M&A Announcement

Sep 8, 2021

Good day, and welcome to the Perrigo Conference Call. All participants will be in listen only mode. Please note today's event is being recorded. I'd now like to turn the conference over to Brad Joseph, Vice President of Investor Relations. Please go ahead, sir. Thanks, Rocco. Good morning, everyone, and welcome to Perrigo's conference call to announce its binding offer to acquire HRA Pharma, a leading global consumer self care company. I hope you all had a chance to review the press release we issued this morning. A copy of the release and Presentation for today's discussion are available within the Investors section of the perrigo.com website. Leading today's call is President and CEO, Murray Kessler CFO, Ray Philcock will join Murray for the Q and A portion. I'd like to remind everyone that during this call, participants will make certain forward looking statements. Please refer to the important information regarding these forward looking statements in our press release issued earlier this morning for more detail about the risks that could cause actual results to differ materially from these expectations. And with that, I'm pleased to turn the call over to Murray. Thanks, Brad. Good morning, everyone. We have some exciting news to share about an acquisition of Resom that Brad just referred to. But before we get through the details of that, I wanted to take a minute to ground those of you who are less familiar with our story or remind some of you who are more familiar with it, the journey that we've been on over the last 2 years. It was May 2019, we unveiled our transformation plan to go from being a health care company to a consumer self care company. We set forth a vision that said our goal was and vision was to make lives better by bringing quality affordable self care products that consumers trust everywhere they're sold and that our goal was to achieve repeatable 357growth by capitalizing on self care trends through our focus on our core OTC businesses, 2, to exit Rx and non strategic businesses to reduce volatility and simplify our business model when and I remind you that was about a third of our company. To expand into adjacent self care segments and technologies via Voltron M and A, to invest in new product pipeline, talent, systems, capabilities and capacity and to trim costs by reducing overhead. So here we are a little over 2 years later, and I'd like to believe that we have completely overhauled the company to set us up for a very, very bright future. You can read through this, but to hit a couple of highlights, you see A dozen transactions selling that generic Rx division, selling our Latin American operations, selling our Rosemont Rx business, Selling animal health, closing our R and D facilities in India and then buying and building out the adjacency in oral care with Raniere, Doctor. Fresh and Steriprod, buying Prevacid, buying I mean, Eastern European skincare, buying the Dexcel brand in the EU and investing in CBD, but none of those compared to what I'm about to share with you on the acquisition that we're announcing this morning. We also spent a lot of time and effort rebuilding our new product pipelines, investing in people, investing in IT and infrastructure, delivering $100,000,000 in cost savings, improving service levels, building out our e comm and that resulted in over the past couple of years before some of the recent interruption from COVID in a very strong and accelerated net sales CAGR. We also have been working hard at reducing uncertainty And we have significantly reduced the Irish, Noah and I think more progress to be made on that in the near future. On the Athena case, we strengthened our cybersecurity. We strengthened ESG. DNI divested our most volatile businesses. And just last week, We won $400,000,000 in cash from the original Omega Pharma purchase. So Again, uncertainty clearly being reduced. And then ultimately, all of that has generated a more focused CPG companies and a company that was committed to growing in line with top tier CPG companies And that we are optimistic about as we get through the sort of the worst of the logistics and supply chain issues with COVID that is poised to have accelerated base business growth against our original 3.57 commitment, but that also had a significant Worchester, a couple of $1,000,000,000 that it had available to be able to invest for growth, which was always part of that original May 19 plan. So I talked a lot about in the beginning of positioning Perrigo for base growth and divesting Rx Perrigo 2.0. And the next two moves, I think, involve us to Perrigo 3.0. The first is today's, which is acquiring HRA and its leading high growth brands, and I'll go through that in detail, but that's a step change. Really, I can't emphasize enough how significant move this is for Perrigo and building scale and Europe augmenting our CSCI and CICS businesses with high growth leading brands with significant and achievable synergies, high margins, clean brands, It's just an awesome opportunity for us. And then the final piece of that is to get rid of that big piece of uncertainty, which we hope to be back to you within the next few months. But we've already made significant progress and that puts us in a position where we will be the company that has come through transformation and is poised to deliver significant and superior results over the next few years and beyond. So