All right. Good morning, everybody. Thank you so much for being here. My name is Korinne Wolfmeyer, and I'm the Beauty and Wellness Analyst here at Piper. We're happy to have the Perrigo team with us today. We have CEO Patrick Lockwood-Taylor and CFO Eduardo Bezerra. For those unfamiliar, Perrigo is about a four billion market cap company. We use their products every single day. Perrigo is a major player in the branded and private label self-care space. They make products like generic ibuprofen, allergy meds, and even infant formula. We'll start with a brief presentation and overview from the team, and then jump into Q&A. Take it away.
Thank you very much. Good morning, everyone. We just wanted to give a few slides, just to explain who we are, the business we're in, and what we're focused on. So we're in the self-care category, which is an essential consumer staple category. It's about a $400 billion dollar category worldwide. Worldwide, it produces about $170 billion dollars of savings by reducing doctor's visits and prescription medications. And each year, for perspective, about 1.2 billion ailments across Europe alone are treated with OTC. We deliver substantial benefits to consumers and society. About 2,000 Perrigo doses are produced every second of the day. And we alone produce about $30 billion dollars in yearly savings to the U.S. and the E.U. healthcare systems. Our household penetration is extremely high relative to our competitive set.
About two out of three households in the U.S. actually purchase a Perrigo product. We're building out critical capabilities needed to win in self-care. We are a hundred and thirty-year-old company, so it comes to no surprise that we have a very strong foundation and a very strong asset base. We think we're poised for greater scale across multiple fronts and have the capacity to drive value-accretive growth through consumer-led innovation, by winning more store brand business, and through brand building as well, which I'll come on to explain. We're getting clear on what our core competencies are and bolstering those, and also getting very focused on what our long-term enablers are for future growth. Importantly, we're very well diversified across global self-care categories, which insulates us a lot from seasonality impacts, which allows very predictable scaled growth.
Branded products represent about 40% of our portfolio today and will disproportionately drive our growth going forward, because they tend to have much higher margin profile. Our store brand business is about 60% of our revenues and can be found in every major U.S. and U.K. retailer, and we're by far and away the largest provider in the U.S. Just turning a little bit to how our portfolio allows us to win with emerging trends. In for example, GLP-1 usage, this is expected to drive certain OTC categories. The market today represents about 6 million users, growing to about 30 million users over the next five years or so. Growth in this space has the potential to drive meaningful increase in OTC usage, as GLP users have the potential to be OTC category multipliers. What do I mean by that?
There are a lot of side effects associated with these products, leading to a lot of OTC opportunities. For example, one GLP user may basket and experience nausea, diarrhea, headache, constipation, and gas side effects, meaning that they will look for OTC remedy against all of those. We've worked through specific claims, and we'll look to add more relating to GLP-1 side effects, and we've now started to provide a one-stop solution for this, working with our major retailers. This is but one example of the Perrigo scale, really providing unique solution for emerging OTC trends. When I started at Perrigo, there was no doubt in my mind it was an organization comprised of very dedicated, loyal, and talented individuals, and we have now built that out much further as we focus on blended branded growth.
We've welcomed additional world-class talent, both in the executive team, but also at the senior vice president level in quality brand building and other leadership positions, including innovation. Much stronger consumer focus, much more knowledge on the healthcare category, much more expertise in CPG. These new leaders, as you can see from the chart behind me, joined from world-class consumer organizations. Perrigo is becoming a destination company as we get very clear on how and how fast we will grow and the kind of winning culture we're looking to develop. So as I finish, and then I'm gonna hand to Eduardo just to share some update on our balance sheet.
Our near-term focus is really quite simple, which is to deliver and stabilize our infant formula business, fully recovering $140 million of annual adjusted operating income through 2025 and early 2026. Continuing with our major cost-saving initiative, which is Project Energize, realizing $100 million to 110 million of cost saving by the end of 2026. Starting to regrow, which we are, which hopefully we can expand on in a minute. Our critical $2.5 billion U.S. store brand business, expanding our market share and our margins in that business. Getting our cost structure optimized under a One Perrigo operating model, which means common systems, processes, financial planning, tax acts, et cetera. Continuing to prioritize free cash flow generation, which is improving strongly, and critically deleveraging our balance sheet.
