EcoSynthetix Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 7 speakers on the call.

Operator

Morning, and welcome to the Perrigo First Quarter 2023 Financial Results Conference Call. All participants will be in 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 Brad Joseph, Vice President of Investor Relations and Corporate Communications.

Operator

Please go ahead.

Speaker 1

Thank you, Anthony. Good Good morning, everyone, and welcome to Perrigo's Q1 2023 earnings conference call. I hope you all had a chance to review our leases issued this morning. Copy of the earnings release and presentation for today's discussion are available within the Investors section of the periwad.com website. Joining today's call are President and CEO, Murray Kessler and CFO, Eduardo Bezera.

Speaker 1

I'd like to remind everyone that during this call, participants We'll 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. 1st, unless stated, all financial results 2nd, organic growth excludes acquisitions, divestitures and currency in both comparable periods. All comments related to constant currency, remove the impact of currency translation versus the prior year by applying the exchange rates used in the comparable measurement In the prior year's financial statements.

Speaker 1

And 3rd, Murray's discussion will focus solely on non GAAP results, except as otherwise expressly noted. I want to share my deep appreciation for Murray during his tenure at Perrigo and a warm fellow congratulations on his retirement. Your mentorship and leadership has been invaluable and you have set this company on a path for long term success. On behalf of shareholders, thank you. Now for the last time, it is my pleasure to turn the call over to Murthy.

Speaker 2

Thank you, Brett, and thank you everyone for joining us this morning. Many of you likely attended the virtual Investor Day we hosted at the end of February, where we provided details of the next phase of our strategy, What we are calling Optimize and Accelerate. This was my 2nd Investor Day since joining Perrigo, And I believe this was a critically important event for our company. My team shared specifics on how we expect To generate a significant amount of value for shareholders and the feedback we've received has been overwhelmingly positive. Now after 4 years of transforming Perrigo into a consumer self care company, the management team is focused squarely on operational execution and consistent delivery of results.

Speaker 2

To that end, we've made meaningful progress on many of the initiatives discussed at Investor Day during the Q1 of 2023. We're on track with the integration for the HRA and Gateway Goodstart brand acquisitions and are already realizing significant benefits from both. We are progressing faster than I expected on supply chain reinvention and have seen some exciting results in the early stages, And I'm proud to say that Perrigo's women's health team is starting its presentation to the FDA advisory committee today for a potential 1st in class Rx to OTC switch of the Opel oral contraceptive. Underpinning the progress across our strategic initiatives are strong financial results and business fundamentals. To echo comments from my general managers at our quarterly business reviews, after 2 years of unprecedented volatility, We are seeing our business become more consistent and predictable again.

Speaker 2

That predictability manifested itself in the Q1 where Perrigo achieved double digit growth on top and bottom line, meaningful gross margin expansion driven by both the base business and acquisitions And Retainter grew market share as the global consumer demand and fundamentals remain strong. We also announced within the last 2 weeks The successful elimination of the largest remaining tax overhang on the company by resolving the entire April 2019 ATHENA tax assessment of $843,000,000 No payment was required and this assessment is now completely dismissed. We also just settled the interest rate tax assessment with the IRS and have now Cleared the decks and dramatically reduced uncertainty in the Perrigo investment thesis. As I just touched on, benefits from recent acquisitions are not only turbocharging our financial results, are also creating greater leverage across the Perrigo portfolio. In HRA, we're delivering on our revised higher synergy targets.

Speaker 2

We remain on track with the HRA distributor conversion into Perrigo's direct sales model, which will deliver significant ongoing cost savings Once complete, as I discussed on previous conference calls, there is an approximate $32,000,000 one time impact to operating Income in 2023 associated with returning inventory from distributors. Of this annual estimate, 12,000,000 top line and $0.05 in EPS impacted the Q1 as expected. Importantly, we are realizing greater leverage on our legacy CSCI business as our sales force is now able to combine strong pan European brands Such as Compete and LO1 with Perrigo's existing more regional European brand portfolio. The integration of the Gateway into formula facility and the Goodstart brand also are on track. We are progressing on in sourcing transition services currently provided by Nestle and despite a voluntary recall in the quarter, We're continuing to leverage increased capacity from this facility to provide much needed supply of value based infant formulas.

