All right, good morning, everybody. Thank you so much for coming in. We have, we're happy to have Perrigo with us today. And for those of you who are unfamiliar with Perrigo, you know, we use their products every day as consumers. Perrigo is a major player in the branded and the private label self-care space. They make products like generic ibuprofen, allergy meds, even dental floss. Anything you really use in your daily lives, they, they likely make. And today we have with us the CEO, Patrick Lockwood-Taylor, who just recently joined the team about two months ago. And then we have Eduardo Bezerra, the CFO, and then as well, we have Brad Joseph from Investor Relations in the crowd. So thank you both for being here. And Patrick, I'd like to start with you.
Before we really get into the details, you just joined Perrigo, a couple of months ago. You came over from Bayer. Can you tell us, you know, initially, what excited you about the Perrigo opportunity and why you wanted to come over to Perrigo?
Yeah, sure. Good morning, everyone. Is this working? Can you hear me? Yep, very good. What excited me about Perrigo? So I've known Perrigo and competed against Perrigo for about 15 years, both in Bayer and as the head of consumer health in Procter & Gamble. And I've always respected them. High integrity, very successful in the store brand business, very high shares, good competitor. And then I've watched them over the last sort of decade as they sort of moved into generic Rx businesses and other things. And then obviously, more recently, as they repositioned themselves, I think very sensibly, back into eminently more profitable self-care business. And they're a unique model. I mean, tremendous amount of scale in their manufacturing, their innovation.
As a blended business, as you rightly said, of both store brands and national brands, Prevacid, Opill to come, and others, they can create a very unique model if they can really unlock this potential synergy between the store brand business and national brand business. Whilst they position themselves in self-care, there's now a lot of work to be done to become a world-class self-care company. A transformational opportunity is interesting.
Great, thanks. So the company has gone through a pretty big transformation, kinda going from the healthcare side to more the self-care consumer side. Now that that transformation is kind of complete, what's next on the agenda? You know, are you adjusting the products you play in? Maybe touch on that, and what are your goals for the company?
Yeah, obviously, with our investor community ahead of us, first, commitment is our 2025 growth algorithm, which we, you know, I've recently reconfirmed and I'm confident in. Continue with our deleveraging route, which I'm also confident in. So through, really, through 2025, I think, there is clear line of sight to the commitments that we've previously articulated. As we look beyond that, I think there's a number of things to do. Firstly, the theme you're gonna hear me refer to consistently is to consumerize the company. We've got to build our brand building, our digital capabilities, our ability to precisely target consumers, convert consumers. And so there is a lot of capability to build out.
I think the next area for us, we have to get clearer, and we owe the investment community, the organization, the board, a compelling long-term growth story, all right, that leads to sustainable growth and is clearly value-created. So that work is now underway, and we'll be able to share that in a few months. And I think the last is, you know, we're essentially a conglomerate made up of a large number of acquisitions, different organizations, operating systems, and that's inefficient. So moving to one Perrigo strategy, structure, operating model is also a critical aspect for us. So, a lot of work done, but a lot of work to do to operationalize and better monetize those assets we now have.
Great. And so you have confirmed your 2025 outlook and touched on that a little bit. But Eduardo, you know, this outlook includes mid-single digit net sales growth, gross margin, 40%, mid-teens adjusted operating margin, that's up to about 11% in 2022. You know, what gives you confidence in these targets, and what makes you comfortable here?
Yeah. So first, yeah, so, h ello, good morning, everybody. So, I think first of all, it's we need to deliver on our commitments, right? So we had three quarters of, you know, delivering on our commitments, you know, starting at the end of last year. So as we look into the second half of 2023, there are some things that I believe is gonna position us to achieve the short-term objective of our 2025 targets, right? So we talked about the nutrition business, right? So given all the new guidelines from the FDA, and the impact of that into our production schedules, et cetera, we were forced to increase prices. So we took, you know, significant price increases, that is starting to benefit us in the second half of this year. So that's number one.
The second piece there is, we continue to grow our HRA brands that we acquired last year. So now in the second half of the year, they become inorganic, and we continue to see positive growth in those brands, mainly in Europe. And the third one, with the recent approval of Opill. We're gonna have the first selling and positioning of product. That will help also offset some of the incremental costs that we have to build the brand, as Patrick mentioned. We see that as an opportunity for long term. And so I'm very confident that, with these actions that we put in place, we're gonna be able to deliver on our commitments for the second half of the year.
Great. And speaking of pricing, you touched a little bit on that. Can you talk about where you are with pricing actions? That's obviously a very topical thing in the consumer space right now, so I'd love to hear about, about how Perrigo is tackling this.
