All right, thanks everyone for being here. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. Just before we get started, for important disclosures, you can see Morgan Stanley's website at morganstanley.com. And with that, we're very pleased to have Perrigo with us here today, including Patrick Lockwood-Taylor, President and CEO, and Eduardo Bezerra, Executive VP and CFO. Thank you very much for being here.
Thank you.
Today.
Thank you.
So first, Patrick, you've been at the company for about five months. You know, maybe just talk a little bit about your experiences before Perrigo and, you know, how that might apply here, and what made you excited about the opportunity at Perrigo?
Yeah, very good. Well, thank you for having us. So almost 25 years at P&G, worked four regions around the world, multiple positions across their famous matrix, and spent about 10 years in their personal healthcare business in Asia, globally, and in the US And then most recently, about five years in Bayer, two roles. I was running their consumer health business here in North America, and also was the president of their US business, all divisions. And then, why Perrigo? I've known Perrigo a long time. Particularly, it's from the manufacturing, they were suppliers to both Bayer and to P&G.
A stand-up, decent, high-value company that I thought really was a blended brand company, store brands and conventional brands, and as such, could create a unique model in self-care, comprising store brand and national brand.
Okay, great. Usually I start with the long term, but maybe let's start with a couple short to medium term questions here. Just with the cold and flu season upon us, your perspective on, maybe some of the w ith the volatility we've seen in the external environment, right? We're coming off of COVID a few years ago. Cold and flu season is volatile season to season. So just any thoughts around how you see that ramping up in the US and Europe. And also just your position from a sort of macro standpoint, given all the volatility we're seeing in terms of the consumer. That would be helpful to start there, maybe with some external-
Sure
-issues and how that impacts your business.
Yeah. I mean, firstly, on cough, cold, having been running cough, cold businesses for 20 years, the big insight is they are seasonal.
Okay.
That varies from year to year, and sometimes it's strong, and sometimes it's not, and you manage accordingly in terms of your spends, your inventories, and you know, just agility for cash. This year, we're coming off several extraordinary years, which were not representative. I think there's been a normalization. Last year, it was a big season, and it started very early.
Mm-hmm.
Okay? This year, we see actual incidents in line with projection, consumption probably somewhat tailing that. We're still very early in the season. The CDC had predicted that there would be a normal season, and it would start later, okay? We'll see. We'll see. For us, unlike others, it's not a particularly large part of our portfolio, certainly from a profit standpoint. Therefore, we are not particularly troubled. In terms of consumer volatility, there has been a little bit of trading down from national brand to store brand, some, and we have seen some recent uptick in store brand share, but not massively. In terms of disruption, of are they moving across different channels? Yes.
I think some retailers have seen an increase in foot traffic, others have seen declines, but it's the sort of reverse of what happened for 2 or 3 years during COVID. So again, no particularly big disruption, just normalization. Continued growth of e-commerce as it has been for 15, 20 years, so no particular disruption. So I'm not really seeing disruption as such, as really just sort of a lot of normalization. Self-care continues to grow, has very favorable tailwinds globally. You know, 3%-5% sort of growth across category. I think some categories, again, though, normalization, you know, vitamins, minerals, they declined slightly, but they're still significantly larger categories than they were pre-COVID. So I think it's not so much dislocation as normalization. Mm-hmm.
Okay. Given your mixture and brand portfolio,
Yeah
how does trade down impact your business short term, and how do you see that playing out as you look out over the next year or two? Any sort of tactical adjustments in strategy as you reconfigure to that environment.
I mean, I mean, we, again, blended brand. 90% or so of our business in the international business is branded, okay?
Mm-hmm.
