eduardo will add any color. I think it's fair to say that it has been a slower ramp-up than we expected. We've stepped up some of our activity in terms of demand generation, looking at some of our packaging claims, as I mentioned. And there's no doubt we need to put more effort against rebuilding point of market entry. So we still have the same share ambition. It will take longer. So in terms of store brand volume, share, capacity requirements, et cetera, that's okay. The bigger question for us, frankly, is there's a lot of variability in terms of local branded share, what that is going to be on a going basis given the continued importation primarily of European organic products? What share of the market are they going to take on a long-term basis? Will the U.S. administration continue to allow importation of foreign product given emphasis on made in America and the quality standards we already have in our formulations as local manufacturers? That has some variability to it. And we need to continue to try to triangulate that capacity assumption and that has implications for capital, et cetera. But in terms of the primary part of our business, store branded formula, no change to our long-term outlook, and we continue to work through the dynamism that we're seeing on this foreign importation as a matter of priority.

And we have no further questions at this time. I would like to turn it back to Patrick Lockwood-Taylor for closing remarks.

Thank you very much. So as we continue to execute our Three-S Plan, Stabilize, Streamline and Strengthen, we are seeing tangible progress across key areas of the business. New wins in our store brand business have overtaken prior year losses. We've upgraded our brand-building capabilities, and those are delivering the results we want. We're scaling our commercial operating growth model, driven by strategic category and brand management with enhanced local commercial execution. This is accelerating and is proving its effectiveness as I hope we've given you some proof points on today. Despite a dynamic and difficult consumer environment, Perrigo's diversified portfolio of hundreds of molecules across all price points remains a source of resilience, enabling us to grow share in our most strategic categories and outperform the market very significantly. Looking ahead, we're reaffirming our fiscal year '25 outlook with strong operating income growth expected in the high single-digit range and EPS growth expected in the mid-double-digit range, even as net sales are expected towards the lower end of our guidance. We remain very focused on driving growth, deleveraging our balance sheet and improving free cash flow to net sales, all of which position Perrigo for long-term value creation. Many thanks for joining us today.

Thank you, presenters. And this concludes today's conference call. Thank you all for joining. You may now disconnect.