Monster Beverage Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2022

There are 6 speakers on the call.

Operator

Good day, and welcome to the Perrigo First Quarter 2022 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Bradley Joseph, VP of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Perrigo's Q1 2022 Earnings Conference Call. I hope you all had a chance to review the earnings press release we issued this morning. A copy of the earnings release and presentation for today's discussion are available within the Investors section of theperigo.com website. Joining today's call are President and CEO, Murray Kessler and CFO, Ray Silcox.

Speaker 1

I would like to remind everyone that during this call, participants will make certain forward looking statements. Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our press release issued earlier this morning. A few quick items before we start. First, unless otherwise stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the divested Rx As described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, Exclude from the prior year period certain costs incurred to support the operations of the RX business, which were reported in continuing operations.

Speaker 1

See the appendix for additional details and reconciliations of all non GAAP financial measures presented. 2nd, Organic growth excludes acquisitions, divestitures and currency in both comparable periods. And third, Murray's discussion will focus solely on non GAAP results. With that, I'm pleased to turn the call over to Murray.

Speaker 2

Thank you, Brad, and good morning, everyone. With our 3 year transformation to a consumer self care company now complete, Perrigo is moving into a new phase, which we are calling The Perrigo team is hyper focused on optimizing and accelerating our self care platform through 1, supply chain reinvention to improve efficiency, productivity and customer service 2, successful integration of our Scale HRA Pharma acquisition and 3, gross margin recovery via pricing and I will also note that this will be accomplished as we also continually strengthen our organization and culture We issued this morning. First, I'd like to thank Todd Kingma, our General Counsel for the last 19 years, who just announced his retirement And Ray Sokak, who I've worked with on and off for the last 30 years and who previously announced his retirement for incredible contributions to the company and our self care transformation. While they will be missed, I'm very excited to share who will be filling their roles. First, Kyle Hansen has been hired from Wolverine World Wide and will serve as our EVP, General Counsel and Corporate Secretary and second, Eduardo Bizerra, most recently from Fresh Del Monte Produce, has been hired as EVP and Chief Financial Officer.

Speaker 2

They represent the next generation of Perrigo leaders who will help drive the newly transformed Perrigo organization. They both have the passion and seasoned relevant experience that embodies the Perrigo advantage, and I'm confident that their diverse perspectives and deep experience will make valuable and immediate contribution to Perrigo's success. Turning to HRA. I'm also pleased to say that we closed the HRA acquisition nearly 2 months ahead of schedule and are extremely excited to welcome their team into Perrigo family. The final purchase price was approximately $1,900,000,000 nearly $200,000,000 lower than originally anticipated, tracing to the recent strength of the U.

Speaker 2

S. Dollar, a good outcome for shareholders. More importantly, the company we bought is performing beautifully. HRA results for 2021 were stellar. This is a business that is growing rapidly, finishing up 26% in 2021 versus a year ago and achieves a robust gross margin north of 70%.

Speaker 2

HRA's strong growth continued in the Q1 of 2022 with net sales up versus a year ago on top of double digit growth versus the prior year. EBITDA was up an impressive 77% versus a year ago in the Q1. Strong top line growth, strong margins and a number of budgeted expense decreases, including One time investments included in 2021 operating income that are not expected to repeat in 2022 Supports our estimates of HRA achieving approximately €90,000,000 in operating profit in 2022. Since we closed the acquisition early and HRA earnings are historically much stronger in the second half Due mainly to the seasonality of Compete, Perrigo is expecting operating income accretion of around €55,000,000 to €65,000,000 in 2022. Beyond 2022, HRA business growth is expected to versus our original €30,000,000 estimate leads us to reiterate our expectations for HRA to add About EUR 150,000,000 in operating income in 2023, and that excludes any potential short term impacts associated with capturing the synergies.

Speaker 2

Turning to Slide 11. 1st quarter results for Perrigo were generally in line with our expectations, despite another wave of cost headwinds resulting from the war in Ukraine. Net sales increased 6% versus a year ago with organic net sales up a very strong 10%. We attribute this strength to a global rebound in coughcold and U. S.

