Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's Household Products, Beverage, and Food analyst. We're very pleased to welcome Perrigo here today, including Murray Kessler, President and CEO, and Ray Silcock, Executive VP and CFO. It's certainly an interesting time to have them here today, as they're in the process of shifting their focus to consumer self-care on the OTC side. I'm sure many of you have a long history with Murray and Ray, given their success across the CPG sector over the last couple of decades. They'll be familiar to many of you. With that, I'll turn things over to Murray, and then we'll get into Q&A. Thanks for coming, guys.
Great. If it's okay, I'm going to go ahead and.
Sure
from here. Just to ground everybody, and then we'll have our normal dialogue with questions. I just wanted to give a little bit of background of the Perrigo story because we've been primarily covered by healthcare for forever, and we're making a pretty big change to consumer side. I'll share a little bit of forward-looking data, and you can read that statement. If you don't know Perrigo's basically a consumer company. It has primarily been a consumer company, two-thirds of the company, but it has, over the past number of years, had been pushing and driving on the pharmaceutical side. We have three divisions, a little under $5 billion in sales, and it's three distinct businesses. The Americas Business is the market leader in private label, over-the-counter products.
We have big infant formula businesses, almost every single product that you see made by, we're the market leader, market share leader across every single one of those categories, we have a remarkable formula that works as a partnership with customers that is very difficult for everyone else to be able to match, which is we don't get into a private label category unless we can make a roughly 30% margin. We can deliver a 30% discount to consumers versus the national brand on an identical product. The last piece, which is critical, is we want the retailer to make more money selling our products than they do selling the national brand.
All three of those things come together for a sweet spot, and that's why in our industry for years, we have grown to the highest level penetrations, and we're the market share leader in basically the biggest private label categories in America today with roughly 30% penetration. Internationally, we're a consumer-branded business. Bunches of regional stores where we have leadership positions, but they're not pan-European. They tend to be markets, but somewhere around 36, 37 countries, where we have a billion and a half dollars, billion two dollars in sales. We have a very highly differentiated Rx pharmaceutical business, which we've discussed and gone public with, which is our goal over time to exit. It's a very unique and successful business as well, mostly leading the way with topical products.
When I joined and was asked to come out of retirement and Ray joining me, we went down the path of studying the business and how we could create a lot of value, and we believed we could, of focusing Perrigo back to its heyday of what it did best, which was growing the core consumer businesses. We changed and launched a vision to say we're going to make lives better by bringing quality, affordable self-care products that consumers trust everywhere they're sold, which sounds little, but self-care being the operative word there, of moving from things that are treating diseases to ones that help prevent, help people live a healthier lifestyle, and promote wellness, et cetera.
You'll see that within our portfolio, but it also says there's reconfiguration that needs to be done because we did still have, if you needed to go to a doctor, we say that's not within our vision. If you can do it yourself, you can learn on the internet, et cetera, and it takes advantage of huge, massive trends and tailwinds that get behind our businesses. We have this, we believe, a unique proposition in that we have a very large private label market, which again, is continuing to grow and we don't see anything changing. We don't see healthcare costs getting cheaper. The products go through the rigor. We have scale in that. Importantly, the sort of the biggest cohorts out there are millennials, et cetera.
They have learned, they understand that private label products, 83% say it's the same quality as a national brand and that they trust private label at least as much as a national brand. That keeps fueling the growth of our core U.S. business. Then as you define what self-care is globally, IRI did a study last December and went in that study, identified $450 billion of global sales, and you can see some of the statistics underneath here, but it's a huge opportunity. A year ago, we were the first ones talking about it. Today, I hear a lot of other big companies starting to talk about it as well. We think the convergence of those two are huge.
If we can pull that off and get the growth associated with that, then Perrigo, which has been trading at a much lower multiple, should be able to trade up to a consumer peer, which is why Ray and I are here today. Today, we're at 12.8 times. When I presented this strategy on May 9th, we were at about 10 times. You can see the generic peers at 5.8. That was about seven and a half times when I presented the strategy. Our Rx went from seven and a half multiple as an industry down to 5.8. Despite that, total Perrigo went from 9.10 to 12.8, which is being driven by the consumer results and the consumer story. Having said that, you saw the big number there with 22.
There's a long way to go. To get that to happen, we think we need to perform like a top consumer company. The numbers I've stated today, in line with the way they've been performing, was we needed a three-five-seven was sort of the mantra that I've been using, and that it would take us a year or two to get there again. First job, get the top line growing again, stabilize operating income, and then grow and accelerate from there. We are one year in, and we have been following a very disciplined transformation playbook.