A model market for us is the UK, which is 55% branded, 45 store brand. Grows very well, very attractive margins, and that's almost where we're sort of thinking as how we want to grow. So a disproportionate amount of our growth will come from, from branded. We're launching Opill soon, which I'm sure we're gonna touch upon. And we want to get to more global categories and more global brands going forward. For us, because we play across so many molecules, we're much less seasonally impacted. Nothing in our business represents more than 3%, so we're more insulated on that. And because we play in every price tier, we tend to be more insulated, you know, during these sort of economic downturns, or indeed, as disposable income then increases and consumers start to trade up.
Right.
We're really largely agnostic to that because, again, we're a blended brand company.
Okay. Why don't we talk about the Opill launch and excitement there, and you know, dimensionalize the opportunity for us and how you see that playing out over time?
Yeah. So, we're getting ready to launch. Production well underway, marketing qualified. It looks like a very good launch model, excellent retail support. This does create access to daily oral contraception for about 75 million American women, which is important and a huge audience, in a highly convenient, value attractive way. Okay. We see very good growth potential from it, of course. It's a net new category. We're the only brand. And really, it's how quickly we can build awareness and trial and just compress conversion, and that's the model that we've been developing. But it is only start of the architecture, because we do want to be a mega brand offering solutions across the women's sexual health journey.
Okay, from you know, the moment she enters into that category, all, all the way through to post-menopause, including fertility. So we will develop out a mega brand.
Okay. Maybe we can segue into just broadly, R&D at the organization. How you develop R&D, your process, the marketing side of things. We obviously talked about it in relation to Opill, but it'd be helpful to have some background there and how you guys sort of approach that.
Yeah, I mean, one of my surprises in coming into the organization was how enormous our R&D organization is. We have, probably globally, somewhere in the region of about 300 product development people, 300. A lot of that resource, particularly in the US, have been on fast following other innovation. And so as we move to be increasingly focused on building brands with consumer-preferred innovation, the big change to our process is consumer qualification, which is relatively straightforward, just to confirm that we are bringing superior innovation, that builds the category and the brand. But we have the resourcing and those technologies already in place. This is just an additional step to our development process. So, I mean, Perrigo has phenomenal assets that we need to repurpose in a most growth-oriented, more differentiated way, but the asset base is largely there.
Mm-hmm. And are you bringing changes to that sort of R&D innovation process or the commercialization of it? How are you thinking about that with-
Yeah, yeah. As we focus, particularly in the US and building brands, we will bring in brand-building capability. We will bring in digital consumer capability along with everybody else. Having done that a couple of times before, we know very good providers of that. We can build it out quite quickly. Obviously, in the US, as we increasingly go to branded, go to market, that is slightly different to store brand selling. Okay? And so there are a number of areas, you mentioned innovation, a number of areas where we are bringing in new capability and bringing in leadership that's more consistent with our future direction, yeah.
Okay. Let's talk a little bit about pricing, how you plan to manage that going forward. Obviously, there's been a multi-year period here of excess inflation from a CPG perspective in general. But, you know, maybe talk about strategically, how you think about pricing, where you think you're at in terms of key pieces of the portfolio today. Are you at the right spot? And maybe we can touch on the cost side of it, too.
Yeah.
which obviously is a big driver, ultimately, of the pricing you're looking to realize.
Yeah, yeah. Let me take a piece of that. It's you know, if you look into the portfolio, right? So on the branded side, which is, you know, 90% of the international business, we have been increasing prices year-over-year, consistently, right?
Mm-hmm.
So to keep up with all the increasing costs that we saw, you know, across the board, mainly in Europe, in, you know, utilities, oil, you know, different components of, of the portfolio there. So we have been being margin accretive, you know, in our actions there. When you look into the US, right, so there are three specific business units, right? So you have OTC, infant formula, and you have oral care, right? So in OTC, last year, we had around average 5%, you know, price increase. It's because there are some places that you're very competitive, that you had almost zero. There are others that you were able to get 8-10, so 5% around an average that we saw there in the OTC business a nd we continue to look that opportunistically, you know, in the different molecules that we, we participate.
