Good afternoon, everyone, and thank you for attending our conference. I'm Susan Anderson, one of Canaccord's consumer analysts in the space, and we're very excited to have here Perrigo and in particular, CEO Patrick Lockwood-Taylor and CFO Eduardo Bezerra. I'll turn it over to Patrick to say a few comments about Perrigo, and then we can go into Q&A.
Thank you, Susan. Good afternoon. Can you hear me okay? Yep, thank you. I wanted to just spend a minute just explaining a little bit about who Perrigo is, how we're positioned, why we're excited about the self-care market. So, as you all know, the self-care market is huge, over $400 billion and growing quite nicely. Very favorable consumer tailwinds. We play across the different price spectrums in the international and the American business that we have. And so a lot of consumers rely upon us for their self-care needs. Actually, we've probably got the highest household penetration of all self-care companies. More than 80 million households in the U.S. purchased a Perrigo product last year, and about 150 million, including our European business. I've been here for about a year now.
Spent a lot of time, assessing the organization, the portfolio, the competitive landscape. I think that this is a strong company with a good asset base, but we need to reimagine what we need to be doing with that asset base to drive performance. So we've started the work to consumerize our organization and really been focusing on getting clear on what's the right leadership, culture, capabilities we need, the portfolio that offers the most potential for shareholder return and growth of that. The operating model that we need to run the company as one company, remembering we're a product of about 14 transactions. Getting very clear on how we drive growth and value creation from our U.S. store brand business, and how we create a more efficient asset base.
We do actually have a large number of growth pockets or growth vectors, both in the U.S. and our international business, and we're getting clearer on how and when we launch those across our business in order to drive revenue and EPS. You'll be relieved to know we are on track for a very strong second half EPS performance, with our first half bottom line meeting expectations. We had a lot of remediation work to be done in our infant formula business. That has gone extremely well. It's ahead of expectation, and we improved significant gains in profitability in the second half and of course, into 2025. This is the first year in many years where our contract gains and our store brand business offset contracts that we lost, so we are outlooking growth in that critical, huge business.
Our gross margin is performing very well. We're on track for 40%. Initially, we had outlooked 40%, excluding our infant formula business, but so good have our cost initiatives been that we're actually now expecting 40%, including the impact of infant formula. We remain, as you've heard me say many times, very focused on driving cash flow and delevering, and we're on track to achieve 3-3.2 ratio by the end of next year. So a business, I would say, that's getting increasingly focused and set up for better performance.
Great, that's exciting. Maybe if we could start off with the U.S. business, which is primarily private label. Maybe if you could talk about the private label business in the U.S., what you're seeing there. Are you seeing consumers trade down to private label? And how you see the growth trajectory for the business?
We're definitely seeing trade down. I think in the last three months or so, about 150 basis points increase in volume share, about a 60 basis point on value share. So, pricing and premiumization remains an opportunity.
Mm-hmm.
We are probably facing the most request from our retailers to drive household penetration, to invest and drive household penetration of store brand. That's a very profitable opportunity for them and an expansion opportunity for us. And we are seeing more retailers come to us based upon quality concerns they have from other store brand suppliers, because obviously, we manufacture in the U.S. and operate to very high quality levels. So we have a large number of inbounds. Also, we're convenient in that we sell over 300 molecules, so we're really the one-stop shop. So we're starting to see good momentum within store brands and our share of store brands.
Okay, great. Then maybe just sticking with the U.S. business and the infant formula business in the U.S., can you talk about where you're at with those plant remediations, which was caused by external factor of increased FDA regulation, but maybe if you could talk about how you're expecting that business to trend now that you're getting past that in the back half?
Yeah, I mean, that was a big intervention for us. We completed the remediations really by May. All three plants are in normal manufacturing mode now. We're achieving incredible levels of quality, compliance, and environmental, cleanliness with these new requirements. We're getting to production levels at or ahead of what we were achieving previously. So we're ramping up now in terms of production, in terms of re-pipelining, and we will be in going state in quarter four. So a big undertaking, executed extremely well.