The kind of the steps of this virtuous circle I like to talk about are reconfiguring our portfolio, which means exiting non-self-care businesses as we make sense, achieve our plans, invest in repeatable platforms, drive our organization, build the talent in the organization, fund growth, take costs out, allocate capital wisely, and start delivering consistent results because we weren't so good at that a year ago. A year later, it's just the start, but I'm proud of the start. We have a global self-care vision that I believe you could interview any employee anywhere in our company and at any level, and they would be able to describe the vision of where we're going and understand their role in it.
We have made great progress of separating businesses that, the big one being our Rx, or being prepared to separate, although the multiples have made that difficult for the biggest piece. We exited the animal health business for $185 million as an example of one that didn't fit. We bought the leading oral self-care company in the world earlier this year, Ranir, a fantastic asset that is doing incredibly well and opens up a new vector of growth for us. We closed yesterday on the Prevacid brand that we just bought as a consumer brand. We've initiated and are getting savings already ahead of schedule on a $100 million cost savings program, turned over or put into place new leadership, about 40% of the leadership team. We have transformation offices in place, have ramped up the innovation program.
We've put $500 million or more of ideas into the new product pipeline. We're investing a few hundred million dollars in our manufacturing capacity because it had been neglected in a few years. During the year, we also invested in our digital capabilities, and we've met or exceeded our financial goals for the last four quarters in a row since we started this path. We're off to a good start. It's all making sense. As you look at it, we're not disclosing a lot of numbers here, but bottom line, the business was flat with the acquisition of Ranir and a ramp-up in organic growth. We had our first double-digit growth in a very long time, reported in the third quarter. On an adjusted basis, we had gone from the operating income declines to slight increases. Market share is never an issue for this company.
It always puts market share first, so those continued to grow, and we had some pretty weak customer service levels issues a year ago that have been put back into place and repaired with some investments in working capital. The business is responding. I feel like, I hope if you're an investor today, and I know there's a couple of big ones in the room, that we're staying true to our word and we're working hard every day to make Perrigo the spectacular company and what we call recapturing the Perrigo advantage. The investment thesis is simple. It's a unique business model, takes advantage of consumer trends. That's not changing. It's on trend. Categories we compete in are going to grow. We have a very high complexity quotient. We make 14,000 products, and our ability to service customers is a core competency of this organization.
Favorable trends drive self-care more and more. We typically convert 100% of our cash. Probably our biggest issue that holds us back a little bit right now is a little bit of tax uncertainty that's been a problem, not from the current management team or anything the company has done wrong, but from audits from six or seven years ago, and we're working through those issues to get rid of that uncertainty and let this stock start to really create value and provide value. It's been a fun first year for me and for Ray, and I'm more confident today than I was a year ago that we can drive this company and do it in a way that I've done it in the consumer companies I've been involved with before.
Now we're clearly on the road telling the consumer story, not just the pharma story, because it's an entirely different mindset.
Great. Well, that's a very helpful overview. Maybe first we can start on the consumer side of the business and the articulation of an acceleration of that consistent 3 to 5 to 7 cadence from a top-line profit and earnings perspective. Can you talk a little bit about the top-line piece of that, and what are the key strategies that get you there from where you are today? What's the level of confidence that you can do that? Maybe compare and contrast it to some of your prior experience in CPG and what's unique about the strategies here.
Well, versus my last 12 years or so, these categories grow more robustly. Our challenges are less category growth here than in tobacco, right? You're fighting declining trends and in foods, I was always finding stagnant to slightly declining categories. That's not the issue here. Like, healthcare costs and the value that's provided and the customers behind it so aggressively have these categories growing, and I don't see that changing. Our challenge is price. In tobacco, I can take a price increase here. I'm constantly facing people trying to cherry-pick in and steal some business, and whether you give price concessions or not, and that's where I think the consumer experience that we have can help drive that. Because if you could do that, you get a lot stronger growth than anything we're talking about here.
We're already growing in those levels, and we're doing it while making some price conversions, concessions. If you can get to the point where you're innovating enough that when somebody walks into a customer and wants to try to compete with us on price, I want the customer to say, "Well, that's great, but they've already made a better version of it." You have that. They'll be like, "No, we'll be back in a year." Hopefully we're constantly staying ahead of them. Bottom line, it's a company of different pieces. The history of Perrigo was it always had to give a little bit of price concessions. It did small bolt-on acquisitions that opened up new avenues of growth, like our infant formula business. Ranir is an example of how we've gone back to something that had gotten neglected for four or five years.