Speaker 2

More on infant formula in a few minutes. Within our supply chain reinvention initiative, we are on track to remove complexity from our operations through our winning portfolio strategy, which will result in the optimization or standardization of nearly 1,000 SKUs By the beginning of 2024. We had positive conversations with customers at last week's National Association of Chain Drug Stores, NACDS Conference and look forward to partnering with them to increase customer service levels We also completed a pilot program using a system called the Redstone, which will be an integral part of our enhanced Perrigo work system. It provides management and monitoring information at the line operating level. We piloted the system on 3 manufacturing lines across the globe in Q1.

Speaker 2

All three achieved increased productivity above our expectations at a lower than expected cost. These are truly exciting results and we've begun the process of rolling Redstone out across all our global manufacturing sites. As I mentioned earlier, the FDA Advisory Committee meeting begins today to discuss the potential switch of Opel. This is an important day for all women and people in the U. S.

Speaker 2

And it epitomizes our commitments to women's health space. The FDA's approval of OPELL OTC would increase access to safe and effective birth control, while allowing women to take control of their contraceptive needs Independent organizations voicing support of Opel. In the year 2023, Women should have ready access to oral contraception. As a reminder, the FDA advisory panel vote is non binding. We expect the agency to render a decision on approval later this year.

Speaker 2

Looking at our Q1 financial results. We had a tremendous quarter as constant currency net sales grew 13%. Organic net sales grew 6.4% despite unfavorable impacts of 2.7 at 1.3 percentage points from 2 voluntary recalls and portfolio optimization initiatives in CSCA, respectively. Pricing in the quarter was 5.5%, importantly volume grew 1%. Gross margin improved by 400 basis points with nearly half driven by the legacy Perrigo business and the other half attributed to higher margin acquisitions.

Speaker 2

Year over year adjusted diluted EPS grew an impressive 36% or plus 40 7% on a constant currency basis. Success in the quarter was broad based. While global consumer demand remains solid, European consumption is robust and is at a 4 year high, driven in part by a very strong coughcold season. Our Compute brand continues to see strong demand and share gains with consumer takeaway up 19% versus year ago in the quarter. And we're positive drivers of CSCI growth.

Speaker 2

In the U. S, our oral care business is continuing to recover from the logistics and supply chain dynamics experienced last year and sales and consumption trends are very positive. Oral Care consumption grew a robust 20% in the quarter and Perrigo recaptured the number 2 share position In the categories we compete in. And in U. S.

Speaker 2

OTC, we gained share in higher margin Digestive Health and NRT categories, driven by new products and distribution gains. Of note, U. S. OTC organic growth in the quarter We achieved strong growth in both segments and nearly every product category. Many of our investors are U.

Speaker 2

S. So they gravitate toward the U. S. Business, but CSCI, which is nearly 40% of revenues, is really hitting its stride. The business grew 24% constant currency in the quarter, 11% organically.

Speaker 2

The strong EU consumption I just noted was due to high instances of cough, cold and flu, strong brands, share gains, the stickiness of our strategic price increases and the greater leverage from the HRA, Pannier and PN brands. The CSCI business has really come together We also once again experienced solid consumer demand in the U. S, especially when you adjust Our OTC business grew 9% in the quarter in total, including a 200 basis point unfavorable impact from SKU rationalization. It's worth noting shipments to customers were greater than consumption during Q1 in the U. S.

Speaker 2

As customers replenished inventories that were reduced below normal levels as they exited 2022, And that's something we see often in the Q4 and it's not unusual. Other notable category movements in the quarter included women's health, which benefited from the addition of LO1 and other brands from the acquisition of HRA, skincare which benefited from the addition of the Compete and Moderna brands and increased manufacturing capacity for our minoxidil hair regrowth products in the U. S. And oral care, which I just discussed. Let's spend a minute on our CSCA Nutrition business.

Speaker 2

Net sales grew 10% in the quarter driven by strong growth in the contract infant formula business and an additional $36,000,000 in sales from the Goodstart acquisition. As a reminder, this growth is compared against a very strong year ago period position includes an unfavorable impact of $9,000,000 due to a voluntary recall of certain loss of the Gerber Goodstart Soothe Pro Infant Formula. Let me go into a little more detail here. In March 2023, FDA released a national strategy and issued a letter to members of the infant formula industry to assist in improving the microbiological safety of powdered Infant Formula. This letter has a significant impact on our manufacturing and cost to produce infant formula.