Great. And then the other exciting part of the U.S. business is the Opill rollout, which happened earlier this year. Maybe if you could talk about how that has gone, what the consumer response has been and the consumer uptick, and, you know, I guess, how you see that product trending over the next several years.
... Yeah, a very good launch that is getting better. So we are shifting our media strategy to drive awareness even harder. We're getting very good awareness to trial, to repeat ratios, such as the nature of the category. Retail support, in terms of distribution, excellent, but we need more display, and we need more signage. It's a complicated category. Consumers need to be aware of it and educated through it. Also, as you know, a number of insurance companies have agreed to pay for Opill per normal insurance conditions, but there is a lot to be done to operationalize that in store, so we're doing that as well. So very good. It's now about approaching a 3 share of the total category already, and so we continue to see it as a growth engine for us.
Wow, that's great. Then maybe just turning to the European business, which is pretty much branded product, maybe if you could talk about the trends there and why it's less susceptible to private label versus in the U.S.
Yeah, private label is underdeveloped there in many of the markets because they're very fragmented, so it's difficult for these retailers to achieve the sort of purchasing thresholds. We continue to see good growth through the first half of the year, sort of mid-single digit with OI expansion, which is encouraging. In our larger markets, we're growing disproportionately, and probably our strongest market, which is the U.K., which is where we have our largest store brand business. They are doing a very effective job, really growing at the good, better, best price points with really good innovative solutions for consumers and customers. So that really is our model market. So I think we would say the international business on all metrics is performing extremely well.
Great. And then maybe just getting into some of the cost savings that you guys have laid out, the supply chain reinvention program and the SKU rationalization program. Maybe if you could talk about where you're at with that, what's that, what's that gonna do to the P&L, and, you know, kind of the timing of that being complete?
Yeah. So, we started the program a couple of years ago, so we started last year to see some of the big benefits. So to date, since the start of the program, we realized $63 million of savings, so about 40 basis points of margin improvement last year and 30 basis points this year. So we're pretty well on track to deliver our gross savings expected between $100 million and $120 million, until the end of the program, at the end of next year. And from the SKU rationalization standpoint, we have completed that in the second quarter, so we're really now focused on the other verticals, how we continue to deliver on the savings and improvements in our operations, across both CSCA and CSCI.
Okay, great. And then maybe if you could also give us an update on the HRA synergies and also Project Energize and how that's gonna flow down to the bottom line, and then maybe your longer term EBIT margin projection.
Yeah. So on the, on the HRA side, so last year, we delivered $30 million of synergies, but because we're doing the one-time distribution transition, that was offset by that. So this year, we're delivering incremental $25 million, and that's when we expect to, to complete all the synergies from the HRA. Regarding Project Energize that we announced in the beginning of the year, we expect the program until 2026 to deliver between $140 million and $170 million of savings, of gross savings, and then we have, reinvestments to be done between $40 billion and $60 billion. So to date, we delivered on Project Energize more than $50 million of savings on the program we launched at the end of the first quarter. So great accomplishment from the whole team, really putting emphasis on that.
We expect the majority of the savings to be realized this year as we continue to reinvest in building capabilities to really transform one Perrigo, you know, and so how do we bring both CSCA and CSCI in a unified way in terms of systems and standardization? And then look into the overall margin. So from an operating standpoint, we expect to... We're on track to deliver between to get to 14%-16% by the end of 2025. So we're on track to deliver on those improvements that we mentioned between 400 and 500 basis points since we launched that at the beginning of last year.
Great. And then I guess just looking out over the next 3 years, you know, from what we see, there's a lot of growth drivers between the infant formula coming back, Opill, the brands in Europe. I guess between all of those, where do you see kind of the biggest growth drivers over the next 3-5 years?
Okay. So I think it's, first of all, making sure that we deliver on our commitments and continue to delever the balance sheet.
Mm-hmm.
So we're really focused on improving our margins as well as achieve our deleverage commitments. So as Patrick mentioned, we expect, you know, at the end of this year to get around 4 times-
Mm-hmm
... and next year to get a little bit higher than 3x. But as we look into opportunities beyond the next couple of years, it's how do we improve the mix between store brand and branded?