let's turn to HRA. The acquisition of HRA is strategically compelling. I got to tell you, we went through a process over the last year or so, well in advance of even selling Rx where we had gone through and screened dozens and dozens of opportunities and ultimately came to the one that by far was the most strategically compelling. It's aligned with our vision and our capabilities. It falls squarely within our 5 pillars and that we've gone to the street with on our acquisition focus. The HRA brands are all number 1. There's kind of 3 major brands and we'll go through that. They're all category leaders globally. They are they will put us in a position to deliver top line growth In excess of CPG averages, the HRA itself is a double digit grower, but it will help drive Perrigo up to higher levels. The brands themselves are not played out, not even close. They're leading brands, but importantly, they huge potential to expand through numerous types of adjacencies and adjacent categories into adjacent Geographies, and I'll go through a little bit more of that in a couple of minutes. There's upside potential that we won't be talking about today. It's not built into any of our financial projections, but there are 2 significant Rx to OTC switch projects, which are part of this to bring the first to market regular contraception product to the U. S. And select European markets. And there is an experienced internal switch team that has a heck of a track record at HRA that has improving their ability to get that done. Because the overlap with Perrigo is so significant, there's actionable synergies that, again, I will talk about. But these are synergies that aren't maybes. These are synergies that we're going to get. And it's primarily through 3rd party distributors and external sales forces again where there's opportunities. But of course, we'll do all of that in a disciplined and careful way. And then most importantly, I think when you look at the size of what this does in transforming Perrigo, This is not just another acquisition. This is a scale acquisition that meaningfully offsets literally about 75% of the earnings from the Rx Diverse Passenger, but it's a trade for what was volatile and declining earnings to growing extremely high quality earnings and adds critical scale to our European business in numerous markets, raises the size and also again deploys the Rx proceeds effectively. Like I said, HRA is a store asset. By 2023, with the growth plans in place, we estimate about €400,000,000 in net sales in 4 segments. The biggest is Compete brand in blister care, which is about little under half of the business, women's health with the Eloana and Norlevo brand is about 25% of the business. Moderna is a scar care business primarily in the U. S. About 15% of the business. And there is a unlike our previous Rx business, there's a small rare disease business that's about 15% of the sales, but growing. The business is 60% Europe, 20% U. S. And 20% in the rest of the world. Again, if I go through them, Compeed is a fantastic brand, market leader with a 70% market share in the EU. Today is primarily blister care treating blisters, bunions, countless scorns, cold sores, number 1 foot care Treatment is number 2 in cold sores in Europe and with the potential and is already on the path towards expanding through new adjacencies either geographically into the U. S. Where it's starting to make some inroads or through adjacent categories like cuts and burns and spots and broader wound care. Women's health, Ella 1, it is has a point of difference. It's the most effective morning after pill available without a prescription, and it is has more than a 50% market share in the EU again growing. HRA is the undisputed category leader in emergency contraception in Europe, has the potential for further switches around the world and progress is being made on those. And then there are also the opportunity for switches in everyday contraception. In fact, just within the last few weeks, they received MHRA approval in the UK for a product called HANA, which will be the 1st over the counter, everyday contraception pill. And it's in process in the switch process with a product called Frieda in the United States right now. Again, not in our model yet, but huge upside. 3rd one is Moderna. We know a lot about the scar care business, this is the category leader in U. S. Scar care and again the opportunity to expand into others. And the smaller rare disease business is, for the most part, focused on Cushing's syndrome and adrenocortical carcinoma. The team that has been leading, HR, I have gotten to note David Wright, the CEO, Extremely well over the past months that we've been working on this transaction. And by the way, this was not a process. This was a relationship and a negotiation between David and I and the respective private equity partners on their side. I got to know the management team extremely well, which was an important part of this transaction for me. These are pros. They know what they're doing. They'll be they've all agreed to stay on with Perrigo. And I think that is important for you to know that I don't believe there will be any disruption on this. I did the same thing with Raniere when we purchased it. It worked beautifully. And I'm looking forward to these group of folks joining us and keeping that continuity and growth engine going. The other thing I think this sort of really has a significant