Yeah. So, overall, in the portfolio, we've been like, in the first half, about 5% increase on prices, right? So that doesn't take into account the price adjustments that we're doing on the nutrition business, that we're gonna see the benefit in the second half. But and we know that we are, you know, much below the national brands. So one of the key things that, under Patrick's leadership, we're pushing the teams to really revisit some of those assumptions and what we can do to really drive further pricing, you know, in the different categories, mainly the OTC in the U.S.
Mm-hmm. Awesome. And another thing that's been very topical right now, obviously, is talks of recession, and, you know, what's going on with the macro environment, how that's impacting various businesses. I do think Perrigo is very uniquely positioned to, you know, potentially benefit from a recessionary environment. So can you talk about how you're positioned, both Eduardo and Patrick, how is Perrigo positioned in a tougher macro backdrop, having the store brand products? You know, Walmart discussed this a little bit yesterday, too, of the store brand is starting to see greater uptake. So just discuss how that's benefiting the company and how you're positioned here.
Yeah, I'll say a couple of things, and then Eduardo. I mean, our, our brand, store brand business is split 50/50. So as consumers trade up, we gain. As consumers potentially trade down to better value store brands, we gain as well. There has been some interaction, okay? But I think the, the amount of volume shift from national brand to store brand is less than people expected, okay? So there is good opportunity to continue to trade consumers up and to move them to higher price points, and that's work that we're very much focused on. How do we give them better, better products that perform better at better value than they currently buy, either if they're in store brand or if they're in national brand?
Yeah, just complementary to what Patrick mentioned is, when you look into the data and compare national brand with store brand, you don't see much because of the price differential, all the actions that national brands took versus store brands. But from a volume standpoint, we're seeing a small increase going on there, and if you know deflation really start to play in a recessionary environment, we're very well positioned, you know, with our manufacturing footprint to serve our customers. So, it's very important now we're getting ready for the cough and cold season. So, last year, because of all the disruptions in supply chain, there were a lot of challenges to be able to really be ready for the season. This year, we're in a much better position because we're able to build back inventories.
Our service levels have increased significantly as compared to last year. And so, we do expect to be a normal cough and cold season, and that should benefit us in the second half of the year as well. And so that's where store brands, consumers really changing their behavior and trade further down, I think we're gonna be in a very good position to have our products ready for that.
Mm-hmm. Maybe discuss some of the supply chain bottlenecks you faced last year, and is everything fully improved? Are there still some things that have some improvement to go? Just talk about, you know, where you're sitting now versus last year.
We are in a much better position as compared to last year. So last year, there were different disruptions. So either on our oral care business, because of disruption of product coming from China, that was one that has been stabilized, normalized, so our service levels are very high. We're in a very good position there. Also, we had competition in terms of labor that was impacting our ability to really get our products out. The actions that we took in the second half of last year had a major benefit, you know, and we're seeing that, you know, into our throughput and output on our facilities.
So those short-term impacts that we saw in the last, those impacts over the last couple of years because of COVID and the reflection on that, I think we are in a much better position. The key thing is, we believe there's still room for improvement, and that's part of our supply chain reinvention. We believe there is an opportunity through that to grow our operating margins between 100 and 300 basis points, mainly by improving our portfolio, automation of our facilities, as well as how to improve our planning process with our customers. So a lot going on. It's a journey that we have communicated in our Investor Day, and we continue to make progress.
Great. And on the nutrition side of the business, there's been a lot of increased regulation around infant formula. Can you just discuss for the crowd who may not be familiar some of the challenges you faced with that regulation and what kind of costs you faced as you've navigated that?
Yeah. So after the Abbott recall last year, the FDA introduced what they called the National Strategy, which was basically a series of guidelines, but effectively requirements, that all manufacturers change their manufacturing processes, their sanitation protocols, their environmental monitoring, their cleaning protocols, et cetera. And that was a significant burden and cost, but well underway. Then they issued, very recently, a warning letter to three manufacturers, us included. There were no safety concerns, nothing really had changed, but it was a reaffirmation of the changes they wanted to see. Now, we've invested in those very precisely and are very confident that we will fully abide by that. And the FDA also said, encouraged parents to continue using infant formulas for babies and infants. So it was a surprise. It went to all manufacturers, and we are very confident we are fully implementing the intent of their National Strategy.
Mm-hmm. Great, thanks. Now shifting to Opill, and for those of you who aren't familiar, Perrigo just did recently get FDA approval for over-the-counter oral contraceptive, Opill. Can you just discuss, I mean, you've spent a lot of time on, on your investor calls talking about the market size and the opportunity, this means for Perrigo. Can you talk about kind of the market opportunity you have with Opill, the timing of the launch, and just kind of like where you see the the overall brand going?