Mm-hmm.
So today, 60% of the business is store brand, mainly because of the Americas and the U.K., and 40% is branded. So the opportunity to really grow the branded portfolio, that should translate into higher gross profit margins and flow through on the bottom line.
Mm-hmm.
So that's a big opportunity that we have there, aside from the recovery on the infant formula that we expect to take place in, starting in the second half of this year, but we should see the full benefit of that next year.
Okay, great. And then maybe if you could talk about your brand innovation strategy and how you think of, about rolling out new products for your existing brands that continue to drive growth there.
Yeah. So we just appointed a new head of global innovation. She has strong CPG background coming from L'Oréal and Colgate, and her brief is really quite simple, which is create bigger, more scalable innovation. Looking both at our branded products, we, we want to get consumer-preferred innovation in order to drive consumer-preferred brands, and we want to apply it to as many brands in as many countries as possible. Store brand innovation is important. Very often, we can offer formulations that are, you know, better than national brand, and that's a key part of our strategy for premiumizing store brand, especially in the U.S., and driving mutual margin on that. But also driving household penetration of store brands, because obviously, that's economically in our interest.
So we are seeing a bigger value in our next three-year pipeline, with improved rates of return and significant margin accretion.
Great. And then I guess within the U.S. store brand, there has been some inventory rationalization among retailers there. Do you think we're past that, the inventory at the store level is in pretty good shape at this point, or are there certain categories that still maybe need to be rationalized a little bit?
So I think there was a reduction in inventory as a response to the cough, cold seasonality. It was quite a weak season, ditto with allergy. I'm not hearing or seeing of any further destocking, and we're getting ready now to stock up, obviously, for cough, cold, et cetera. That looks to be quite aggressive at the moment. And if I casually observe, in a lot of stores, there was quite a lot of out-of-stock, you know, 6-8 weeks ago. So I think you will see a response to that. Service levels are important. So I say, without 100%, predictive ability, that I think that's behind us.
Okay, great. And then I guess as we look out to the back half of the year, you know, pricing, and it, it varies by private label and brand, but pricing had been a big driver, more for branded products than private label. I guess, how are you thinking about pricing, maybe in your European business and in the U.S. business, versus volumes as we head into the back half and into next year?
Yeah. So I'll give some commentary-
Mm-hmm
... and then Eduardo will have some additional perspective. So we took about 7% pricing in Europe this year. That's landed quite successfully. We took a lot of pricing last year in infant formula. Obviously, that was disrupted because of the remediation, but we're starting to see the impact of that now flowing through. I think you've probably we will be taking additional pricing in infant formula next year, given the remediation and the cost of now competing in that industry. But I think you've seen price stabilization. I think you're seeing rollbacks from some of the national brands, many of whom increased pricing 20%-40% over the last couple of years.
But we are seeing, as I mentioned, a lot of retailer interest in growing store brand household penetration, both as an economic reaction from consumers, but also an economic necessity for our retailers, just because they make more margin, significantly more margin on store brand. But I think pricing, generally speaking, has probably plateaued now.
Yeah. No, no additional comments there.
Okay, great. Then maybe just going back to the infant formula business, you know, as you guys kind of restock the shelves, do you think it's gonna be an issue getting market share back, I guess? I know a lot of the branded competitors as well have had some issues, so maybe that's gonna make it a little bit easier. But maybe just talk about kind of, you know, that ramp back up of revenue and, you know, if you see any kind of roadblocks in terms of getting that share back.
Well, so first of all, the role that the store brand takes in the whole infant formula business is quite critical, right?
Mm-hmm.
Because of the price differential between the national brand and the store brand in the 25%-30%, you know, is so critical for consumers at this situation, you know, to really be able to have options-
Mm-hmm
... now. Historically, the share of store brand has been 10%-15%-
Mm-hmm
... on the overall market. If you exclude what's called the WIC market-
Mm-hmm
... you know, all the U.S. program on women, infants, and children, that represents about 50%. So the share of store brand has been between 20%-30%.
Mm-hmm.
We believe that it's, you know, consumers want even more in this situation to see store brand products in the shelf.