Speaker 2

Of course, Perrigo supports FDA in its mission to ensure food safety and promote nutrition for babies. So in response to FDA's new strategy and evolving regulatory expectations, we are 1, making significant investments to further modernize our infant and 2, modifying and evaluating further adjustments to our manufacturing processes and procedures, including refinements to sanitation procedures, quality hold times and more. As I said, these actions will negatively impact supply and significantly raise the cost of producing infant formula. The substantial cost of these new regulatory requirements We will be offset with a price increase. But even after the price increase, we anticipate that Perrigo store brand products We will deliver consumers an approximate 40% savings per ounce as compared to the national brands.

Speaker 2

Let me pull this all together. I can't say enough how much Perrigo has transformed over the past few years and how excited I am about our future. Our fundamentals are strong and getting stronger as we continue to win market share, With that, I'll turn the call over to our CFO to discuss financials in more detail and I'll come back in the end to wrap up before Q and A.

Speaker 3

Thank you, Maureen, and good morning, everyone. For this morning's call, I will provide some color on our Q1 financial results, walk through the drivers of our gross margin expansion, highlight our cash flow And balance sheet metrics and then wrap up with our 2023 guidance. Starting with our GAAP to non GAAP summary, The company reported a GAAP loss of $1,000,000 for the Q1 or a loss of $0.01 per diluted share. Adjusted net income was $61,000,000 and adjusted diluted earnings per share was $0.45 per share versus $0.33 per share in the prior year quarter. A few adjustments to the quarter pre tax non GAAP P and L, totaling $71,000,000 were amortization expenses of $66,000,000 acquisition and integration related expenses of $4,000,000,000 mainly related to the HRA and Gateway facility and restructuring charges of $3,000,000 primarily related to our supply chain reinvention program.

Speaker 3

Details can be found in the non GAAP reconciliation table attached to this morning's press release. Since Mario already provided details for our top line results, I will begin my comments that consolidated gross profit, which grew $84,000,000 or 23.3 percent in the quarter with our gross profit margins expanding 400 basis points versus the previous year quarter. Growth was driven by acquisitions, strategic pricing actions And favorable volume mix, which were partially offset by inflation, 2 voluntary recalls, impact from the HRA distribution transition and the unfavorable impact of currency translation. Operating income increased $33,000,000 or 38%, driven by favorable gross profit flow through, which was partially offset by higher operating expenses due to the inclusion of HRA and the Gateway Facility net of divested businesses. Interest and other expenses increased $15,000,000 due to last year's debt refinancing associated with the HRA acquisition, which both closed in Q2.

Speaker 3

We also saw a benefit in our income tax rate of 300 basis points versus previous year due to changes in jurisdictional mix of earnings. Looking at the bottom line, these factors translated into an adjusted EPS of $0.45 in the Q1, an impressive 36% increase compared to last year or 47% improvement on a constant currency basis. Looking at Slide 16, 1st quarter gross margin improvement of 400 basis points was driven by both business segments. Was achieved through an equal split between the legacy Perrigo business and the HRA and Gateway acquisitions. Within CSCA, gross margin in our OTC business grew an impressive 450 basis points, driven by favorable mix on existing products, benefits from new products and acquisitions and strategic pricing actions that offset inflation.

Speaker 3

As Murray mentioned earlier, our U. S. Oral care business is rebounding from The supply chain logistics dynamics experienced last year and accomplished a 360 basis points increase in gross margin driven by strategic pricing actions, improved service levels and favorable customer mix. These factors led to a 310 basis points expansion in CFA gross profit margin, Including an unfavorable impact of 150 basis points from 2 voluntary recalls in the quarter. The FCI gross margin expansion of 4.70 basis points versus which more than offset the impact of inflation in the quarter.

Speaker 3

The gross margin expansion included an unfavorable 90 basis points impact from the HRA distribution transition. Bringing this together for total Perrigo, gross margin expanded 400 basis From the 2 voluntary recalls and the impact of the HRA distribution transition. We also achieved operating margin expansion across both segments in the quarter. Perrigo operating margin expanded to 100 basis points compared to the year as gross profit flow through due to the factors I just discussed were partially offset by higher operating expenses, Now moving on to the cash flow. Cash on hand was $553,000,000 at the end of the first quarter, down from €601,000,000 at the end of the Q4 last year.