impact on our European business. People have asked about it or half in or half out to Europe. You layer the Compeed and LO it becomes our number 1 and number 3 brands in our total portfolio. More products that are actually Legitimate OTC products that aren't just science based nutritionals, etcetera, gives us way more credibility with customers, significant for revenue synergies on both sides, our sales force is multiple much, much larger than theirs, which again can become an accelerator. And this is just pointing out OCA, but shows that it puts Perrigo as a major player in Europe, not to mention dramatically improves the margins in Europe. An important part of this transaction and that helps make the returns on it so strong is that with the overlap, there is operating synergies of greater than $30,000,000 by 2023 that there is a clear path to and we are we have a high degree of certainty on. Frankly, I think they could be bigger, but these are the ones that I'm willing to say today for sure, and this again does not exclude it does not include revenue synergies. And I think it's important to understand these are more fixed cost infrastructure and backroom kind of sharing. It's less of a people story with synergies. It's much more of an infrastructure and leveraging the facilities that and systems and processes and and everything else we have in place at Perrigo because today's HRA is mostly outsourced and paying a premium to be outsourced. The transaction will substantially improve our financial growth profile. Like I said, projected to add approximately €400,000,000 in net sales in fiscal 23, growing at an expected mid teen percentage level. It expands CS and because it's both U. S. And Europe, 2 thirds Europe, let's call it a little less than a third that will affect the U. S. And overall Perrigo, but it will expand their margins, their sales, the operating margins and for perspective, these operating margins that we'll be bringing in with HRA approach 30%, which means if you back into sort of the numbers you're approaching 70% gross margins, which will have a nice accretive impact. We expect operating cash flow conversion of 100% in line with Perrigo and this is big. It's immediately accretive. But within the first That first 2023 year when we have that full year, we expect it to add around approximately $1 to adjusted EPS. So like I said, this is a scale, not just a quality acquisition, it's a scale acquisition prepared. The details of the transaction, dollars 1,800,000,000 is the Purchase price, so that's $2,100,000,000 in today's conversion rate in U. S. Dollars. It values HRA at enterprise value to expect a 2022 adjusted EBITDA of 18 times. And if you add The synergies to it expected by 2023, it drops it to less than 14 times. We anticipate that it will be funded in cash. As of the Q2, we had $336,000,000 of cash on the balance sheet. We received $1,500,000,000 from the RX divestiture. We are we will be receiving $400,000,000 for the Omega lawsuit of which half is in escrow right now and the court gave or the binding arbitration gave them 30 days to come up with that cash plus our additional operating cash flow all year long. And we also have a $1,000,000,000 current credit facility. Now having said that, I'm not ruling out the fact that we might refinance opportunistically some of the debt, but I'll leave that In Ray's hands, because we have some debt coming due next year, but we don't need to do it for this deal. The cash is sitting there. I think we anticipate through there is normal processes and when you do a deal in France And we think this is a great deal and a win win, but we need to get work council approval in France. And so we'll go through that process. And likewise, we'll have some regulatory approvals around the world. I'd say, should get done in the first half of twenty twenty two. Maybe we'll beat it a little bit, but we're saying the end of the first half of twenty Okay. So If I go back to May 2019 again, What I'm most excited about besides that the high quality of this particular acquisition is also that we are fulfilling our May 19, 2019 Investor Day promise. So when I look back on it, we were at if I take a slide on the top half of the slide on the screen, We were at $3.60 to $3.95 in the 2019 guidance, and we said we would do 3 things. We would have business growth that we would have M and A and cost savings that would get us to back to the $3.65 And that was after we had sold off the RX division, which represented about a third of the EPS at the time. So on the bottom, walking us through where we are, we are exactly on that commitment. It took a little longer than I might have liked, we were originally trying to get Rx sold right out of the chute. But in order to get a good price order at a good value, it took us about a year longer than I thought, but we got a better multiple. We made cash along the way. And when you do that, Some other divestitures that we made like the divestiture of our Rx business in the U. K. That was sort of our starting point. Then we added back some acquisitions, some base business growth, got hit a little bit by cough and cold, that got us to where at the end of the second quarter, we provided guidance to the low end of our original range of 2.50 to 2.70. So if that's the starting point, with the normal growth from the base business that we've been talking about and the addition of Approximately $1 by 2023, which