Mm-hmm. Okay.
We want to make sure that we're gonna have the product at the right time there.
Mm-hmm.
One thing that's gonna be also very important as we look into 2025, as we stabilize our operations and make sure that our quality release is on track, how do we build finished goods inventory to avoid any kind of, you know, hiccups in supply do not impact demand.
Yeah.
That's something that over the last two years, you know, all companies have depleted that safety stocks.
Mm-hmm.
And so now it's time to build that back to make sure consumers will not be impacted by any changes or regulation or further compliance actions from the FDA or any other measure in the industry.
Okay, great. And then you mentioned getting your leverage ratios down close to 3x by the end of 2025. Maybe if you could talk about, at that point, your capital allocation strategy. Do you think, you know, you're in a position at that point to maybe make some additional acquisitions? You know, would you like to add more brands to the portfolio, or what categories would you be looking at?
Yes. So that, in combination with a streamlined portfolio, gives us some major capital allocation decisions. We will look at all of them in terms of what's right for the business, for the long-term sustainable growth, what's right and best in terms of shareholder return. So I think for us, the big levers to consider is: Do you consider further deleverage? Do you consider investment against organic opportunity, of which we have plenty? And probably the third big factor to look at is share buyback, and what role can that play? But we will look at all of those with, you know, long-term shareholder interests in mind. But undoubtedly, there is a major capital allocation opportunity ahead of us.
Okay, great. Are you seeing a lot of opportunity just from a M&A perspective out there, as maybe some other larger companies look to shed some brands?
Highly selectively. We've done major acquisition. This is a time for us to get to consolidation of those assets, streamlining those assets. We're always looking at, strategic opportunity, be it a certain technology, a capable, a capability, or a brand in a certain area that we think has significant scalability potential and is consistent with our portfolio choice.
Okay.
Really make sure that, you know, we get the balance sheet in the right-
Mm-hmm
... situation, right?
Yeah.
Also, not only from a leverage standpoint, but how do we optimize our asset base, right?
Mm-hmm
... with working capital, the opportunity to further streamline how we operate today and free up more cash.
Mm-hmm.
That's gonna be very important over the next 2-3 years, how do we operationalize that?
Okay, great. And then it looks like we have a couple of minutes left. I have one final question that I'm asking all of my consumer companies, and that's really around the consumer. You know, what's your take on how healthy the consumer is now versus a year ago at this time? And then also, how do you think about, you know, consumer spending as we go into the back half? You know, do you expect it to slow further and into next year? And I think you guys are unique in the sense that you kind of get a look from both a branded and a private label perspective.
Yeah, I mean, you know, we're sort of insulated from economic downturn because, as you rightly say, we have such a high share in store brand business. I see no reason why the trend of movement to store brand won't continue. Typically, when a consumer goes to store brand, they don't go back.
Mm-hmm.
They realize it's as effective, but is at a significant value discount. So that's good for us. I've seen nothing to suggest that conditions will significantly improve in the very near term or, really, if I'm honest, that they will significantly worsen. So I do expect volume share for store brand to continue, and I do expect national brands to be more aggressively price promoting.
Are you seeing any differences in spending in your international markets versus in the U.S.?
I think it's held up slightly better in Europe than it has here. We didn't see the trend, but in part, that's because store brand is nowhere near as developed there, outside of the U.K., as it is here. I have seen an uptick in incidents already of cough, cold, often related to small spiking in COVID that we're seeing in Europe, starting to see here.
Mm-hmm.
That will drive spending across several related categories, be it pain, cough, cold, et cetera. That is in early stages here, but quite pronounced, actually, already in Europe.
Mm.
I looked at some data, and I saw in the past three weeks or so, cough, cold category in the U.S. was about eight points up, something like that-
Mm-hmm
... which is surprisingly early.
Mm-hmm, which is nice to see after the season we had last year.
Well-
Yeah
... I hate to see people ill, but yeah.
Yeah, yeah. Great. Well, thank you very, very much, Patrick and Eduardo-
Thank you
... for joining us today. Thank you everyone in the audience.
Thank you.