Speaker 3

We haven't been impacted by recent financial institutions' stability In U. S. And Europe, and we have proactively taking actions to diversify our cash flow management amongst We will continue to monitor these developments closely. Operating cash flow for the quarter was $19,000,000 a conversion of 32% in line with our phasing for the year, which we expect to be similar to last year. As a reminder, we typically experienced the heaviest cash outflows in the Q1 driven primarily by annual employee incentives.

Speaker 3

The quarter, operating cash flow included outflows of $10,000,000 from acquisition related and restructuring expenses. We also invested $23,000,000 in capital expenditures and returned $36,000,000 to our shareholders through dividends in the Q1. Looking ahead, we are still projecting 100% operating cash flow conversion to adjusted net income for the full year. Also, our net leverage over the trailing 12 months was 5.3 times adjusted EBITDA, In Q1, we are reaffirming our 2023 guidance, which includes, as Marie discussed, higher costs coming in our CSCA infant formula business with pricing actions to offset these costs. Additionally, timing has shifted slightly in the distribution transitions from HRA to Perrigo, And we now expect the unfavorable impact from HRA sales returns in Q2 and Q3 to be similar to the $0.05 impact EPS impact in Q1 and minimal in Q4.

Speaker 3

This is good news As it means, our transition from distributor to direct sales is going faster than originally planned And does not change the total estimated earnings per share impact of $0.16 to $0.18 only at the time. And we continue to provide updates each quarter on the progress we are making with these transitions. Coming this up, we now expect our second half EPS weighting to be slightly higher than discussed At our February Investor Day. As a reminder, we anniversaried the Latin America and ScarAway divestitures At the end of Q1, we will anniversary the Atreus acquisition during the Q2. Since joining the company last year, I have been repeatedly impressed by our team's ability to adapt and overcome in the face of numerous challenges.

Speaker 3

From record inflation to logistics and supply chain issues, our team continues to navigate in a dynamic environment. This quarter is no different. On top of a solid financial performance, we also eliminated almost all of the remaining tax overhangs on the company, nearly $1,000,000,000 with only a minor cash impact to the company. These overhangs drew my attention when I first joined Verilog and I'm now extremely pleased to say that these are behind us. I look forward to carrying this momentum forward through the rest of the year as we continue to make progress toward delivering on our strategic initiatives, strengthening our business and delivering substantial growth in a dynamic environment.

Speaker 3

Before I turn the call over, on behalf of the entire operating committee, I would just like to say It has been a pleasure working with you, Mark. The transformation that you have led during your tenure here has truly set Perrigo on a path for success, and we could not be more excited to drive our strategy forward. We wish you all the best in your retirement and thank you for your tremendous efforts over the past 5 years. Now Thank you, Mauriz, for your closing remarks.

Speaker 2

Thank you, Eduardo. That's really kind. Few comments on my retirement announcement before we move on As you know, I joined Perrigo almost 5 years ago to lead the transformation of the company from a healthcare company to a consumer self care company. Leading that transformation has been one of the most exciting assignments of my career. From 14 M and A transactions to reconfigure the company's portfolio, The near complete elimination of the company's $4,000,000,000 tax and legal overhang, To the strategic path put in place to create value for the future, I am proud of what my team, the Board support has accomplished.

Speaker 2

The fact that this all happened in the face of a global pandemic, global supply chain disruption, the Russian invasion of Ukraine And the highest input cost inflation in decades makes the transformation that much sweeter. All the pieces are now in place. Perrigo is growing its top line robustly. We've added over 1,500,000,000 in revenues to our consumer businesses since the beginning of the transformation. Perrigo is growing and expanding its margins and is set up to continue to do that going forward And it's growing its bottom line.