On the infant formula side, you know, there's been a lot of catch up that we did mainly this year. You know, we were behind in some of the advancements on formulation, so this year we took 40% price increase to deal mainly with the changes in the regulatory environment that took place early this year, right? And keep up with the additional cost to manage the portfolio. And the oral care, similar to OTC, we have been looking. You know, we have a branded portfolio that we're able to increase prices and the store brand a little bit more competitive. So, we're gonna continue to look into that and see, okay, how much more opportunity we have there to price.
But the positive side, like in oral care, we're seeing costs receding because mainly a lot of those imported products from China. You know, on the US side, logistics and other stuff have been receding as well, so that's helping adjust also our average margins to a positive extent.
Okay. And, I guess as you think out long term in terms of pricing, what goes into that decision? Is it more costs, that drive it? How important is the retailer dynamics in that decision or consumer elasticity, and what have you learned in recent quarters as you've had some of that, higher than typical pricing?
Yeah. So a couple of things. I speak to the short term, and there is this second component that's more what Patrick is alluding to: how do we consumerize Perrigo, right? So, the first thing is how do we make sure that, as we look into our overall margins, we have a target to get back to 40% by 2025. So this year, we're growing more than 200 basis points, you know, versus what we had last year. So we're pretty well on track and the different initiatives to get our margin up. I think long term, the key thing is how do we look into these blended branded portfolio?
To really look into, okay, where can we bring incremental pricing to the equation, either through our branded side, store brand, but even opportunity in certain categories to position into a kind of a mid-tier, you know, portfolio there. Because if you look today, the price differential of the national brand versus store brand has grew significantly over the last three years. And so there is a real opportunity to have a mid-tier product that will bring more value not only to us, but also to the retailers. Because, you know, a nd it's something that we believe Perrigo can do and we are doing today. So for instance, the example Patrick mentioned about the UK.
The UK, we have store brands, we have our equivalent mid-tier brand, and we have the national brand, and that's a very, you know, profitable business that year-over-year, we're able to grow the top line and improve our margin. But I don't know, you want to talk more on the long term on pricing there, Patrick?
I don't think I have much to add. I mean, we believe that we bring a lot of differentiation with our store brand business. We need to get better at that story, and we continue to think, we should command more value in that particular piece of the business. So that's what we're focused on.
Okay. You talked about some of the pricing in infant nutrition. Obviously, there's been some volatility there. You talked about it on the last earnings call. Can you just give us an update on your thought process on that business and some of the volatility that we're seeing?
Yeah, we continue to manage to stabilize it. It's gonna be a few more months before that business is in steady state with the right level of sort of safety stocks. Because we supply so many store brands with different SKUs, our SKU count is much higher than some of the branded competitors. Therefore, the complexity of us in managing line changes and all the new cleaning protocols is just exponentially greater.
Mm-hmm.
It's been, it's been slower, more complex, and we're not out of the woods yet.
Okay. Great. Well, shifting more to the long term. You know, you're a player in sort of a land of behemoths to some extent. We just spoke to a new friend on the block, a couple of meetings ago in Kenvue and other larger organizations, and in theory, some may be splitting off down the road here. So just maybe talk about your sort of special sauce, you know, sweet spot as an organization, how you sort of manage through that, and how you think about driving outperformance in your business versus some of those larger competitors.
Yeah, I mean, we produce about 62 billion units a year. That, by far away, is the most.
Mm-hmm.
We have the most number of SKUs. If you were to add up some of our competitors, I think we have more SKUs than the top four combined. The point being is our secret sauce is how broadly we play.
Mm-hmm.
We compete in about 300 molecules. Okay? Our competitors are competing in a fraction of that. We're also the only ones who compete in every price tier. So the secret sauce that we have really is our scale. The challenge for us is to get that scale into things that are more meaningful for consumers, and create a more sustainable growth model for ourselves, and that's the work that we're currently doing. But a lot of our competitors are very strong in a small number of categories.
Mm-hmm.