Speaker 2

Nutrition infant formula sales. Price also had a positive impact. Gross profit margin was down 140 basis points sequentially versus Q4 due to one time items we don't expect to repeat. Note additional cost pressure was offset by price increases and higher volume in the quarter, resulting in our EPS finishing at $0.33 per Currency neutral EPS for the quarter was $0.37 including a $0.02 per share negative impact from the war in Ukraine. While Perrigo's top line continue to accelerate sequentially, What is more important is that our net sales in Q1 2022 are substantially higher than they were back in 2019 before the ups and downs of COVID.

Speaker 2

On a 3 year basis, our 1st quarter net sales compound annual growth rate is plus 5.6 percent and our organic growth rate, call on a compounded basis, is 2.9%. There can be no doubt that the transformation has returned Perrigo to revenue growth. Looking at our categories in more detail, strong total net sales growth was driven by strong performance across both CFCA and CFCI with coughcold and contract tax sales leading the way. Infant Formula was also a big driver in the USA. Strong shipments are aligned with robust Global consumer demand for self care products.

Speaker 2

After 2 years of disconnects between shipments and consumption, The system appears to be back in balance. I think it's worth spending a minute on infant formula. This business has turned around nicely. Top line growth in our nutrition business was up 38% in the quarter, driven by infant formula. Importantly, Perrigo gained more than 5 share points compared to a year ago.

Speaker 2

These gains came from the launch of new hypoallergenic formula offerings, Continued growth in our organic products and the roll off of COVID enhanced benefit programs for formula. Our business also benefited slightly at quarter end from the recall of a competitor's infant formula. While this didn't benefit us in the quarter much, we are now seeing higher demand. And Perrigo is doing everything it can to run as much infant formula as possible to help fill the shortages created by the recall. Also during the quarter, I'm proud to say the Perrigo team received U.

Speaker 2

S. Food and Drug Administration approval for over the counter Nasonex, the company's first ever branded Rx to OTC switch. The NDA was a first cycle approval and we expect the brand to be on shelves at leading retailers in the U. S. This fall, a big win for the Perrigo regulatory team.

Speaker 2

Turning back to gross margin for the quarter. We are laser focused on recapturing the margin loss due to supply chain disruptions and cost and freight inflation. And we still see a clear path to gross margin expansion in the second half of the year, consistent with the phasing discussed on our last earnings call. Manufacturing productivity, elimination of one time costs, price increases and note 90% of expected benefits from price this year are still to come. The sale of the Latin American businesses and now the addition of 70% gross margin HRA products should allow us to recover 400 to 500 basis points of gross margin by year end.

Speaker 2

Now on to guidance. We are increasing our organic net sales growth guidance to 8% to 9% compared to prior year, up from 7% to 8%, driven by expected strong performance for the rest of the year, partially offset by 0.5 percentage point from expected loss business in Ukraine and Russia. We are also increasing our all in net sales guidance to growth of 8.5% to 9.5%, up from 3.5% to 4.5% versus the prior year. The primary driver is the addition of HRA, which is expected to contribute approximately 5.5 percentage points of growth through this year. This will be partially offset by the impact of unfavorable foreign exchange.

Speaker 2

We are also increasing our full year adjusted diluted EPS guidance to $2.30 to 2 point and $0.40 per share. This range includes approximately $0.35 accretion from HRA and a $0.20 headwind stemming from Russia Ukraine related macro volatility, which led to unfavorable foreign exchange and higher than anticipated refinancing costs. Putting the year together, we are now Expecting outsized growth on both the top and bottom line with near double digit top line growth and approximately 14% Diluted EPS growth. In closing, our focus going forward is to optimize and accelerate the business through supply chain reinvention, through successful integration of HRA and through gross margin enhancement and by continually improving our organization and culture. We are focused on controlling what we can and what remains a very dynamic environment.

Speaker 2

We have inflation related pricing actions in place to cover rising costs and expect them to fully take hold in the second half of this year. We are also uniquely positioned in the U. S. Consumer self care market to benefit from an inflationary cycle as evidenced by store brand share gains during the last recession. And with that, I will turn the call over to Ray one last time to discuss the financials in more detail.

Speaker 2

Ray?

Speaker 3

Thank you, Murray. Good morning, everyone. And yes, This is my last Perrigo earnings call as I'm going to be retiring from the company. It has been a privilege to work with the talented Perrigo team over the past 3 plus years, and I'm excited about the path ahead for the company. Currently, I'm working diligently to Sure.