Speaker 2

In the Q1, I think we were right at the top or nearly at the top of our consumer peer group. It has a strong plan in place to produce leverage and the company has a clear strategic path for sustained long term growth. Now is the right time for someone else to take the reins of Perrigo and relentlessly drive the execution of our strategic plan for years to come. I truly believe that we collectively have set up Perrigo for a bright future and to create tremendous value for investors. Remember, despite strong results, Perrigo continues to trade at almost a 50% discount And that's why even though I'll be retiring and I will sell a portion of my Perrigo Holdings to diversify, I intend to remain a large individual shareholder of Perrigo and will continue to be very tied to the success of the company.

Speaker 2

I've set the target retirement date of the end of July, and I'm working with the Board on identifying a successor and ensuring a smooth transition. Lastly and most importantly, I'd like to thank the Perrigo employees You have supported me through the transformation. You are truly amazing and it's been an honor to lead you. And with that, operator, we'll now take questions.

Operator

We will now begin the question and answer session. Our first question will come from Susan Anderson with Canaccord Genuity. You may now go ahead.

Speaker 4

Hi, good morning. Thanks for taking my question. And Murray, congratulations on your retirement. You've done a great job setting the Yes. So maybe just I wanted to drill down a little bit first on the gross margin, the 400 basis points.

Speaker 4

I think you said 130 bps from the recalls With the HRA distributor, I guess how much of that was the input formula? And then also if you could maybe just give a little bit more color on the rest of the drivers there between pricing, mix, maybe currency, etcetera.

Speaker 2

Okay. Why don't I take Amador to the first part, Which I just want to sort of talk relative to the gross margin across the businesses and then you can break up the individual drivers. So The gross margin from last year to this year was On CSCA, 310 gross margin points, I think if you look at it, the important parts are Excuse me, it was up more than I had 310. OTC was up 450, so it went from 25.5% last year to a 30% gross margin. Oral Care went from 20 5.3 to 20 eightnine, up 360, but Nutrition had a significant decline had even a bigger decline from the Q4 to the Q1 and that was related to the recall.

Speaker 2

I mean, you had a big hit on that. CSCI actually had a 480 basis point increase. So every part of our business expanded significantly from a gross a margin standpoint. I mean, it's progressing just as we expected, but you had hits and Eduardo can quantify these Purposefully with the HRA, not recall, moving from distributor to our own sales force and then you had 2 recalls that It's $17,000,000 or roughly $0.10 but the business was so strong, it covered it. But I want to be very clear, our margin programs Are working beautifully.

Speaker 2

They're not pricing driven. There's some in recovery, but they're all the kind of things that you want that will continue to We are expanding to grow over time, especially as we have our highest margin businesses are growing the fastest in company now. Eduardo will get to your specifics on the drivers. Go ahead.

Speaker 3

Yes. So coffee specifically there, Susan. So Between the good start impact as compared To last year, we had about 50 basis points there and also on the inventory transition on HRA about 40 basis points and we also had around 40 basis points related to the OTC recall that we announced there. And so On the flip side, pricing had a positive impact of about 300 basis points and volume and mix about 160 basis points positively and those combined more than offset the impact we had on inflation And input cost that was about 230 basis points.

Speaker 4

Okay, great. That was really helpful. Thanks for all those details. And then on the infant formula business, I guess, do you expect there to be a sales impact? It sounds like the rest of the year with the changes from the FDA?

Speaker 4

And then also how much will this pressure be on sales and margin and how long will it take you to get Back in stock and just in terms of raising prices, do you guys have an idea of what that will be in the timing? And then I guess pricing does increase across the category. I would assume this is actually helpful to your private label business, correct?

Speaker 2

Yes. Those were a lot of questions. So let me make sure I cover them up. I Don't get to every piece of it, just ask it again. But let's just go back here a little bit.

Speaker 2

I think it's probably important to say that this letter was Sort of a shock to the system. It's very well intended. I'm not sure whoever wrote it fully understands The impact of manufacturing and output for the industry, especially during a period of time when there are shortages. But I want to be very clear that the Perrigo quality control system did not break down during the Q1. If it had been 3 weeks earlier prior to this letter coming out, there would have been no recall.

Speaker 2

So The quality control measures that were in place of how much product to throw away, etcetera, if you get anything, any variation That had been in place for decades, there would not have been a recall, okay? The FDA, given what happened last year and pressure from Congress and others have tried to raise safety up to another level, very admirable, but it has an input and that's what You're talking about now. So we full plant sanitizations and shutdowns, there'll be more of them. It'll have a negative input on product, All of that, including the sales, will be offset by the pricing, okay? So once you lose in a little bit of volume, you're going to gain an additional pricing and cost and we still see it as making our original plan on the infant formula business.