Okay? Particularly within the, you know, OTC space.
Right.
We have incredible volume share relationships with some of our largest customers. Amazon is something like a 70 volume share. Walmart is t hese are huge relationships that we have. And how do we serve them better, the consumer better, using all these incredible assets we have in order to create a more attractive investment opportunity for Perrigo?
Mm-hmm. Okay. And how are you sort of providing value to those retailer partners? How do you use your scale across categories, right? That broader product offering across categories versus competitors. Maybe talk about how you use that to your advantage and, maybe how you think about it a little differently coming in and running the organization than the way it's been historically or maybe not.
Yeah. So I mean, I've worked for two of the so-called behemoths.
Mm-hmm.
Actually, our US business as Perrigo, I think is slightly bigger than those two behemoths, or two of the behemoths. I've been very surprised at the strategic relationships that Perrigo actually has with some of these big retailers. We're invited into discussion on long-range planning at the category level, that I've not been a party to before. We're exploring consumer opportunities because we serve them to better serve consumers according to what they want to do, as opposed to, "Here is my brand development plan that I sell to you," okay? So we enjoy a much more partnership than I've experienced before. My relationship before has always been, how do I best sell my brand? This is, how do we craft the self-care category together using our asset base to help them with their strategies?
It's a different, it's a different type of role than I've experienced, and I think one that we will continue to build out.
Okay. And as you think about long-term growth profile, which areas are you most excited about? Could be geographic, could be brands, product categories, et cetera. However, you guys would sort of dimensionalize it, thinking about long-term top-line growth, what are the biggest growth opportunities for the company? And maybe, you know, under your leadership, what's sort of changing in terms of focus versus where we were previously?
Yeah. Obviously, the most immediate opportunity for us is Opill, okay? And so entering into women's healthcare in a meaningful, expansive way. We are increasingly focused on a narrower range of brands that we think have global application. So you will see disproportionate focus and spend now on driving our branded portfolio here in the US and in international. And paring that down, we have to get more focused. So again, it will be a narrower portfolio of brands and a narrower range of categories with world-class brand-building capability that we need to build out. But really, the thing that gives us scale is the store brand business. That will always be an important part of us, and that's what allows us to work more strategically with customers. Again, the UK is a great example.
55 branded, 45 store brand, outstanding partnerships, sustainable growth, value accretive growth. That really is the model that you need to probably be thinking of for Perrigo in the future.
Okay. And how do you see that mix evolving over time? Maybe getting down into a little more detail of geographic, right? The answer is different from a geographic standpoint. And how do you think about the margin implications also of that?
Yeah, I mean, so basically, we're a European and US business essentially at the moment. Within that, there are, obviously, the US is critical, the UK is critical, significant business in Germany, and in Southern Europe, and a fast-growing business in Central and Eastern Europe. So they really will be the core geographic focus. No plans at this stage to expand south or east. Okay, we have abundant opportunity here. And we are very focused on managing for cash and margin and expansion. I'm less concerned about rate of revenue growth. It is the quality of our current revenue that I'm focused on.
Okay, that's helpful. Maybe we can turn to capital allocation-
Mm-hmm.
- priorities there in general. Is that shifting at all as we think about priorities from here?
Yeah. So, so there are mainly three major areas of focus that we outlined in the Investor Day, the beginning of this year, right? So, first of all, how we deleverage our balance sheet, right? So we were at 5.5x, and we have objective to get to 3x by the end of 2025, and we have clear plans on how to do that, and they have been tracking pretty well there. The second piece is reinvesting in the business, right? So, we did certain acquisitions recently, and there are some investments that come through that, you know, mainly on the infant formula business to increase capacity to be able to meet our volumes and our targets there. And the third piece is, you know, returning value to our shareholders, right?