Yeah. So it's very exciting. It's very important, and we're very proud to have got that switch. This will dramatically improve access for women for oral contraception, without the need for prescription, appointment, et cetera, and significantly help with unplanned pregnancy, okay? So, it's very good. We will start shipping the product towards the end of quarter four. It'll be on shelf by January of next year. We are deep into the consumer modeling. How do we most effectively drive awareness and trial? What does that investment profile? There is no doubt for a major new brand launch that it will be diluted the first 12-24 months. That's very standard for any brand launch. Market size, target population is about 64 million, okay?
And we need to confirm through the modeling we're doing at the moment, what is how quickly can you reach, and what is the speed of the conversion, and what are the mechanics to actually convert? That is new learning because it's a new category, and we're modeling that now. We will complete that, and that will give us an idea of potential market size, rate of market conversion, cost to do so, and size of potential market on an ongoing basis. So you're gonna have to give us a bit more time. The other question we always get asked is, "What's the shelf price?" We, of course, don't control the shelf price. That's at the sole discretion of retailers, but we think this will be a solid value proposition and a real game changer, and we're the first to do it.
I think the brand is O, okay? The particular architecture we're talking about now is the pill, and we want to create a mega brand that offers women support throughout their sexual journey. And so we will build out that architecture as part of this switch over time.
Awesome. Well, we're looking forward to it. And can you maybe discuss some of the retail partners that have been established for Opill and, you know, where we could find it on the shelves in general?
Yeah, yeah. Excellent, excellent. Actually, the retail support, and I was with Sam's and Walmart last week, and with Dollar General, later today, and I've met a number of our other retail partners. The support for this is, is blockbuster, as we call it, support. So you will see display, you will see all sorts of incentives, you'll see multiple placements, and it will be in the, you know, the, women's sexual health section within the stores, and it will be multiple SKUs, multiple facings, and very, very visible. Also, including is the sort of retail media, the retail sort of digital, and their e-commerce tools that they have, which are very sophisticated. This will be a full-blown mega brand launch, and I'm actually very pleasantly surprised and pleased with the amount of retail support we've been able to garner for this.
Yeah, wonderful. Well, we're very excited and it is very instrumental for the broader healthcare and consumer space. So very excited for that. Turning to a different topic, yesterday, you did announce a new EVP and President of the Americas division, Catherine Schmelter. Can you talk a little bit about what she brings to the table, what made you want to choose her to lead the group, and where you see that side of the business going with her now on board?
Yeah, excellent. So yeah, my first major appointment, an extremely important one. Eduardo also interviewed her, so I'll let him add some commentary in a moment. But as we look at the opportunities. So I've talked about we want to drive disproportionately our branded business. Our store brand business is our scale asset base to enable, hopefully, more success with our branded business. It's very rare to find people who have run both store brand businesses and national brand businesses. She has, in TreeHouse. It's very rare to find people who even more so have been able to synergize that relationship to create incremental value, where she has. As we go forward, we will be looking at our global portfolio. We want a global portfolio that's more scalable, more profitable, faster growth rate, and we want more global brands.
She has also done, as a Chief Transformation Officer of TreeHouse, significant global portfolio adjustment. So if we look at the critical jobs to do to accelerate growth for her, she's done that work and done it extremely well. So it's a very rare skill set. She also happens to be, you know, culturally a great fit, is from the Midwest, very happy to live in Grand Rapids, so ticks a lot of boxes. But mainly, it's the work we've got to do to accelerate versus her skill set.
Mm-hmm.
Yeah, and it, you know, it's great because her experience through General Mills, Kraft, and TreeHouse, and she was the Chief Transformation Officer, you know, leading a lot of the changes in the profile of the company there. I think, you know, fits like a glove on this whole portfolio work and how do we consumerize the company. That's really the skill set that we need to take it forward.
Mm-hmm. Great, and then just a few minutes left. Lastly, you know, I would love to touch on cash and debt. Those are obviously very important things for investors looking at a company. So how should we think about your cash and debt levels going forward and your plans for use of cash?
Yeah. So that's a priority, you know, that we also laid out in our Investor Day, right? So one of the concerns that we had, and as we talked to investors last year, is, okay, we put all these transformations together, now we need to put that to work and monetize all these assets. And at the same time, how do we really reduce our leverage? So this year we're seeing progress on our EBITDA growth, so we're able to reduce from 5.5x to 5.1x adjusted EBITDA. And then our objective by end of 2025 is to get to around 3x.
So as part of that, one of our key elements is to pay you know the majority of our $700 million debt that we have maturing at the end of next year. And so for that, we count on the whole you know business cash generation, but also some divestiture on non-strategic assets that came through those different acquisitions, and those actions are on track. So we feel confident that we're gonna be able to meet these objectives.
Great. Well, that takes us up to time. Thank you so much, Patrick and Eduardo, for being here today, and sharing more about the Perrigo story, and we're really looking forward to what's to come.
Thank you very much.
Thank you.
Thank you, everyone.