Speaker 2

It will just be a little bit more back loaded. Pricing here, we don't we're not pricing relative to the competition. We're pricing to offset this higher cost and lower productivity. And but it just so happens that after the pricing that is necessary to do that We'll be about 25 percent on our price value business, store brand business will be about 25% cheaper on an absolute unit, we give away a couple more ounces. So on a cost per ounce basis, we'll actually be at a 40% discount after Pricing.

Speaker 2

Customers hate price increases. I just spent 5 days at the NACDS, our biggest conference. They all understood this. They understood that there was a change and that we have to be able to produce and make Margin, they understood that we weren't expanding margins on this. We were just literally addressing this regulatory change.

Speaker 2

So I think it will be very well supported. Nobody likes pricing when you're a value competitor. But in this case, it's absolutely necessary and we'll sell that through. I'm not worried about that. So

Speaker 4

And then also at retail, I guess, are there certain categories you wish you had more of and how has your ability been to get back in stock quickly?

Speaker 2

Depends on the category. We're making progress, but I've heard of and I heard at NACDS I heard of a lot of categories out there where they're fully back in inventory or even inventories could be a little high. That's not the case for us yet. We shipped a little bit more than we that was consumed during the Q1, but we're still a week, week and a half On average of low end inventories out at the retail level and that's before we begin to build our own safety stock. So, listen, it's really right now for the company, our productivity is doing beautifully in the manufacturing facilities.

Speaker 2

We are running at record levels. We have 2 issues in terms of getting our inventories back off gold And that's because again last year we had an elevated cost cold season right through the summer, which is supposed to be our down season where we build inventories. We are running again at record levels, especially on liquids and pediatric liquids was We should be back in business with safety stocks in for the fall cough and cold season next year. So the other business, as I said, is nutrition. And on a nutrition basis, There is going to be some working through this new regulatory guidance.

Speaker 2

It is with additional full plant sanitizations And longer quality holds in order to comply, it will take some time before we can get inventories back. So What's been a challenge for the last 18 months is probably been now extended. I can't put a time on it, but I don't see an end in sight yet. So when we are fully back in, in a safety soft position on But the good news is we did buy the other facility, so we have a lot more product to work with and we are making those investments. We're not backing off those investments and within another year we should have an additional £7,000,000 of capacity.

Speaker 2

And on the rest of the business, we're back up to service levels. Service levels are not a concern in Europe. We're in the 90s in the U. S. Other than nutrition and cough, cold, I think we're back in the most recent weeks back into the 90s again too.

Speaker 2

So everything's going In the right direction.

Speaker 4

Okay, great. And if I could just ask one more on this week's AdCom on Opel. Curious just any thoughts you could give around that on how they're going to think about this? And then also if it is approved, your thoughts around just the market opportunity in the U. S, is this going to basically add to the market or will it take some of share.

Speaker 4

And then any color you could give on the timeline to launch and impact to the P and L? Thanks.

Speaker 2

Well, I think I read in your note, but it is not and I think everybody knows that at Investor Day, it's not in our Current modeling. It's not in our any of the guidance we've given over the next few years because it's you're talking birth control and this is a big change having So it's only upside, and I think we've been giving a year one estimate of roughly $100,000,000 in revenues. And by the time The FDA got into a position, I think that next 2 or 3 months for them to make a decision once they review all The data and what the advisory panel has to say about it. And you're talking in the very end of the year or beginning of next year. I don't think we have a set Yes, it depends how the FDA when they come to their decisions and any implications of those.

Speaker 2

But Like philosophically though, this is a product that has been on the market since the 1960s. There is reams and reams And reams of safety data on this. And when taken in a whole, we believe the FDA should approve this application, period. There's a lots of pushback in there, which is their job, and that's what they're supposed to do. And we have many extroverts will be testifying and we'll see how it That comes out ultimately.

Speaker 2

We believe this will get approved and hopefully it gets approved this This time through, but again, it's not in our numbers this year, next year. It's all upside, But this is a big idea for the company and we're really excited about when it's out.