We're looking to these, and we brought some new thinking about that. You know, on a yearly basis, we return about $140-$150 million through dividends, and we're looking to, as Patrick said, how to make sure we focus the capital allocation to get to the best total shareholder return there. And of course, as we think about how do we build these capabilities and narrow the portfolio going forward, there may be opportunities to expand in certain categories. But most likely it's gonna be more on bolt-on, you know, acquisitions or switches. You know, I know Patrick has a long history of that and great experience there, and Opill is a great example through the acquisition of HRA, and there are a couple of others that we are building up.
Those three things are the most, most relevant ones. You know, investing, getting our deleverage down, and return value to our shareholders, so. We're doing that on a holistic way to make sure that, our pipeline on innovation. You know, one of the things in Europe, we have today a very decentralized business. How do we extract the higher margin, operating margin from that business is a key priority for us as we're looking to that as well.
Okay. And how do you guys think about reshaping the portfolio over time, either through M&A or divestitures? Do you expect that to be something that's significant or, or more moderate and, and not a big focus?
It's a core focus. We're looking a deep dive in portfolio now. I would expect we will narrow it, both, categories and brands. And then at some stage next year, be sharing what are those global assets that we're looking to drive. And then with time, I expect us to be, you know, divesting certain businesses as well.
Okay. We talked a little bit about innovation process earlier. Can you talk about expected contribution? Obviously, Opill is one big launch, but just holistically, as you look across the organization over the last the next few years versus the last few years, how do you think about innovation contribution?
I think about it a lot. We're in a CPG category. We were historically in the US, a fast follow innovation, so we now have to get to consumer leading. That expands the category, the brand, our share of it, and that does mean a lot more consumer. At the moment, with a combination of sort of refresh and new to world innovation, that is approximately $300 million a year. I would expect that to continue going up with the contribution from new innovation as opposed to refresh innovation, increasing of that. I think probably we would expect 40% of our annual growth-
Yeah
to be coming now from innovation. I think historically it's been probably more in the 20.
Yeah.
And I think the key thing is more focused innovation in big bets rather than. Because one of the biggest, you know, complexities of the large portion of the portfolio in the US, as well as the multiple brands in international, you dilute a lot the focus, so we have been focusing a lot on how do we reduce the tail so that you can invest more in the big bets of what are really gonna be, I wouldn't say disruptive, but what's really gonna give you the highest return on that investment. So that's a key component of the capital allocation that we're doing internally as well.
And more of our innovation coming from switch continues to be very value accretive for all stakeholders, including shareholders. It's a very good cash return, typically, and so we will be looking at more switch.
Okay. And it sounds like there, you know, could be a narrowing of the portfolio over time. Are there certain areas you're looking to move into over time, or are you comfortable that you have sort of this broad offering, and it's more about narrowing it down to core choices and really driving growth in, in that piece of the business? How do you think about that?
It's the latter. There are some very obvious places. We have a very good business in sort of what I call damaged skin. That's, you know, Mederma company. These are great brands. We obviously have a very good OTC business in core categories. The NRT business, we actually do think is a part of self-care, is a great alternate to smoking. That is a large business for us internationally as well.
The women's health.
And of course, women's health, which will be one of the fastest growing parts of our portfolio. Those are almost obvious choices for us.
Okay. And coming in from the outside, are there organizational capabilities that you really want to beef up? Is there, you know, levels of spend in certain areas, headcount, infrastructure, whatever it may be?
Yeah.
Yeah, help give us some insight maybe on-
Yeah
some of the areas that could use a bit more investment or even just broader-
Yeah
-changes execution-wise.
So the first thing, we have a large, quite complex organization, so this isn't about finding new money. This is actually about simplifying our company and allocating our resource to re-resource that we think will help consumerize and digitalize the company. So given that, investment in brand building, you know, from top to bottom, obviously digital, and all aspects of that, in innovation, consumer insight, design, really anything that just locks onto brand building, which I've spent 32 years doing, and we will build out quite quickly. But this is about spending less, streamlining an organization, but having more fit-for-purpose capability going forward.