We're on track to be below four by the end of 2024 and three to three point two by the end of 2025, and that all remains on track. Let's talk a little bit about the balance sheet optimization, Eduardo.
Yeah, talking a little bit about that. So there's no change in our debt paydown strategy. As Patrick mentioned, we still expect, you know, to achieve a little bit below four times at the end of this year and low three times by 2025. So we are committed to pay down $400 million of all the investment-grade bonds that we have maturing in December. And yesterday, we announced a refinancing. You know, we expect to be out of the market by Thursday. And so two things important to highlight there. So we have $700 million that are due in March 2026, and also we are taking a portion of our Term Loan B that we have.
So $400 million out of $1.4 billion of notes that we have, and we're replacing with eight-year notes of about $715 million and about EUR 350 million that we're launching in the European market. So again, no change to overall debt. It's just extending, you know, the maturity terms that we have there. We expect favorable coupon rates, mainly in the European market, on our high-yield bonds as compared to the current Term Loan B rates that we have currently because of SOFR rates that we have right now. So the euro-denominated notes create a natural hedge because, as Patrick mentioned, 40% of our business today we generate internationally, mainly in Europe, and so that creates a natural hedge into our business.
Also, by taking that refinancing now, we reduce the uncertainty because of the U.S. elections and how, you know, liquidity in the market could take place. Also, you know, if we delayed that and we left that for, let's say, the Q1 of 2025 , we would be at risk to have our debt as current, and then you enter in all the discussions with rating agencies and auditors about how much cash that you have in the balance sheet versus how much you have current debt, so it made a ton of sense there. An important thing is all three rating agencies, Moody's, Standard & Poor's, and Fitch, they all reaffirmed their current rating and their outlook, so no changes, you know, versus our current debt profile.
So again, just a regular refinancing that we're doing at this stage to really take advantage, mainly on the coupon rates in the European market. Okay?
Great. Well, thank you both so much for that overview. It's really helpful in the background and in the info on the debt. Really useful. So thank you very much. I would like to touch on, I guess, just jump right into probably the biggest topic for Perrigo right now, which is the infant formula business. It does seem like you've gotten things pretty under control. All sites are now up and running, and production is on its way to normalizing. So a few questions here. First, maybe you can give us a little bit of color on your expectations for that business heading into the back half, what you've seen so far over the past couple of weeks and months. You have said production is normalizing, but how far into that safety stock build are you?
When should we really start to see a pickup in the sales data from that recovery?
Yeah, I'll give some perspective, and then Eduardo. So job one was get to quality compliance. That was done in the first four months, five months of the year across the three sites. Significant undertaking, done extremely well. We have excellent environmental control and monitoring, and compliance. So that was fundamentally important and very well done. Second was the ramp-up of the production. Okay, getting to the attainment levels that we've historically seen with much more thorough quality-led GMP. We're at or ahead of year-ago production attainment, okay, which is very good. The sites are much more disciplined, much cleaner, running much more smoothly, with much less downtime. The third part of the exercise, as you rightly say, is then rebuilding retail pipeline, shelf inventory, back of store, the distribution centers. That is going well.
We're 90% plus in our major customers, but not across all customers. We still have work to do to repipeline. As soon as that's completed, we'll focus to the last element of your question, which is really on consumer activation. There's no point doing that until we have good in-stock levels in store. We're seeing that. We will start the demand creation activity literally any day now. And that will allow us to start rebuilding consumption and demand pool. Consumers typically switch from branded to store brand proposition after about three or four months of being in the category. That's when we have the target, but obviously having such low inventory positions in store the last few months, you have seen a dip in share. And we should start to see sales, consumption sales recovery in Q4 and then accelerating.
Great.
So for us, as we look at it, all on track and on track with what we outlined back in February.
Great. That's great to hear.
Yeah.
I also believe, you know, you still have the final FDA review, I believe, in November. Can you describe to us what all that review will entail, and how confident you feel it, that in the changes that you've made heading into that review?
We don't know when the FDA will do their-
Okay
Pre-review inspection. Typically, they do it for when, at the annual
Mm-hmm
-or a warning letter, which is indeed November. There were repeat observations in that, so understandably, they will audit those aspects of our operation and any other aspect that they want to. We've put in a tremendous amount of new people, protocols, training, et cetera, which we monitor every day now, and we also have run our own mock audits to see how we perform, and have some learnings from that. What I would say is, we feel we have a quality, compliant, reliable plant.