We always were one of the fastest innovators. Our innovation pipeline slowed way down as the company invested to go internationally and invert and do those things. The core new product pipeline dried up to some extent, and we have ramped that way back. Those are the two most important issues that we needed to do to get growing again. You look at the scale. We did a $750 million acquisition of Ranir. We just bought Prevacid. There's plenty more in the pipeline. We're tough, and we want them all to be good contributors. To get from what was 1% or 2% growth is some smart bolt-ons, get you a little more aggressive growth, takes you to the next level. Hopefully, you're accretively buying in terms of revenue growth, takes that 2%-3% on the organic line.
With that, there's waste in the system from lack of investment that I believe we have very clear line of sight to over the next few years, $100 million of operating expense coming out. There's also COGS opportunities as well. Those are the pieces, and that's all happening. It's all happening. It feels real well. We've just got to get some of this uncertainty out of it.
Okay, that's helpful. Maybe you can take us through the innovation process and how that's changed. It seems like it's a pretty important piece of the top-line acceleration expectations going forward. Obviously, there's been increased spend, as you guys have publicly outlined already. Help us just understand, is it spend? Is it people? Is it process? How has it actually changed, and how impactful should that be from a top-line growth perspective?
Yeah. It's sort of two stories, one internationally and one. Internationally is they've been doing a good job for four or five years, we bought a business that also had a lot of cats and dogs that needed to be pruned out of it. They are operating under the traditional do your consumer market research tests, and when you do those consumer tests, you find a way to innovate and bring new products and take products that work in a market, bring it to another market. They have a beautiful new product program, which has a very full pipeline, and it's continuing to generate results. You can just think of our international program as like any good consumer company. There is a step change mind difference, the way we're trying to manage the U.S. private label business.
For years, private label was managed under the definition we call it NBE, national brand equivalent. Wait, see what they are. There's a big switch that comes from Rx, and then be the first and fastest to go out there and copy it exactly. To innovate, we need to shift from a mindset of national brand equivalent to a mindset of national brand better or national brand different, and we can do that. We don't have to own the NDA, the active ingredient license with the FDA to take, let's say, nicotine lozenges or gum and put them in a better consumer-friendly packaging, liquid centers, easier, softer, all the kinds of things you would do for any traditional consumer marketing company.
As an example, take it to another level of form and usage, easier open packaging, better flavors, all of those kinds of things, sizes, mini, faster dissolving, all those kinds of things we can take the lead on. We're not inhibited from doing, but it wasn't the way the company operated. That's been the biggest shift in the year to go after those. Some of those we can make happen very fast. Some of those will take two or three years, the bigger hitters. I think the world will be surprised when I come out in the beginning of the year to see how much we've ramped up, and we'll start hitting the market next year.
The idea generation from an innovation standpoint, is it more internally generated? This is just a matter of now there's a top-down focus on it, and it's moving throughout the organization using third parties?
We're not using third parties. Especially in the U.S., there were capabilities that didn't exist. Some of it is just the fundamentals of a good, well-run consumer company of having the data, which we don't have all fully yet, where you know where the gaps in the marketplace and items that aren't available and doing the consumer testing of what's liked and what's disliked. We have ramped up the investment in market research to identify those national brand better differences. I also brought in a top head of R&D. It was all run as separate divisions. Now they all report to Jim Dillard, who worked with Ray and me at UST and is brilliant. He's got a great team, but the team worked in silos. Now, an idea in Belgium becomes an idea in the U.S. and vice versa.
Their ideas are coming from all over the company, but a lot of them are obvious. We're not going out to get a consultant to come up with the ideas. We don't need to. It needed a strategic shift. As soon as you're no longer a treating disease company and you're a self-care company, there's just the world open dramatically, right? It went from, you have this narrow lens to look at opportunities to, "Wait a minute, oral care makes sense. Let's buy Ranir." All of a sudden, there's tons of opportunities. Ranir is small internationally, and it has all these great products. We can use our 1,200 detail force that calls on every pharmacy individually in France and Spain and Italy and take a line of products that way. There's just so many opportunities.
Take us through the thought process on how you look at those different opportunities. Obviously, self-care is an enormous market. OTC is a huge market. Are there particular segments you're excited about? Do you approach it more from an organic or M&A standpoint? While we're on the subject of M&A, there's strategic and financial criteria.