includes the synergies that puts us right back at that original commitment. So I think it's worth a moment to sort of step back and say that this company has completely reconfigured itself, has sold off a third of its earnings, replaced it with higher quality earnings And we'll sit today with a business that is and you can see from the numbers that I'm putting on here, Some very strong double digit growth in both top and bottom line over the next couple of years, getting back to where it was before with a high quality focused consumer portfolio that has benefited now with stronger brands, Higher scale and again higher margins and Just a beautiful and bright outlook. When you compare this acquisition to investing in Alternative uses of our capital, we looked at acquisitions and like I said dozens of them to get to This one, we looked at share repurchases, we looked at special dividends, and I'm saying special dividends because dividend regular dividends are always A priority for Perrigo and over the 3 year horizon on every analytic, whether it was IRR, ROI, Accretion, everything, correlation to value, The HRA acquisition, 1 on all metrics. Now having said that, this is a big acquisition for us and a big use of cash. And I will tell you that our focus now will be to close this transaction, work with The regulatory authorities or work councils get the deal done, integrate it and put a lot of energy against integrating it well, and there'll be a lot less M and A. I mean, I won't say there won't be anything. It's something opportunistically, but it will not be our capital allocation priority in the near time. Going forward, incremental capital allocation will be directed towards reducing uncertainty. 1st and foremost, reducing leverage and then opportunistically, some share repurchases if that makes sense. So here we are 2 years, 4 months later, and I truly believe that Perrigo is a transformed company. That is not to say that Perrigo isn't a company that needs to now that it's a consumer company, needs to get better and better and better every year and continuously approved, but the major overhaul is behind us. We are now a focused global consumer self care company, positioned to deliver top tier revenue growth and double digit EPS growth over the next few years that has meaningful scale in both the United States and Europe that is equally divided companies both with national brands and store and value brands with significant value creation potential through profitable growth and multiple expansion with a team that is working hard and I believe will accomplish restoring certainty through the reduction over the overhang. And I think we have a completely uncomplicated clean story going forward for our investor base, And we're excited about making it all happen. And with that, we'll open the line up to Q and A. Thank you. We will now begin the question and answer today's first question comes from Chris Schott with JPMorgan. Please go ahead. Hey, guys. Congrats on the deal. Good morning. Good morning. Just my first question was just a little bit more color on the growth in the portfolio you're acquiring. I think you talked about mid teens growth. I'm just trying to get a sense of how that compares to historically, How we think about organic growth for this business? And when we think about that growth, is it kind of one of these assets driving Most of that growth or is it the whole portfolio? I'm just trying to get my hands around basically the drivers here. And is there any as we think about risk to the growth profile, like how should we be thinking about that? And then Couple of follow ups after that. Well, the I'll give you a much more detailed answer in the future as we get closer to the transaction closing. But I will say that the HR team are pro. And each has each of these segments has strong growth plans that are consistent with their historical growth, with the exception of that they too, like us, like many companies, had an interruption from COVID, right? So people aren't out We're now traveling and hiking as much in 2020. So it was affected on their business as well on that particular brand. So you have a probably a stronger growth rate initially on Compete because you got a rebound on that, which is not something that we're hoping to see has already clearly begun and the run rate so far there. In any acquisition, the management team puts together their projections. We risk adjust those. So and we've done that. But there are strong growth plans with Moderna. Moderna just went through a major restage in the U. S. It is positioning itself beyond just beyond just the scar care and the fever blisters and all kinds of different medicated skincare and It has the ability to do that. In the women's health business, there is The daily contraception, there is Europe, I would say, isn't the primary the existing businesses, the primary driver of the growth. There's tons of growth from more new markets. I think they've already switched 35 countries with LO1, which has A significant competitive advantage versus Plan B. And then there's the upside that we don't have in our models yet on The daily oral contraception, which just got approved in the U. K. And is in the process in the United States. So Yes. And Compeed, Compeed is the same thing. They are broadening their strategy to not just blisters, but into burns and into cold sores and wounds. I mean, this it's a beautiful you get