Chegg Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Perrigo First Quarter 2024 Financial Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Tuesday, May 7, 2024. I would now like to turn the conference over to Brad Joseph, VP, Kovan Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning and good afternoon, everyone. Welcome to Perrigo's Q1 2024 earnings conference call. I hope you all had a chance to review our press releases issued this morning. A copy of the releases and presentation for today's discussion are available within the Investors section of the peribo.com website. Joining today's call are President and CEO, Patrick Lockwood Taylor and CFO, Eduardo De Zera.

Speaker 1

I'd 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 releases issued earlier today. A few items before we start. 1st, unless stated, all financial results discussed and presented are on a continuing operations basis. Continuing operations for the quarter include the HRA rare diseases business, which was classified as held for sale after the quarter end and does not include any contributions from the divested Rx business, which was accounted for as discontinued operations prior to its sale.

Speaker 1

2nd, organic growth excludes acquisitions, divestitures, exited product lines 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. And third, Patrick's discussion will focus solely on non GAAP results, except as otherwise noted. See the appendix for additional details and reconciliations of all non GAAP financial measures presented. And with that, I'm pleased to turn the call to Patrick.

Speaker 2

Thank you, Brad. Good morning, good afternoon, everyone. I'd like to begin our call today by emphasizing the important strides we have made to further our One Perrigo strategy, deliver on our purpose to make lives better through trusted health and wellness solutions accessible to all. Let's start by recapping our quarter one results against the expectations that we discussed in our Q4 2023 earnings call. First, we plan the actions to augment and strengthen our infant formula business would have an impact on our Q1 EPS and they did.

Speaker 2

While infant formula actions drove an EPS headwind of $0.30 versus the prior year, 1st quarter EPS was approximately $0.06 ahead of our projection due to timing of infant formula shipments to customers. Actions taken in infant formula were impactful, but necessary. The significant progress we have made sets us up well to achieve a quality controlled, reliable manufacturing environment, though there is much more work to be done. I believe that the quality and compliance actions and investments we have taken will strengthen our competitive position in the industry over the long term. Also as expected, SKU prioritization actions in CSCA weighed on quarter 1 organic net sales and EPS growth.

Speaker 2

However, these actions had multiple benefits, including gross margin expansion of 50 basis points across the enterprise in quarter 1. Greater focus on more profitable areas of our portfolio and provides additional production capacity as we build out our blended branded business. Next, as highlighted in our last earnings call, US OTC retail inventories were above average entering quarter 1. As expected, retailer inventory destocking led to lower shipments of product to customers compared to prior year. Encouragingly, consumption across Perrigo's U.

Speaker 2

S. OTC business remained healthy at +1.9 percent over the last 13 weeks ending March 24. Based on current consumption trends, we believe that retail inventory levels should normalize during quarter 2. Finally, CSCI continues to fire on all cylinders. Organic net sales in the quarter grew 7% and operating margin expanded 2.90 basis points versus last year to 19.7%.

Speaker 2

Collectively, the Q1 was a good start to the year as we delivered against our commitments and we remain on track to achieve our goals in 2024. Turning to our Q1 financial highlights. As just discussed, Q1 net sales were heavily impacted by infant formula in addition to SKU prioritization actions to enhance margins as part of our supply chain reinvention program. These factors caused a decline in reported net sales of more than 8%. Organic net sales declined 7%, which comprised 3 major components.

Speaker 2

An impact of minus 4.3 percentage points from infant formula, an impact of minus 3.6 percentage points from SKU prioritization actions and organic net sales growth of +1. From the rest of our business, driven by strong performance in CSCI and the launch of Opel. Order 1 gross margin declined 90 basis points to 36.5%, which comprised an unfavorable 280 basis points impact from infant formula. 50 basis points benefit from SKU prioritization actions and a 140 basis point benefit from the rest of the business, led by gross margin expansion in U. S.

Speaker 2

OTC and Oral Care. As I said, Q1 EPS was ahead of projection, but was down $0.16 from a year ago to $0.29 per share. Infant Formula had an unfavorable $0.30 per share impact and SKU prioritization actions had an additional $0.06 impact. These headwinds more than offset EPS growth of $0.20 per share from the rest of the business. Digging a bit deeper into net sales, we delivered solid performance in women's health, which was led by the U.

Speaker 2

S. Launch of Opal and in skincare, which benefited from robust growth in our Compeed and Moderna brands. Compeed achieved net sales growth of 56%, not incorporating distributor transitions that impacted sales in the prior year, driven by market share gains and the successful product line extension of Compeed spots. Moderna net sales grew 51% in the quarter, driven by Moderna cold sore, which added incremental sales to the brand and strong growth in e commerce. Net sales across most global categories was impacted by SKU prioritization actions in CSCA, which weighed most heavily on skincare, pain and sleep aids and digestive health.