Mm-hmm.
That's what we hope to show.
Great. Great, that's great to hear. Another big topic for Perrigo lately has been Opill, which is your new over-the-counter oral contraceptive. From the sales data we track and a lot of your investors track, and from hearing you speak on the Q2 call, it does seem like the product is taking a little bit longer to ramp. You know, compared to your internal expectations heading into the launch, how are you now modeling sales contributions from Opill, as well as the marketing spend you plan to deploy into the product? And have you altered your longer-term expectations at all around Opill?
Opill, so it's a new consumer, it's a new category. It's a new consumer journey, okay, which we could never fully understand until it was reality. We can do as much modeling as we like, okay, but so I think on the very positive side, it's now a 3% share already, okay. The sales are sequentially building. We are getting very good awareness to trial conversion and ahead of expectation, repeat. Repeat is in the high 40%, which is very unusual in brand new products. Typically, it's about 30% to 36%. The name of the game for us now is to build awareness. Okay, so we've shifted our media strategy to do more awareness-based advertising across a broader audience, number one.
Number two, we have insurance coverage now for Opill, but just because you have the coverage doesn't mean the consumer knows how to activate that. Or that the pharmacists in the store know how to activate that.
So we're putting an effort now to make sure that we're making that as seamless as possible so they can take advantage of that insurance cover. The third aspect, and it really relates to driving awareness, is we've got to improve in-store display, shelf talkers, et cetera. It's two Opill on the bottom shelf, two facings. This is a new category and new brand. There is a responsibility to drive awareness and make it very accessible. It's gross margin accretive now. It will still be EPS accretive, we said between 18 and 24 months. We're still on track for that. So I would say good, but we're figuring out how to make it better.
Mm-hmm. Understood. Understood. Moving on to the rest of the business. On the Q2 call, you talked briefly about managing your retail partners, and you did end up dropping one of your partners due to unfavorable terms. That was fairly well-received by the Street investors. Can you walk us through the reasoning behind this? Is this something you will continue to evaluate with all of your partners? And how could these decisions end up impacting your longer-term financial targets?
Yeah, I mean, we provide very good service, very good regulatory support, highest quality, and investment in demand creation to drive store brand. Okay, there has to be a reasonable rate of return from that effort, okay? Or there's just a compromise. The prices that were being demanded by that one customer at that one moment in time, we didn't feel were sustainable. They were too diluted for us, and we weren't willing to make the trade-offs to make that a supportable model. So we walked away from it. Interestingly, they almost immediately had a quality incident with their new supplier leading to a recall, okay? And this is an important aspect of this. So the good news is, though, we are now, despite that, net positive this year on new businesses won.
We've replaced that business with more profitable business. And we will continue to seek to expand our store brand business in the US.
Great. Great.
So the impact-
Yeah.
You asked the question.
Yeah.
Yeah, it could have been, had we not offset, it could have been a 1.5-point revenue headwind next year-
Mm-hmm
Which we've now more than offset.
Great. Good to hear. And then as we think about your 2024 targets that you've laid out on the Q2 call, you did lower your top-line expectations, but maintained the bottom line, given the margin strength that you're seeing. Can you talk a little bit about, you know, what's baked into expectations, both on the lower and higher end of your bottom line guidance? How much flexibility have you built in here for the various business segments, such as, you know, the infant formula business and Opill? And then how have recent sales trends, to the extent that you can comment, compared to the expectations that you've been laying out?
Yeah, a couple of comments there. So I think in the OTC store brand, we're seeing now in the month of—after a very mild cough and cold season and allergy season as well, and the stocking from the retailers, we're starting to see now in certain key categories, you know, an update. Cough and cold, the pain, so in between July and August, we saw a positive impact there. So, for the remaining of the year, I guess, infant formula is the key contributor to that. Of course, the cough and cold season is coming in line pretty strongly, as well as the international business as we continue to expand our skin healing business with Compeed. We launched it, cold sore and spots as well, that continue to make good progress there.