Do you want to do the strategic and financial? We have a full process.
Yeah.
Why don't you talk about the M&A pipeline?
Yeah, we have a pretty robust pipeline of M&A. Our board approved a process that we use for evaluating whether a particular acquisition target would fit our criteria or not. We don't look at anything that doesn't actually fit inside that criteria in terms of industry, type of product, size of company, and so forth, and where it's located, whether it's in the U.S. or overseas or whatever. Separately from that, in terms of return criteria, yeah, we have specific ROI requirements within each of those categories. We're not going to disclose the specifics for obvious reasons. We're very data-driven, and we make sure that those return requirements are within the constraints of whatever the pricing for that particular acquisition would be.
That's true on everything. That's true on an IT investment, that's true on a capital investment. There are some that are maintenance. For the most part, if you want us to invest and it comes to a committee, we're your bankers. You've got to sell the proposition. I do give some freedom when you're talking about initiatives. We have a top-notch person running international, and they have to run their businesses and deliver, depending on the size of it. They invest, they have to ultimately show their strategy and how they are going to deliver over the next year or so, building towards the three, five, seven. That part I think is very good at Perrigo.
We're pretty disciplined on that.
Yeah, that wasn't broken. What was broken were things like the tools to make it a lot easier to not have to manually do that and to be able to scan and see more opportunities quicker. I will tell you, I see more acquisition opportunities in a week than I saw in 15 years in tobacco, every week. We turn most of them down, but there are plenty of opportunities once we divided this or changed the course and definition of the company to self-care.
As you look at interesting subcategories to move into, is there an ability to do some of that organically, just given your retailer relationships? It really requires more partnerships or acquisitions just in terms of getting the scale to compete in those categories and margin dynamics, et cetera? How do you think through that at a high level? Obviously, different category by category, but just from a high-level perspective.
You'd be shocked how many categories we're in. It really varies. I put a higher priority than maybe you think on bolt-on, bite-size acquisitions. They're faster. They help get you there. They help shortcut the regulatory process because that can take years, and given what I'm trying to do and Ray's trying to do and the team's trying to do ramping up, it's a faster way in. Could we have built an oral care business? Sure. It would've taken years and years to do what we've done with Ranir, and Ranir is now from there to leverage the two companies, we can bring a lot of revenue synergies. We don't buy a company on revenue synergies, but they're there on this one.
It reduces the risk, too.
Yeah.
In terms of by making an acquisition, you reduce risk, clearly.
Yeah. What we're not doing is what I believe was a mistake for the company, well-intentioned, but there were some big multi-billion-dollar acquisitions during the period of time when the company lost focus on North America, and there's none of those coming, and that doesn't make sense to me. If there's going to be an acquisition, it's getting us into a segment or it's supporting a segment. Ranir gets us a whole new area of oral care that has tons of places to go with it. Prevacid helps to bridge the gap of us starting to learn to be a little bit more branded and consumer in the U.S. Ranir helps us be a little bit more private label in Europe, right? Everything's being done very methodically and strategically.
Okay. Can you talk a little bit about the margin opportunity in your three different segments? One of the things we've seen in store brand business over time in the U.S. is there's been a decent amount of margin as well as top-line volatility for a lot of businesses. Is there sort of an ability to have a steady path to margin progression, and how do you think about it, U.S. and international business, and then on the Rx side?
Well, our international business has been growing a margin point a year, basically for a number of years when you look underneath it. We bought it, and it's, I don't know, it's four or five points higher. We are a tough business to manage on the gross margin line because private label businesses don't have A&P, and when you get mixed between branded and private label, they end up at the same operating margin, but they look a little bit different. For me, I believe that operating expenses in Perrigo have inflated over the past four or five years. There is an opportunity across the board, and that's where the $100 million program is, to improve margin at the operating margin line, which we believe, I think you would agree with that, Ray.
I would
that is the critical driver for our company's success. Growth has been very reliable. I think it could be faster to ramp up to the three or four, and which we're starting to do. Perrigo was, I don't know, 15, 18 years ago. 15 years ago, it was like a $700 million company. It's $5 billion. It's grown rapidly. It's just the last couple of years that it stalled as it took the eye off the ball. Those categories didn't slow down. They just became sort of less differentiated, and we need to use our scale and our high complexity quotient at a better level. Bottom line, I'm very confident of the growth. Margins have been compromised a little bit based on pricing and on operating expense.