Speaker 2

Inventory destocking at U. S. Retail customers also affected growth as I just discussed. This impact was most notable in coughcold due to a lighter season than prior year and industry wide supply chain recoveries. Quick note on the U.

Speaker 2

S. Allergy season. There has been a recent uptick in incidence levels and consumption over the past 13 weeks. A strong and prolonged allergy season could drive the need for customer replenishment even as U. S.

Speaker 2

Retail inventories normalize. If a strong season does materialize, we're in a very good position to take advantage. Looking at our 2024 operational priorities, I'm pleased to say we remain well on track. First, we are making good progress augmenting and strengthening our infant formula business and are working to recover manufacturing volumes. We also executed the nationwide launch of Opal in the U.

Speaker 2

S. More details on both of those in a few moments. We also continue to benefit from accretive priorities. 1st, we are on track to deliver a total of $25,000,000 in incremental HRA synergies as we complete integration activities. 2nd, our supply chain reinvention program drove gross savings of $12,000,000 in the quarter and gross margin expansion of 50 basis points from SKU prioritization actions.

Speaker 2

And 3rd, Project Energize attained $17,000,000 of cost savings in the quarter and we remain on target to deliver $140,000,000 to $170,000,000 in pretax annualized savings by 2026. Turning to infant formula. As the leading U. S. Manufacturer of store brand formula, Perrigo plays a critical role in the health and wellness of 100 of thousands of babies every year.

Speaker 2

Over the past few months, we have made significant progress to augment and strengthen our infant formula manufacturing network. This included in some instances, always in production for comprehensive cleaning and infrastructure improvements in addition to enhancements of quality protocols and manufacturing processes. At this point, any planned large scale plant resets have been completed and we are progressing to the next phase of our quality and operational enhancements. This next phase includes further policy and procedural enhancements at the site level. In addition, we are making further investments in infrastructure and people as appropriate.

Speaker 2

Importantly, we do not expect this continuing body of work to result in extended shutdowns beyond normal maintenance activities. The recovery of manufacturing volumes is expected to continue to build throughout 2024, stemming from longer quality hold times and faster, shorter campaign style production runs. Sales volumes are expected to improve during the second half of this year, followed by market share recovery. All of this is in line with our original outlook. Stabilization of infant formula will remain a journey and I'm pleased with the progress we have made.

Speaker 2

Gaining quality compliance is core to Perrigo's business and culture. We will continue to invest in quality, capacity and other enhancements as we bolster quality controlled, reliable manufacturing across our network. With the launch of Opil, Perrigo has taken a historic step for women's health by creating an entirely new OTC category for oral contraceptives in the U. S. During the quarter, the Opel team executed the most revolutionary and holistic product launch in the history of Perrigo.

Speaker 2

Launch was broad and Opil can now be found at more than 65,000 retail locations across the U. S. In addition to major e commerce retailers. The response to this launch has been truly amazing from customers to academics and now consumers. The Opel launch program encompasses a 3 60 degree approach to drive awareness.

Speaker 2

This began with a coordinated pre launch campaign drove highly positive sentiment. This resulted in high awareness for Opil even before our full media campaign ramps up over the coming weeks. Through activation plans, strategic partnerships, including a newly announced partnership with the WNBA and the increasing support of public and private healthcare plans, Opel is revolutionizing the landscape for women's health. Early Opal consumption and conversion metrics are encouraging. Through the 1st few weeks of activation, consumer time to conversion on opild.com has been impressive with limited touch points.

Speaker 2

The time to conversion demonstrates that our team has the right strategy in place to guide consumers through their decision journey and promote repeat usage, which will ultimately determine the long term success of Opel. I'd like to congratulate our team, partners and supporters who played a vital role in the early success of Opal. Perrigo is committed to advancing women's health and will look to further innovate and provide accessible solutions that empower women to take charge of their own self care journey. Now I would like to share an update on our blueprint for 1 Perrigo. The work we have conducted to identify our winning portfolio is clarifying how we will leverage our core competencies and strengths within our respective categories.

Speaker 2

Strategies within each category will depend on the long term value creation potential and our right to win. These factors will shape various category management objectives including top line growth, profitability and cash generation. Fuel growth across our portfolio, we must continue to invest in innovation, sourcing and new avenues of differentiation to deliver consumer preferred offerings. Work to bolster our innovation pipeline is underway and will take time to fully develop. But we are approaching this objective from a position of strength and we'll work with our retail partners to lead category growth in the self care aisle.