Those give us a good sense of being still in the range there, aside from all the accretive actions. Project Energize, we delivered $53 million on a program that we really relaunched in March. To achieve, you know, what to expect around $100 million this year, we're in a very good position to achieve, you know, that operating income line and the EPS targets that we have.
Mm-hmm, and then moving to 2025, I know you're not guiding specifically, but there is a lot of investor conversation and debate around kind of the targets that you've been, you know, mentioning.
Mm-hmm.
Which is that kind of $3 EPS target. A little bit, a few questions here. Maybe a little bit of color on the building blocks to getting to that $3.
Mm-hmm.
Is that $3 viewed as the floor, or is that the midpoint of the target? And then as we think about the margin progression we need to see to get there, you have talked about that 14-16-
Mm-hmm
-% operating margin range. Where in that range gets us to that $3 target?
Yeah. So I think it's when you compare to where we are this year versus next year. So we have about $0.40-$0.45 impact on infant formula, mainly in the first half of the year. So that's a key element of recovery for next year. Also, there's still a lot of learnings in terms of Opill to make sure it's become less dilutive, but there's still work to be done there. So market growth, you know, should be a key element to see how the base is gonna be impacting there, benefiting there. A couple of things to comment is, even in the infant formula side, one of the important elements that we want to make sure we're gonna avoid these, you know, these swings, you know.
Because once a mom make or a dad make a decision to shift into an infant formula, a store brand infant formula, they want to make sure that every week, as they go to the store, they can find that same formula. And so because of everything that happened and all the changes in the regulation, the regulatory environment, you depleted your safety stocks. So one of the key things to us is very important, and that for also our customers and moms, is making sure we're gonna have, you know, consistent supply. So we're gonna need to build safety stock on our side in 2025. So that's one of the things that could impact there. So the $3 range is what we're looking right now, as a good point base.
There's still work to be done to finalize our plans over the next three, four months, but that's currently where we're thinking right now.
Mm-hmm.
The go forward benefit of the cost-saving initiative, so Energize-
Yeah.
Mm-hmm.
And others.
Yeah.
I think three, the building blocks are fairly transparent, and as we continue going through our sort of budgeting process over the next couple of months, I think we'll be in a better place to answer the question, is that the midpoint, the high point?
Yeah.
Yeah.
So more to come on that.
Great. And then the margin progression, I mean, it's a lot of Project Energize and the infant formula business. Any color on, you know, where in that 14%-16% range?
Yeah. We expect to be in that range, so we expect this year to see significant margin OI expansion as compared to last year. And so we're gonna be in that range, you know, for sure. The question is, is it the midpoint or is close to the top end of the range? We're still defining a little bit more of that, because one of the key things is, as we invest in brand building capabilities, because of some of these costs that we have eliminated and some reinvestments we need to do, we want to make sure we set the company and the portfolio for success in the years to come. And so what kind of investments we're gonna need to do may shift a little bit in that range there.
Yeah.
Okay?
Got it. And then lastly, in our, you know, final minute or so, maybe you can touch on just general capital allocation and cash usage. Obviously, the top priority is getting that leverage level down a bit.
Mm-hmm.
But beyond the debt pay down, how are you thinking about your cash utilization over the coming years?
Yeah. So I think, you know, the leveraging is our top priority, reinvesting in some key areas of the company, right? So we talked a little bit on our overall infant formula footprint, right? So we have three sites, and to what extent we want to, you know, upgrade and make further decisions about how do we want to ensure, you know, consistent capacity and production over time is another one. There's still some lagging effects of the supply chain reinvention that needs to come into play into 2025 . But aside from that, we want to keep our return to shareholders. Currently, you know, we are in this consecutive growth profile of our dividends.
This year, we increased only 1% because of the infant formula reduction, but we want to make sure we're gonna continue with that profile of returning value to our shareholders. Today, with dividends, after 2026, we're gonna revisit that and think, should we do anything different with share buyback, et cetera? It's still early to say.
Yeah.
And also, we do not expect any major M&A activities, but making sure that in each part of the portfolio, we have the right combination between brands, potentially switches and other things that will complement what we have done over the last five years.
Great. Well, thank you both so much for being here-
Thanks.
-and presenting, and, looking forward to seeing where the future goes for you.
Thanks so much.
Okay. Thank you, Korinne. Thank you, everybody.