Okay. Is the bigger payoff in terms of ultimately yielding greater top-line growth through execution? Is it more about their savings as you do this? How do you think about that conceptually?
Yeah, I mean, I'm much more focused on the internals, right? So growth, gross profit, OI expansion, free cash flow. Free cash flow as a percent or yield. This is what we're more focused on. Absolute growth, I think we will see much more growth from certain brands, and then as we execute our sort of portfolio, that will then drive overall growth rate as we exit certain businesses. I'm much more focused on the quality of earnings.
Okay. And maybe we can tie that into valuation, right? You're coming in as an outsider. You've obviously been at some of these larger consumer organizations over time. You know, in public markets, you can see some of the higher multiples that some of your peers set. So, I guess your thoughts on sort of opportunity there, that's partially our job instead of your job, but your perspective on how you see that and maybe how that ties into some of the strategies that you're installing at the organization.
Yeah. So what I hear from our investor base, and then I'll hand over to Eduardo, because he's much more experienced on this. Get to operating reliability consistently. I think we've largely sort of checked that. The second one is show a sustainable growth path that believably gets you to about a 20 OI. That seems to be the magic number, okay? That is uniquely you and is done in a sustainable way. It's not about, you know, trying to acquire into that, if you will. That is the work that we're currently going on.
Mm-hmm.
Later next year, we'll sort of share with investors what our pathway to that is, as we conclude our portfolio analysis, et cetera, demonstrate some of the capabilities we've brought in, and of course, look at OTC, which, you know, internally is much more profitable, obviously, than the balance of the business in the US, as you would expect. So it seems to be that, what's the sustainable pathway to 20 OI that sort of starts to get you into sort of CPG known performance, okay? Less focus on extraordinary revenue growth, but again, quality of revenue growth, if you will.
I would just,
Mm
Add to what Patrick said, is achieving that objective while, you know, you get your balance sheet.
Yeah, delivered
In great place, you know, you're deleveraging, and that will enable you to translate into a higher cash flow generation. So that really is gonna allow you to make other, you know, capital allocation decisions, right? So how do you fuel continuous growth in the key categories that you believe you can still consistently deliver, you know, top-line growth at a 20%, let's say, OI level, right, or range? And then, you know, what is the cash flow generation on each of these businesses? Some are more capital intense. The others may have some more working capital requirements, so you need to balance that in a way that you optimize the equation to improve your cash flow generation there, and that will make us translate that into a different valuation for the company. That will put us-
And related to that, how are you translating that into a more TSR-driving capital allocation strategy as well? So this is what, quite literally, the work we're going through now.
Right.
So no, no great surprise. Improve your margin-
Mm.
improve your cash flow and translate it into an investor-friendly capital allocation.
Right.
Right.
Ever heard this before?
Sure. Short list. And that 20%, you know, magic OI or operating margin number, what are the key drivers as you look out to get there? How do you, how do you think about that over the next few years here?
Yeah. Remember that, you know, we laid out our plan to get to about 15%-16% by 2025, right?
Mm-hmm.
So that's based on our supply chain reinvention, HRA acquisitions, synergies, and some base business growth, right? So Opill is not there. First year is dilutive, but that's gonna be incremental over time.
Right.
Also, we're looking to how we optimize our cost structure, you know, and get more operating leverage there. And then from that point on, as we look forward, is, okay, how do you bring a consistent branded business on top of what we have today that will drive, you know, incremental value at a much higher margin, at the gross profit, without having to add too much, you know, structural cost? Of course, you're gonna need to invest in A&P and innovation, but you're gonna have the right cost structure set up so that you have even higher operating leverage, bringing that to your bottom line. So that's really, you know, the plan to get from 15, 16 to 20, you know, so.
Great. Well, that was very helpful. We appreciate you guys being here. We're just about out of time, so we'll end things there. But again, thanks again for coming.
You bet.
Appreciate it.
Thank you very much. Thanks for having us.