I think the operating expense and the addition of faster growth overcome that the way it did for years and years and years. We just walked away from it a little bit. You have to know the Perrigo story a little better. There was a model that worked beautifully, and it went away from it, and in essence, all we've done over the last year is to put back in place the model that worked so well, and we're now starting to see those results.
Can you talk a little bit about your retailer relationships? In theory, private label here in the U.S. is becoming more important to them for a variety of reasons. Are you sort of seeing that in your categories? Is that relationship strengthening? On the other side of it, one could argue that, look, technology's enabling more competition, smaller companies to crop up. Is there more competition for the business from other manufacturers out there, et cetera, and how you sort of think through those things in terms of your ability to continue to prosper in the U.S. private label market over time?
Yeah. We're nothing like the sort of most of the private label categories that you're used to. The barriers are pretty high. One of the one-on-one sessions this morning, I love the comment that when we had a group out to Allegan, Michigan, to see the factories, and you see the 28 facilities and the amount of investment that goes in, and all the FDA approvals and the regulatory process to get all that, it's not an easy category. Having said that, there's more competition than there was a few years ago, but it's cherry-picked. It's on a particular item here or a particular item there, or two or three of the higher profit items, but Perrigo's sitting there covering, offering you 100 items, and we need to be stronger in that partnership.
Shame on us, but we have brilliant partnerships with our customers, but we suffered last year on service. When you want to say, "You need to pay me a little bit more" and all that, you better have the best service and offer the full breadth of that line and offer category management services better than anybody else, and that is what we do, and I feel like we've gotten all that for the most part back this year. It's not perfect yet, but massive strides have been made. Again, in relative to the categories that many of you guys, ladies and gentlemen, carry, in us, the biggest brand in over-the-counter by far is a private label brand at one of the biggest mass merchandisers in the country, to worse. We sell 4 times more ibuprofen than Advil. We sell more Tylenol than Tylenol.
We're the market leader in every category. We're a 70%-80% share in nicotine replacement. Now, I'm not talking dollars, I'm talking units, doses that people are actually consuming.
Okay. Maybe we can touch on the Rx business for a few minutes. It sort of seems like we're in a bit of a holding period here in terms of deciding what to do with that business. Maybe just talk about the thought process there, timing, and how you guys think about making a decision on that side of the business.
The strategic decision is made. You don't hear me talking a lot about Rx. It's non-core, but it is a steady Eddie contributor of a lot of cash and at a 5 multiple. It's radically dilutive at this moment. When we went into the process, we probably were thinking, and it was before I got to the company, it could be double that. In the last 2 years, there was already a lot of price erosion in that area. Beyond that price erosion, you had a lot of other things, opioids and all these other things, DOJ investigations, and things that have really, really tortured that segment. You saw the multiple I put up there, it's like 5 times. It's just not a great time to get it done. Strategically, it's not a self-care business. We're very fortunate. It's got great people running it.
It's very solid. I showed, I think, a relative chart in the third quarter. We're, if not the fastest-growing, the business is growing. It's challenged from an operating income standpoint. That business has to have a robust new product pipeline. They do. It's not a drag on the company. Strategically, would I like to go out? Would I like to deploy that cash differently? Yes, but I'm not going to destroy value doing it. Decision's made. We'll see when the timing is right and when the opportunity is there. We'll take advantage of it. We continue to move forward to make sure we can make that decision happen very quickly when it presents itself. In the meantime, we are not robbing it. We continue to treat it business as usual. It self-funds itself. It self-funds more than itself.
The growth of the company, the future of the company, the multiple of the company you'll see is a focus on consumer.
Okay. Ray, maybe you can give us an update on some of those tax disputes, timeline for getting more clarity there and how you guys think of how that impacts your decisions in terms of capital allocation.
We think that we have strong cases against most of those. Certainly the three, the Irish one, and then the two IRS ones that we've received this year. We feel we have very strong defenses against all of those. That said, we would like to find a way to move forward. There's very long timelines here. The length of time before, if we went through the process and the appeals and other things that would happen, there's years before they would get settled. We would certainly like to find a way of taking some of the uncertainty off the table, and that's where we're focused right now, is trying to get some of that uncertainty off the table.
We do believe, and I think this is the problem that we face, is that we believe that we have strong defenses against them, and therefore it's hard for us to just settle them for large amounts of money.
Right. Okay. Well, that was very informative. It was great to get to know you guys better, and we really appreciate you being here.
Thanks for having us, and thanks for your interest in Perrigo.