Speaker 3

A timely and smooth transition to Eduardo, who with his deep experience will be a great new CFO for Perrigo. Now let's review our Q1 financials. On a consolidated basis, the company reported a GAAP loss from continuing operations of $1,000,000 for the Q1 of 2022, a loss of $0.01 per diluted share. On an adjusted basis, consolidated net income from continuing operations was $45,000,000 And adjusted diluted EPS from continuing operations was $0.33 per share versus $0.50 per share in Q1 last year. The decline in adjusted EPS as compared to prior year was primarily due to one time headwinds in CSCA.

Speaker 3

These included Higher customer service claims related to unfulfilled customer orders and lower profitability on contract manufactured product for the now divested Rx business. We also have had higher planned advertising and promotion expenses in CSCI in support of our strong top line growth there. And as Murray noted, the inflation impacts in cost of goods sold and transportation costs were offset by increased sales volumes and higher Also unfavorable foreign currency movements hurt adjusted EPS by $0.04 And we experienced an additional $0.02 EPS impact, half from lost business in Ukraine and Russia and half from product donations we made in Ukraine in line with Perrigo's corporate charitable philosophy. Moving on to non GAAP adjustments. In the Q1, pre tax non GAAP adjustments totaled $71,000,000 Major components included amortization of $49,000,000 HRA acquisition and integration fees of $11,400,000 plus $3,500,000 from HRA purchase hedge costs and impairment charges, writing off a $5,000,000 fixed asset.

Speaker 3

Full details of these and other adjustments can be found in the non GAAP reconciliation table attached to this morning's press release. The non GAAP tax adjustments are primarily due to a $13,600,000 tax expense related to a Pretax non GAAP adjustment and the removal of the following reported items. 1, a $17,200,000 tax Benefit on dispositions of entities offset by $2,600,000 tax expense for non recurring legal entity restructuring. These led to an adjusted effective tax rate for the quarter of 22.5%, slightly up from the Q1 2021 Adjusted effective tax rate of 22.2 percent. From this point forward in this presentation, all dollar numbers, basis Points and margin percentages will be on an adjusted continuing operations basis unless stated otherwise.

Speaker 3

Since Murray already covered net sales for the quarter, let's move on to gross profit. Consolidated gross profit in Q1 Was 8.3% lower than prior year, primarily due to the one time headwinds I just mentioned, including unfavorable foreign currency movements. Gross margin declined 540 basis points versus the prior year due primarily to these one time headwinds, which account for nearly half of the decline, unfavorable product mix from higher proportion of sales coming from store brand compared to branded and the timing of pricing actions relative to inflation as well as unfavorable foreign currency. Consolidated operating income for the quarter was $87,000,000 $32,000,000 below Q1 last year, primarily from unfavorable gross profit flow through, but also from higher distribution costs and increased advertising and promotion expense, which helped us deliver our strong top line growth. Turning now to the Q1 segment results.

Speaker 3

Let's start with Consumer Self Care Americas. CSCA gross profit in the quarter was $178,000,000 $24,000,000 below last year. Higher sales volumes and positive pricing in the quarter were more than offset by inflation in cost of goods sold and transportation. In addition, in Q1, other cost headwinds, including lower profitability of contract sales to the now divested Rx business, Customer service claims and some other headwinds had a total adverse impact of approximately $24,000,000 In combination, these factors led to a year over year gross margin decline of 6.40 basis points in Q1. Operating income for Q1 was $87,000,000 $23,000,000 down from Q1 last year, primarily unfavorable gross profit flow through and increased distribution expenses, partially offset by lower R and D and admin costs.

Speaker 3

These factors led to a 500 basis point year over year decline in adjusted operating margin. Moving on to Consumer Self Care International. CSCI gross profit was 182,000,000 down $9,000,000 or 4.8 percent from the same quarter last year, largely due to unfavorable currency movements. Gross margin for the quarter decreased 180 basis points, primarily the impact of product mix as we had higher growth in both store brand and contract manufactured products as compared to our higher margin branded offerings. In addition, we felt the adverse effect of having carried in high cost inventory made in Q4 last year, but expensed in Q1.