that chance to see Compute. It's a superior product and there's a reason It sells so well and taking that technology and taking it into other areas has been working for them and that's a big driver of future growth As is geography right now. I mean, they've just started coming into the U. S. And that'll be some work to do. It's a big market. But Again, lots of running growth. I don't have the numbers in front of me right now on the percentages, but all three brands will contribute and we believe that based on the history or realistic growth rate. Great. And just as a follow-up to that, it seems like You mentioned that a strong team you're bringing on board here. Is I guess as you think about running this portfolio, is this largely kind of running it As the prior management team had been thinking about in terms of strategy or is Key to the Growth kind of leveraging Perrigo's footprint and driving further sales that direction. I was trying to get a sense of again, is this a business that could have generated mid teens growth on its own? Or are you stepping up The kind of forward growth rate because of the benefits of the broader scale you're bringing to the entity? I have not factored. This is based on their track record and their plans that are the drivers of growth right now. I believe there is upside to that. We have not built revenue synergies into this. But the fact that We have a they have no sales force really of scale in the United States. We do. They don't have we have double the size of the sales force in Europe. It can only bring higher sales to them and the credibility that we get Revenue synergies, there are products that are in our portfolio. I mean, we have blinds like ATCO and all that that are medicated skin products And how you leverage the 2 technologies across it, I think this is our best shot that we've ever had at making the sense of having A European branded business and a U. S. Private label business to bring things across the ocean each way is another significant opportunity for us. I feel good about the growth rates, Chris, but they're and they're in line with their historic No. This isn't like we put in some wild numbers in order to make this deal work. This is what they were doing and performing at. Perfect. And then just final quick one for me is trying to make sure I'm getting the leverage post this deal right. I mean is something in the 4 times range of EBITDA for by 2023 a reasonable way to think about things? I'm just trying to as we factor in the Omega cash flow etcetera or payment. Just help me a bit on leverage for the company? Yes. Without taking into account the A potential Irish Noah payment, which would change the numbers slightly. We'd expect our leverage in 'twenty two to be about around 4 and then coming down into the 3.5%, 3.3% range and even down to better than 3% by 2024. Obviously, the payment of the Irish Noah would potentially change that slightly. Perfect. Thanks so much and congrats again on the deal. Yes. Our next question today comes from Elliot Wilbur, Raymond James. Please go ahead. Thanks. Good morning. Maybe just a few Financial questions real quickly for Ray upfront. Specifically on synergy realization targets, $30,000,000 assuming that is largely the Permanent level of synergies you anticipate achieving from this transaction? And are there any cash costs associated with achieving That level. I want to try and get a little bit better sense of what the operating leverage is on the double digit Expected growth from the business? What's the relative level of operating income growth when you if in fact you are able to achieve double digit top line growth? So I'll try and answer that one a little bit, but then Murray can talk about The synergies. The operating margin on this business standalone is in the mid to high 20s, 27%, 28%. And their gross margin is in the high 60s, almost 70%. So that gives you an idea of some of what do have operating leverage. The synergies come from the fact that we have, especially in Europe, an almost Perfect overlap in geography with our existing CSCI business in Europe. And This company, HRA, is really low. It's a lean asset, low asset base. They outsource both manufacturing and selling and distribution. We have no plans to bring the manufacturing in house, but we do plan to bring the sales and distribution into our sales force and distribution capabilities and that's where the big synergies are. And because It's basically it's bringing it's getting rid of distributors and bringing it into an in person sales force. We think these synergies are really an in house sales force, I'm going to say, and we think these synergies are really achievable. Having said that, we'll do it carefully and it'll take us over we won't do that initially because we don't want to disrupt the business. Okay. And then just And then just And your operating leverage, like you can do the math as well as I can do the math. What I'm telling you is in 2023, You're adding a buck of EPS, right? So if you're at and whether it's exactly $3.57 or not that's what I put today, but build our plans like we always do. Maybe it will be a little higher because this year wasn't good. Maybe it will be a little less. But if you just assume $3.57 right now And then you layer in a dollar of EPS, you're adding 50% EPS in 2 years, right? You can do your compound annual growth rate on that, but those are clearly dramatically higher than