Speaker 4

Great. Thanks so much. Good luck the rest of the year.

Operator

Our next question will come from Fred Schott with JPMorgan. You may now go ahead.

Speaker 5

Hi. This is Ethan Brown on for Chris Schott. Thanks for taking my questions. I guess, first off, you already talked about this a bit. But on the nutritional segment, just how do you think about sales growth for the rest of the year as we move past the infant formula shortages, The disruption this quarter and then with the FDA update as well.

Speaker 2

Okay. Well, Let's start with remember last year, the way our business flowed, we We're stripped our safety stocks last March April, little bit of February, but March April were huge spikes. And then after that, well, once we had no safety thoughts and we actually had challenges as the year progressed On our base business, keeping up and running what was we have on our Vermont facility older equipment, It really pushed that and we struggled in the back half of the year. So I think it's just it's going to be a bit lumpy, but I think this will be a growth year And it's not like we're going to be giving back a ton. When we went into buying Nestle, we had Tens of 1,000,000 of pounds of unmet demand even with the Nestle facility in here.

Speaker 2

It's not a demand question. It's a question of How much can we make and how much can we make under the new regulatory guidance and the dollar. So, I don't have the forecast in front of me right now. Brad Give you those numbers later. But we are not backing off plan.

Speaker 2

But from a flow standpoint, The pricing will hit sort of the middle of the year, the back half will get bumped up because of it. It was depressed in the back half of last year. So You're going to have some big growth rates from, call it, May, June, July onward until the end of the Year end infant formula, which is driving our nutrition numbers.

Speaker 5

Thank you. That's great. And then on pricing outside of the Nutritional segment, do 1Q results reflect most of the planned pricing actions? Or can we think about some further price opportunities as we move through the year?

Speaker 2

Well, it's a 2 part answer, right? It is The second is first is that it took us almost to mid year. We were a touch when you look at The traditional CPG companies on national brands in the U. S, and I'm only talking the U. S.

Speaker 2

Here. Our international business is similar to any branded company. But in the U. S, you have to negotiate with customers on store brands and we lagged in the beginning because most of our price increases didn't go into the mid year. So you're going to still get a pretty strong benefit, I would suspect, In the Q2 of this year on most of ours and then you'll start to lap some of those.

Speaker 2

The great news is we have learned through this whole crisis when we need to price for cost, We can get that done. So I'm not going to answer your question right now. You pay me as CEO I have a toolbox and sometimes I go to pricing and sometimes I go to cost and sometimes I go to new products in innovation and sometimes I go to M and A and sometimes I go to supply chain reinvention and sometimes I go to capital structure. But we'll continue to look at which opportunities make the most sense to deliver on the guidance. I truly believe that Perrigo sitting at where it is in terms of its metrics at a 50% discount On valuation, it's all about credibility right now and delivering on the numbers.

Speaker 2

So we'll use any lever. We have to try to consistently perform and deliver the promises we made for the year and then I think everybody is going to

Speaker 3

And then maybe one last One

Speaker 5

for me. Can you just talk about the trends you're seeing on the private label versus national brands given The current macroeconomic environment and anything notable to keep in mind there? Thank you.

Speaker 2

Yes. Eduardo or Brad, feel free to jump in here. But what I see is our volumes growing And their volumes declining. You don't see the dollar swing of down trading as much because they're more aggressive on pricing. I don't want to price if I don't have to.

Speaker 2

That's our competitive advantage. We want to have a good discount versus the national brand. And with good gross margins and then grow market share over the long haul as partnership with Our customers. So you see clearly most national brands etcetera have priced more aggressively than us. But on the other hand, we used to be in a situation where we were having price make giving price concessions.

Speaker 2

Now we've gotten first to stabilization and now our ability to price for growth when necessary. As a result of all of that, we are gaining market share in volume, meaning consumers are down trading.

Operator

Our next question will come from Daniel You may now go ahead.

Speaker 6

Thank you. Murray, on your well earned retirement, I take it you're also retiring from the Board?

Speaker 2

Correct. That automatically happens, yes.

Speaker 6

Okay. And then I was wondering if you could quantify the product shortage impact on the CSCA Upper Respiratory segment, like what that was and if it was lost sales or you consider it just delayed?