Speaker 3

Adjusted operating income of $53,000,000 was $7,000,000 below same quarter prior year, including a $7,000,000 adverse currency effect. Excluding currency, gross profit was 4.3% higher

Speaker 2

than in

Speaker 3

the same period last year, driven by higher sales volume in the quarter, which came about despite the loss of business as a result of the Russian war in Ukraine. At the operating income line, favorable gross profit flow through excluding currency was offset by higher Pricing and promotion spend in support of CSCI's strong top line growth. These factors led to a 130 basis point year over year decline in adjusted operating margin excluding currency effects. Moving on now to the balance sheet. Cash on the balance sheet amounted to $2,000,000,000 at the end of the Q1, up from $1,900,000,000 as at year end 2021.

Speaker 3

After the quarter ended, we closed on a $2,600,000,000 refinancing comprising a 1.6 $1,000,000,000 term loan and an undrawn $1,000,000,000 revolver. The term loan was used to refinance an Existing term loan maturing in August as well as to refinance 2 2023 bonds and to provide approximately $500,000,000 in incremental borrowings over and above what was already available on our balance sheet to fund the $1,900,000,000 Acquisition of HRA together with cash on hand. Operating cash flow for the quarter was $79,000,000 A strong 176 percent cash conversion on adjusted net income. As Murray discussed, we continue to operate in a dynamic environment, but remain poised for outsized Growth given the contributions from the HRA acquisition and continued strong demand for our consumer products, which is reflected in our updated EPS guidance of $2.30 to $2.40 a share. Operator, can you open the line for questions, please?

Operator

We will now begin the question and answer Please pick up your handset before pressing the The first question today comes from Chris Schott with JPMorgan. Please go ahead.

Speaker 2

Hey, guys. Good morning, Chris.

Speaker 4

Good morning. Just a couple of ones for me here. I guess first on the gross margin front, and it's maybe a couple of different pieces to this. I know you touched on this in the remarks, but I'm still just trying to get my hands around the step down in CSCA gross margins When I look at kind of second half twenty twenty one to 1Q twenty twenty two, I think they came down about 250 basis points sequentially. And can you just provide a little bit more color of, I guess, how much of this was one time?

Speaker 4

What were the one timers exactly? And then I guess, how much of this is Like a sticky or supply chain inflation type stuff that you're going to have to work through as you go to loan?

Speaker 2

Yes. It's 100% one timers. Okay. And we got hit with about $4,000,000 One timers, part of it is cleanup. There was a number of things.

Speaker 2

1 in the system as cold cough business came roaring back, We had a bunch of customer claims, which we're working through and reversing right now. So it may not only be one We may actually recover a fair amount of it, but there was about $7,000,000 of claims that are automatically kicked out when you when we agree on to fill a certain level of orders and we don't, they take deductions. And there are boundaries that guide it, but it automatically happens in their computer systems and ours, and we have to manually go back and challenge those, which we're doing. So We went from I'm going to give you just an example. If the forecast was for 100, I mean, it's obviously different than that for cold cough.

Speaker 2

All of a sudden about the 1st week of January, it shot up to 10 times that. We were able to fill 2 or 3 I'm sorry, but not the remaining 7 times. And there was then automatically kicked into the system these claims. And it was like I said, it was worth about $7,000,000 That number will come down 1,000,000 if not completely go away versus the past. So that's one piece of it.

Speaker 2

Another piece of it unfortunately as part of one timers, Even though we were short of cold and cough inventory this year from a year, almost 2 years ago of inventory that you made for the 21 season back in 2020, right, so for the inventories for that And with no coughcold season, we had a little bit of clean off of write offs that needed to take place for that. We when Ukraine, Russia came along, we made a number of product donations and charitable donations that Where one offs that we believe was the right thing to do. Those are just and there was I think a yes, Ray can help me, but I believe it was a $5,000,000 or $6,000,000 royalty rate catch up on one of our suppliers That day, the accruals just needed to be adjusted. None of that fit. That's a couple of 100 points.

Speaker 2

Basically, I am telling you that the gross margin on CSCA, absent those one timers was exactly what it was in the Q4. And I'm actually feeling Very optimistic about gross margin this year to our plans. I know you guys had us in at A higher level, but we actually hit our plan despite a couple of 100 gross margin points of 1 timers. If we hit our internal despite currency working against us, despite a new wave of cost increases that we offset With pricing and most of our remedial actions, like 90% of them are still to come, like pricing and things like that, which we can talk about.