Speaker 2

Our U. S. Store brand business remains a cornerstone of the Perrigo portfolio and it's the furnace that will fuel our blended branded business. Given the continuous evolution of the self care landscape, we are conducting a thorough analysis regarding the position of this business, including network design, capacity utilization and category penetration. Our priorities through fiscal 2025 include relentless execution in our core business to maximize free cash flow generation and delever.

Speaker 2

These milestones are delivering margin expansion from Project Energize, returning our infant formula business to stable, profitable operations, driving favorable outcomes for key customers in our U. S. Store brand business. Parallel, we will continue to implement 1 Perrigo operating model enhancements to build a leaner, more efficient and agile global organization to enable our strategy. Our longer term objective for 2026 and beyond is to realize our blended branded strategy, a model that delivers sustainable value accretive innovation.

Speaker 2

We'll have made targeted investments in our highest potential growth opportunities in the most attractive categories and build consumer good capabilities. This will enable a global branded growth with an eye towards accretive margins, cash flow and returns. We look forward to further articulating this strategy at our Investor Day later this year. As you may already seen, Sven Anderson, President of CSCI will retire from Perrigo later this year. During his 7 years leading this business, Sven has played a pivotal role in the success of CSCI by focusing the portfolio, concentrating on innovation and brand extensions, all while making significant contributions to Perrigo's overall growth and development.

Speaker 2

On behalf of the Board of Directors, management team and everyone at Perrigo, we appreciate all that you have given Svend and all that you've done for Perrigo. Svend is handing over a business that has performed very well and I am confident that Roberto will continue to drive success. Roberto Corry is joining Perrigo later this month and will officially lead CSCI in August. Joins Perrigo from Chemvue and has more than 20 years of experience in branded consumer products, including leadership of Pan European brands, accelerating digital and e commerce capabilities, reducing portfolio complexity and improving integrated planning accuracy. I'm confident in Roberto and his ability to further our One Perrigo strategy.

Speaker 2

In summary, we remain highly focused on our priorities, including our One Perrigo strategy. We reported a good first quarter and we'll continue executing against our 2024 operational priorities. We are making great progress in strengthening and augmenting our infant formula network. Opel is off to a fast start and we're on track to deliver our accretive initiatives. We will do this while progressing our blueprint for 1 Perrigo to consumerize, simplify and scale our business, all while focusing on cash, returns and deleveraging.

Speaker 2

With that, I will now turn the call over to our CFO, Eduardo to cover the financials.

Speaker 3

Thank you, Patrick. Good morning and good afternoon, everyone. Looking at the Q1 financials, starting with the GAAP to non GAAP summary. Company reported GAAP net income of $4,000,000 or $0.03 per diluted share. Adjusted net income was $40,000,000 and adjusted diluted earnings per share was $0.29 versus $0.45 in the prior year.

Speaker 3

Primary adjustments to our Q1 non GAAP P and L were: 1st, the removal of $113,000,000 tax benefit, primarily driven by an $84,000,000 benefit related to the planned and intercompany sale of intellectual property 2, amortization expenses of $59,000,000 and 3, restructuring charges of $44,000,000 primarily related to our Project Energize and supply chain reinvention programs. Full details can be found in the non GAAP reconciliation table attached to today's press release. From this point forward, all financial results discussed will be on an adjusted basis unless otherwise noted. As highlighted, Q1 results were heavily impacted by the actions we are taking to strengthen and augment our infant formula business and SKU prioritization actions to enhance margins. This led to an operating income decline of 22%.

Speaker 3

Excluding the impact of infant formula, adjusted operating income from the rest of the business grew mid teens percent. Let's dig into additional details. Looking at our segment performance during the quarter, CSCI continues to perform well, highlighted by plus 7 percent organic net sales growth. The strong top line performance was driven by growth in compete and the absence of distributor transitions that unfavorably impacted the prior year. SEI gross margin was impacted by lower volumes, partially in the coughcold category due to supply constraints and lower seasonal incidents across Europe.

Speaker 3

However, operating margin expanded 290 basis points to 19.7%, driven by expense reductions resulting from HRA synergies and ROI focused advertising and promotion spend as part of Project Energize. I too would like to thank Van for his tremendous efforts and leadership over the years, while also welcoming Roberto to the Perrigo team. In CSCA, infant formula and SKU prioritization actions weighted on Q1 performance, with net sales down 15.7% and organic net sales down 14.6%. Organic net sales from the rest of the CSCI business declined 2.3% due primarily to retail inventory destocking across most categories. As Patrick noted, we believe retail inventories should normalize in Q2.