Speaker 2

No, they're lost sales. Right now, we were Brad, if you have a number list. I just saw this. We had a forecast of, I think about $25,000,000 for the Q1, we shipped about 25% more than that, But we had orders that we could have doubled that again. So I don't want to be too specific, but it could have been $25,000,000 or $30,000,000 additional in call and I'm being really back of the envelope here.

Speaker 2

But the point is We had elevated levels and as much as we could have made, we could have shipped. Now people buy it for The coughcold season, so they had to buy something. So again, our puffcold numbers were up And our production in the factories was up significantly. They did a brilliant job, but there was still more demand than Even that and that's why I'm so excited. We haven't really talked about it this morning, but that's why I'm so excited about the Supply chain reinvention and what I talked about on the call of the simplification of over 1,000 and standardization of over 1,000 Because what that does in combination with Red Zone is it increases capacity because it wasn't We can continue to grow and build market share, but we're mindful of our return on invested capital and we don't want to be just adding equipment And lowering prices and getting no return for that.

Speaker 2

So this is sort of an elegant solution to be able So where we see a path to 25% to 50% more capacity in our cold cough business through This supply chain reinvestment and standardization and simplification and less line changeovers and Better operational effectiveness that Leather throw away and all those good things that are part of this program. And I'm excited to say in those three lines we did in the Q1. We got that increase in operational effectiveness. So that's what we're pushing for. So Do we get it back?

Speaker 2

We can get it back next cold season when we played it out. It shows the potential is there, But it's not like it got pushed for a quarter.

Speaker 6

All right. Thank you, Marie. And then just following up on that, what have your initial conversations been with your customers

Speaker 2

No, no, it's better than expected. But we're going for the low hanging fruit first. And If you've listened to Eduardo speak on this, the low hanging fruit is the part that is not consumer facing. So in the complexity between customers, it will be a more difficult decision when you're talking about what consumers Actually see in terms of the number of pills in the bottle or the size of the bottle, etcetera. But 80% of the complexity we have now, believe it or not, is not consumer facing.

Speaker 2

So it is one customer whose label is an eighth of an inch bigger than another one, but you have to and it's not even perceivable to the eye, But we have to stop the line and do a major changeover for the new label size or it could be a slightly different model size Where it really matters is corrugated. You've got the outer corrugated, the thickness of it, The dimensions of it might be a quarter inch, an eighth an inch, half an inch. Inside, it could be packed in 3 shrink wrapped together, 6 Shrimp Magnum together, 9 ShrimpCraft together, 12 ShrimpCraft together, where the national brands only give 2 variations. And over time, Perrigo Being a specialist in complexity and customization, deals all this complexity into its system Working with customers, but certainly no one realized how much complexity it added. So again, I gave this example at Investor Day, but because of that complexity, We can't use automatic case packers and it's the year 2023, that's nuts.

Speaker 2

And everybody agrees they can get Like a standardized outer carton and at least that I've been in front of and same thing with label sizes and all that and they're like, Wow, we didn't even know we were different on those kinds of things. So that first 1,000 SKUs is easier. It will be years it will be we'll be doing this for the next 2 or 3 years where then we go back and say, listen, everybody ought to be in 2 25 count a set of metaphene, Not somebody at 200, somebody at 250. We can still shrink-wrap together into bigger sizes, but We need to standardize as much as possible and because we are a branded company whether it's store brand or national brand At the heart of when we get to the consumer facing is a massive consumer study that we did that will guide us in What consumers want when they go to the shelf, which is frankly not to have to get out a calculator and do math. They want to look at And see the product, know it's comparable to the national brand that it will work as well, be just as safe and cost less.

Speaker 6

Thank you.

Operator

That's all we have time for and marks I would like to turn the conference back over to Murray Kelser, President and CEO for any closing remarks.

Speaker 2

Yes. Just once again, thank you for your interest in Perrigo. Thank you for support and investing in the business and believing in me whether it was here at Perrigo or Laurelard or UST, it's been a heck of Ron, and I hope to see as many of you as I can before I actually say my final goodbyes. But I've worked hard for you and I can tell you that everybody at Perrigo will continue to work hard for you And make your trust in us pay off in over the medium, short, long term, all of it. So thank you again for your interest

Operator

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

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Earnings Conference Call
EcoSynthetix Q1 2023
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