Speaker 4

So it sounds like based on the answer, I know that you laid out the second half margins for a nice step up. Just I think about Sequentially for 2Q, should we be thinking about kind of 2Q, let's just stick on the Americas business and pre HRA, Kind of more in line with what we're seeing for the second half of twenty twenty one? Or is this kind of like 25.5 percent, 25% level, wherever we are currently kind of like a good For 2Q, I just want to make sure I'm kind of getting the this is such a focus on that number, just the gating as we go through the next few quarters.

Speaker 2

Yes, I mean, but HRA is going to factor in, but go back to what was the period you were trying? Are you Sequentially, it's going to increase.

Speaker 4

But that's what I'm trying to get my hands around. Yes. So, should I look

Speaker 2

at basically, I think we were

Speaker 4

like 27.5%, second half of 'twenty one. Is that like a reasonable level to think about 2Q, before HRA.

Speaker 2

Do I think it will be around 20 Well, you're talking I'm looking at consolidated. Just give me a second to get down to the CSCA. Yes, I think that's sort of thinking about it the right way. I mean, if you're doing it pre yes, well, actually, I've got to go. Give me one more second.

Speaker 2

Yes, I think that's right.

Speaker 4

Okay, perfect.

Speaker 2

I'm kind of sticking my neck out here, but I think we're going to recover almost all of the gross margin loss this year. I'm looking at 400 to 500 gross margin points of recovery by the Q4.

Speaker 4

Okay, perfect. The other topic I just wanted to talk a little bit about, HRA looks like you had a pretty very strong 1Q. And I know I think you were planning on talking a bit more about this later this year about the HRA growth targets. But If I just go back to, I guess, the 2021 results and kind of bridging out to where you're thinking about for 2023, I think it assumed something like a mid-20s percent annual growth rate. Can you just again just remind us of the growth drivers that are enabling that type of Step up in HRA growth for the next few years.

Speaker 4

I know it's a question that came out quite a bit post the proxy and would just love just a bit of a Reminder of just kind of how we think about the drivers of HRA these next kind of 2 years or so?

Speaker 2

Yes. I'm in A funny location giving this earnings call to you, Chris. I'm actually in Europe I'm at. I'd be going back and forth. I'm at HRA integration meetings.

Speaker 2

I was at HRA headquarters 2 days ago going through Each General Manager that leads all the hubs around the country around the world actually, Europe export, U. S, Where there's an incredible high level of confidence in them saying this is the best start that company has ever had That there are people are traveling again, etcetera. So the first thing you have this year is The numbers that we published out in the 8 ks, those were COVID numbers. Compete was hurt dramatically by COVID, Like our Frost Cold business, no one was out traveling, hiking, needing, plasters. I mean, they weren't out wearing high heels going to work.

Speaker 2

Those are all the drivers. So you have this ramp up besides the normal growth of them adding countries, Converting on LO-one, they are continuing to switch different countries around the world from Rx to OTC, in future years, you have the entire line. They have their Hannah line, which is the everyday Pill that is a birth control pill that is if you've been reading the articles around the Controversy of Roe versus Wade, there's also been articles in Politico about one of the best positioned companies being HRA, Who has a solution with an everyday, over the counter pill that, we hope to have in by 2023 will be a growth driver and Applications are going into additional countries around the world for that. They are broadening the usage of the brand. I've already extended tremendously successful from just from wounds and heels to adding right now Fever, blisters, and there is just a whole wave of ways to build that brand, to build out the product portfolio.

Speaker 2

Expanding into the United States is a big priority and driver of growth. I mean, I was just blown away By both the confidence in that team, the capability, the sophistication of the marketing and They strongly believe in those numbers. What's that all up add up to? I think you're talking about on a about Double digit top line growth continuing without any revenue synergies and you're talking about the 100 and Going to $150,000,000 in operating income next year or 2023, excuse me. So, yes, Brad talked to you about operating income.

Speaker 2

I've gone back and forth. Even in the deal model, we were talking EBITDA and the European version of EBITDA, though we're converting it back into our operating income numbers. So I mean, right now, it feels like the sky is the limit. And again, we raised the synergy number from €30,000,000 The €40,000,000 This is going to come back this will be the best acquisition I've ever done in my career.

Speaker 4

Excellent. Appreciate the color. I'll jump back in queue. Thanks.

Operator

The next question comes from Elliot Wilbur with Raymond James. Please go ahead.

Speaker 5

Thanks. Good morning, Alex. Hey, Murray, how are you? Good. Thanks.