the 3.57%. And that's why I've made the point that you're adding a lot of scale here. Okay. And Murray, with respect to your commentary Earlier about getting more detail in terms of top line growth drivers going forward. But, I mean, anything you can share at this point, at least in terms of What's been driving those numbers historically? Is it geographic expansion, just additional penetration within Core targeted markets, are there is it new products, obviously very strong numbers there and just trying to get a sense of the sustainability of double digit growth, what the key drivers have been. And I know that they have, HRIA recently did a or executed a partnership for the Chinese market. Maybe just a little bit of insight into how important that segment is currently and what potentially the longer term growth opportunity there may be? Sure. Again, we'll go into more details of it. But when I look at what's driven their business over the past and they have been one of the fastest growing consumer FDC companies in the world, they have done it systematically from Geographic expansion has played a big role for compete, so has channel expansion, So has price and channel management. So has been rebuilding the brand's positioning. I mean, it's been growing at 6 times a faster rate under their ownership than the prior ownership. They believe and I believe based on the data that they've showed me there's a potential to double the size of the blister category. They believe that by expanding to being a wound care leader that that puts them into significant segments. And I'm sorry, I don't have at my fingertips the size of those, but they're big categories that we're talking about. Same thing with Moderna going into additional areas, but Compete is clearly a big driver as is women's health. You mentioned that, for example, there are numerous Which is an Asian market is underway and partnerships that are being done. And again, you mentioned a key one that has been a driver for EllaOne and EllaOne has a competitive advantage, right? The leading brand in the U. S. I think is sort of has an efficacy rate with 3 days of emergency contraception and L01 has 5 days, which it gives a competitive advantage. I don't I'm not going to promise OTC switch in the U. S. Because that's a difficult and challenging one. I'm actually more optimistic about the daily contraception and that one seems to be proceeding really well. But if it was to breakthrough and Perrigo, as good as HRA is, we bring a lot of clout in the FDA as well. That could be even a significant and bigger opportunity. But I would say the driving will come from continued geographic expansion and switching in women's health business. So those are kind of The big drivers and again we can go through it as we get into more detail, but Lot of new product activity, a lot of e commerce. Again, Moderna is now I think it's got almost 30%, 40% of its business is e commerce. They've done beautiful job building that out. And again, those are synergies that will work together on both companies. I hope I've given you enough color here. As it gets closer to us, when we know when we're closing and we get through all the councils and regulatory authorities, etcetera, We'll probably do some short introduction and let you meet the management team and hear about their plans themselves. But I get it. These are big numbers, but they've been delivering them year after year and they're confident in their ability to continue to do so. Thanks. Last question, Rx business. Can you just talk a little bit about the operating margin or EBITDA margin structure there? How important is that segment to the profitability of the overall business and given that these are Rx assets, just maybe a little bit of commentary on the sustainability of the revenue streams associated with the various products there? Well, listen, They have been growing. There is significant opportunity without much investment for again geographic expansion. They are confident in their ability and it's good margin business. We'll see what role it plays in our portfolio. I Obviously bought the business for the 3 global leading consumer brands. I don't we've assessed it. We did a good job in assessing it. It's a standalone business. They've set it up as a standalone business within their own portfolio. So And I don't think there's any we have to worry about any volatility within it. And we'll see how it plays out and we'll give you a point of view on that later. But the good point now is right now is a good quality business that is not like subject to pricing erosion and things like that, it's solid. All right. Thank you. And ladies and gentlemen, this concludes our question and answer session. I like to turn the conference back over to the management team for any final remarks. Well, we just wanted to thank everybody for their interest in Perrigo. We know we've gone through a lot of change over the past couple of years, but I'm really excited about the future of the portfolio. Again, I think we have a more financially compelling simpler story than we've had the whole time I've been here. We've got just a little bit more to go to get all the certainty done. And of course, we'll continue to keep getting better, but I really believe next couple of years, you're going to see some big growth out of Perrigo as the stage is set. So thank you very much. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.