Speaker 5

Just Maybe a high level question on macro trends in the U. S. Store brand market seeing relatively strong growth metrics, but Wondering what you may be seeing in terms of potential consumer trade down In the quarter over the last year, just how things have trended from a market share perspective in the categories In which you compete in. And then more specifically on the Nutrition business, Strong performance in the quarter, obviously, a lot of factors behind that. But just wondering if we could sort of maybe tease out the Incremental lift from some of the organic initiatives that you talked about over the past couple of quarters Versus the benefit from overall supply issues resulting from developments at one of your competitors.

Speaker 2

Yes. Well, let me do the second one first because that's pretty finished. And It only the recall only happened in like last week of March. So it had a we had a bigger week that one week, Whether that was a few $1,000,000 or so, it wasn't massive. It is big in the Q2 though.

Speaker 2

It just is. We are I could run double what we have. We are running flat out as much as we can. Will that be sticky? We hope parts of it are sticky given the test, but the and we don't know how long that situation is going to be In place, it could be a while, it could be a long while, and we're looking at ways to potentially Increased capacity at the request of the FDA.

Speaker 2

We're doing whatever we can. I will tell you part of it that will be sticky In the face of the cost increases and shortages, our customers were more than understanding that we Needed to adjust the price of this product. No price gouging or any of that, but it had been hard to do in the past few years and we were able to do that. So that's a positive. So yes, I mean, Q1, barely anything.

Speaker 2

Q2, it'll be meaningful. Turning to the first question, we haven't really seen much trade off. It continue I believe that is going to be And I listed it on one of the slides as an upside for Perrigo. But the national brands have spent a lot of money in A and T To restart their businesses, to restart their advertising, they clearly had some new products out there ready to go And they've grown frankly a little bit faster than the store brands in the exiting the year end The Q1, the good news is we dug in pretty hard to that and had our partner from a data source and information resources do all the Panel data and switching and none of it came from store brand. It was just increases in consumption among their existing consumer bases, but not a big trade down.

Speaker 2

So the big numbers that you've seen in consumption for us is all been just Category growth in all boats rising, not a lot of switching. I will tell you they're taking more pricing Then we are. We work hard as we can with our partners to they've been beautiful. They understand what the situation is now. We have, boy, I think we had only $125,000,000 of pricing in our consolidated P and L for this year and for us that's a lot.

Speaker 2

And by the way, I think about 10% or a little more than 10% of that was in the Q1. So there's well over 100,000,000 still to come on agreed upon price increases, but that's still only about 3%, 2% to 3%, I think it was 2% in the Q1, where if you're looking at other consumer benchmark companies, the big guys, they were talking about volume up 5 from pricing, 5 from volume. We were up 8 from volume and 2 from pricing. And I think that sets us up For even more future growth, as the price gaps widen a little bit. So, we're working hard, but I think we've got All of the inflation, including a second wave because of the war, implications on Energy prices, other commodities, and all of that is triggering a rise for us of another $45,000,000 of input costs.

Speaker 2

The input costs we carried in plus that $45,000,000 are all being covered by about $125,000,000 of pricing, so And some good strong volumes. But I think we finished this year double digit On a constant currency basis top line near 20% on a constant currency neutral basis for The bottom line, margins growing again, beautiful brands coming in with HRA. I think it's going to feel a whole lot different I'm in the back half of the year, but I do think this was our low this quarter.

Speaker 5

Okay. Just following up on that. I think in the text With respect to CSCA, it's mentioned that roughly $34,000,000 of cost Headwinds hit the operating profit line, absorption issues and freight costs And the like of which all seem to be more transitory. Just wanted to confirm, in fact, if you believe that Pricing actions and procurement actions in and of themselves would be sufficient to offset That drag in the second half of the year?

Speaker 2

Yes, I think it will be enough to offset the drag for the total year, but There was a delay a lag. We're not like a national brand where I can go in, take a price increase on Friday and it's up on Monday. We have to negotiate those, when the stores are being reset. Many of those price increases are just going into effect now. Many of When into effect late in the quarter or in the beginning of the Q2, but somewhere in place.

Speaker 2

But call it, If we had roughly $0.15 of material and freight inflation in the Q1, we probably offset 80% of that, Something like that in with pricing alone and then the rest got offset by volume. As we go forward, you're going to offset all of it or even possibly a touch more. And listen, the big unknown For us, no one said it, but we had a big currency impact on the business.

Speaker 5

Then I wanted to circle back to the Gross margin issue and we've obviously touched on this many times over the past 12 to 18 months. But Within your prepared comments this morning, you talk about Optimize and accelerate and refer to supply chain reinvention. I mean that sounds more like a facelift than a Botox Injection, so I'm just wondering if you can kind of give us maybe some early insight into terms Of what you're thinking, I mean, is this an actual, alteration of the physical Footprint here is just more about just having better processes and procedures in place and material planning Strategy so that we don't kind of see these huge swings in Inventory and just we've got just better line of sight into production, just trying to understand Exactly. What you're kind of thinking, at least at this early stage when you talk about the supply chain reinvention?

Speaker 2

Let me also be very clear. When I am talking about that, I am talking about Accelerate. I am not talking anything about the 2023 For the 2022 forecast, I do have some assumption in 2023 as I build it. So Can I if you don't mind, may I answer the I'd like to answer the question for you this year because I want to hit it over the head that it's a very clear After recovery without that? When you add the absence of the one timers in the Q1 sequentially, You're adding a couple of 100 basis points.

Speaker 2

When the absorption issues go away that we carried into the year in the second half, you add 120 Basis points. When you remove Mexico that was low gross margin and 0 operating margin, dollars 100,000,000 in sales, You add a certain amount. When you add a 70% gross margin HRA business that's growing rapidly from a mix, you add 200 gross margin basis points, even if you don't get a single benefit of the pricing. So those are the drivers between to get you back to 400 to 600 points and a growing portfolio with the top line growing double digits and the EPS Growing double digits, which is a pretty exciting place for us to be and by the way without $3,000,000,000 worth of tax risk. Okay.

Speaker 2

Now optimizing accelerating. I'm starting to tease you with the ideas that I think can be very exciting for Perrigo going forward. We have done 5 divestitures, 8 acquisitions completely reconfigured this company to be consumer self care. You had the Omega Acquisition that was done a number of years ago and the entire supply chain has never been optimized. So The answer is all of the above to what you said.

Speaker 2

And it will be a 5 year project. And We got we took out $100,000,000 and people have complimented us on being pretty tough on the operating expense line, but the Cost line in this company is dramatically higher. There are 3 to 4 phases. There's a short term, let's call it a short term, a midterm and a longer term, 12 to 18 months, 18 to 36 months, 36 months plus. Anything that would involve Consolidating distribution centers and optimizing for the portfolio of weed products we have going forward.

Speaker 2

That's further out And I will share with you when we get to our Investor Day our ideas there. The immediate ones though are getting our service level Backup coming out of COVID and all the disruption of supply chain disruption that has given us a number of those one timers that has resulted In SSSO levels that over the course of the year and obsolete inventories from making it and missed shipments of It's probably $100,000,000 of profit opportunity in that category alone. But the carrot that I'm starting to tease That again is not in our numbers. It's $100,000,000 to $300,000,000 opportunity. We have a lot of work to do on it.

Speaker 2

It's Rita's and it is going to be the culmination of 3 years of putting in costing down to the SKU level, Being able to get demand data for our SKUs separate from the entire store brand industry to build better demand models, But a lot of things change when you get your service levels up into the 90s, including your ability to sell more distribution and leave less revenue So demand planning is a super example of that. Scheduling is a super example of that. Product portfolio is a great example of that. Elliot, we did an analysis and had some help doing it. But every time the national brand launches a big SKU, we have 500 variations we take to market because of Years of history of Perrigo in the U.

Speaker 2

S. Saying, yes to every single variation. The startling part of that is 80% of that It's not consumer facing and it's just a customer wanting it a little different, a little different, a little different, slows down, breaks down our line. So the ability for productivity, increased volumes, almost every single one of our lines is at max capacity running 24 Hours a day, which is one of our major service issues. And so that's a huge opportunity, eliminating probably, I think I showed this a year ago though, and we're working on it.

Speaker 2

But 30% of the line probably represents 90%, 95% of The contribution margin. So upfront demand planning forecasting, getting those service levels up, our portfolio reconfiguration are short to mid term goals, but there will be behind that opportunities for Consolidation of distribution centers and plant shop floor metrics, etcetera. So Yes, we're excited. We have turned ourselves into a consumer self care company. Now it's time to turn ourselves into a great one.

Speaker 2

And I got to get this darn margin issue as you point out behind me, so everybody can get as excited about the business as I am.

Speaker 5

Yes, absolutely. Two quick additional ones for you. Given all the external issues That the company has faced on the logistics side and input cost side that have hampered Gross margins in the U. S, I guess, I find it surprising or relatively impressive anyway that the CSCI margins have held up substantially better. We've really seen very little margin compression There.

Speaker 5

How much of that is just supply chain related with respect to that business versus the ability to just take higher and more immediate pricing actions to offset whatever incremental costs you are seeing. And then as a closer, Given that you now own HRA, the company has been working on a potential OTC switch of a daily oral contraceptive in the U. S. Market for some time now. Just wondering if there are Any action or regulatory updates that are on the clock for the next 6 to 12 months.

Speaker 5

Thanks, Barry.

Speaker 2

Okay. So on the second one and the biggest one, the next step is the official filing, You go through all the questions and all those circles and with the FDA in the U. S. On

Speaker 1

We're with customers, so I'll

Speaker 2

tell you the name. It's called the Oak Hill. And the Oak Hill is Should be filed here within the next few months. So that would be the next big hurdle and then the clock starts But again, I'd encourage you to read the political article from earlier that this is Something this country needs. I mean, there are 6,000,000 abortions a year in the United States and 30% of women who can't or have difficulty getting access to birth control And this improves accessibility, which is what our company is all about.

Speaker 2

And by the way, it won't be the only country that we are Applying and we continue to apply for also for L1 in numerous countries and We also have Nasonex that we got done. So it's there's a lot of great things coming. CSCI, you answered your own question. It's primarily pricing. But I mean that's the biggest answer, I think.

Speaker 2

In general, I would say, I'll give credit to Stan Anderson, who runs that group and team. They've done a lot of the portfolio reconfiguration that I've talked about. 5 years ago, there were 15,000 SKUs and our international business today, there's about 5,000. Sven would tell me there's still about 1,000 too many. So there's still further opportunity, but that's helped drive gross margins as well.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Murray Kessler

Speaker 2

Yes. Like I said earlier in the call, I'm over here in Europe For the first time in 2 years over 2 years to sit in front of a room of our sales force. And 2 days ago, I was in Harris, in front of the entire HRA team and I just can't share with you how excited and not how excited The people in our organization are and about our future, etcetera. Bottom line, we said we would start growing this company double digits and earnings double digits This year and this is the year to do it. We spent a few years making it smaller and getting that cash And I've reinvested it now and you'll start to see those numbers show it very soon.

Speaker 2

It's unfortunate That we got hit with the supply chain and some of the other freight costs and others, but those weren't perrigo Yes, sure. You know that. Those were our gross margin hits are no worse than Conagra's gross margin hits, Procter and Gamble's gross margin hits, Clorox's gross margin hits. I mean everybody at TreeHouse's gross margin, I mean it just hit the entire consumer industry. And I think if you look, you'll see that Perrigo's probably wasn't as bad because our teams have Done an incredible job and I think we will get it recovered with less pricing, which will then in an inflationary environment, hopefully Benefit the company in expedited trade down because the last time this happened, we gained about 4 share points when there was a Meaningful inflation in a recessionary period of time.

Speaker 2

And I think you're going to start seeing volume for those national brands slowdown and and not see volume slowdown for us, but that's just my prediction. Bottom line, we've kept Every single promise we said we would make or we made 3 years ago in order to reconfigure this company, we are At the sort of the point where we believe it starts paying up and you take currency out of the situation where We're well above estimates and that'll turn around too, I mean, in my opinion, but we'll see over time. But right now, we've plugged A very aggressive euro exchange rate and that has an impact. But Strong organic growth continuing, been growing for 3 years, lots of effort on margins, lots of great brands And switch potentials, etcetera, going forward. And after that, you've got the supply chain reinvention coming behind it.

Speaker 2

So I like where I sit right now and it's time for us to prove it. We would have been proving it already, but The world, we didn't expect a war, but we'll get through that too. And I will leave you with one final note. A member of my Ukrainian sales force At the sales meeting and she intends and I almost fell down. I'm like, what are you doing here?

Speaker 2

And she said, well, we need all the information. We still think we can deliver 70% of the plan. We're not backing off. So the people at Perrigo are fighters.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Monster Beverage Q1 2022
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