Speaker 3

1st quarter CSCA gross margin declined 2 80 basis points versus last year, including minus 5 20 basis points driven by infant formula. The infant formula impact was partially offset by gross margin improvement of plus 10 basis points from SKU prioritization actions and plus 230 basis points expansion from the rest of the business, driven by favorable product mix in U. S, OTC and Oral Care. Continuing with margins, Terrigo's 1st quarter gross margin declined 90 basis points, including an impact of minus 280 basis points from infant formula. When excluding these impact from infant formula, Perrigo achieved a meaningful year over year gross margin expansion of +190basispoints.

Speaker 3

All of these translated into operating margin expansion of +260basispoints, excluding the impact from infant formula. 2 central takeaways here. 1st, the importance of augmenting and strengthening infant formula cannot be over stated. And second, margin across the rest of the business continue to recover and expand. Now to EPS.

Speaker 3

Infant Formula, as expected, had an unfavorable $0.30 per share impact and SKU prioritization actions had an additional $0.06 impact year over year. These headwinds more than offset a benefit of $0.20 per share from the rest of the business, which included a reduction of $0.02 from the impact of exited products. Before turning to the balance sheet, a few comments on the proposed divestment of HRA Rare Disease Business, which has been a key component of our 2024 deleveraging plan. This proposed divestment further supports our focused consumer self care portfolio and the business will best flourish as part of the STEVIC Group. We plan to redeploy the upfront proceeds of EUR190,000,000 later this year for debt repayment.

Speaker 3

Importantly, the financial impact of this proposed divestment was included in our regional 2024 outlook. I would like to thank the HRA Rare Diseases team for their dedication and focus as they continue improving the lives of patients with rare disease. Cash on the balance sheet at the end of the Q1 was $659,000,000 1st quarter operating cash outflow was $1,000,000 due to infant formula and restructuring costs, primarily related to Project Energize. During the quarter, we also invested $25,000,000 in capital expenditures and returned $38,000,000 to shareholders through dividends. Courses and uses of cash for 2024 remain largely intact from our initial outlook, apart from upcoming cash tax payments related to the planned intercompany sale of intellectual property that will benefit the company over the long term.

Speaker 3

We continue to anticipate operating cash flow conversions for the full year of 90% to 100% of adjusted net income. Looking at the balance of the year, we expect Q2 to be our lowest operating cash flow quarter due to restructuring costs related to Project Energize. In addition, you may have seen that Perrigo recently settled a shareholder lawsuit for $97,000,000 without any concession of liability or wrongdoing. We expect to pay the settlement in the Q2 using cash on hand and are seeking a full recovery from insurance providers this year. In total, we now estimate any cash balance for 2024 of between $500,000,000 $550,000,000 Importantly, we continue to expect a net leverage ratio of year end.

Speaker 3

Looking at EPS phasing for the year, our expected weighting between the first and second half remains unchanged. As discussed, timing of infant formula shipments realized in the Q1, which were originally expected in the Q2, are driving a change in our first half phasing. Outside of these, there are no updates to our previous phasing assumptions. Our 2024 outlook for total Perrigo also remains unchanged. Organic net sales growth of 1% to 3 percent is expected to be driven by new products including Opio, pricing actions and the absence of the HRA distributor transition impacts.

Speaker 3

These drivers are expected to more than offset volume declines, primarily in infant formula and a negative impact of 1 percentage point to organic growth from SKU prioritization actions. All in net sales growth is expected to be flat compared to 2023 as organic growth is offset by divested and exited Business and Products. Excluding infant formula from both years, we continue to expect gross margin expansion in 2024. We are reaffirming our full year EPS range of $2.50 to $2.65 equating to meetings percentage growth, excluding infant formula. In closing, I would like to thank our Perrigo colleagues for their commitment to advancing our One Perrigo vision and for their continued focus on achieving our 2024 priorities.

Speaker 3

Now I will turn the call back to Brad. Brad?

Speaker 1

Thanks, Eduardo. Operator, can you please open the call for questions?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Susan Anderson from Canaccord Genuity. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking my question. Thanks for all the details this morning. I guess maybe just to start out on the infant formula business. So I think it was maybe a little bit better than expected, I think due to some early shipments.

Speaker 4

I'm curious is that going to take away then from Q2 or should we expect kind of still a sequential improvement there? And then I think you noted that the back half sales volumes will return. I guess I'm just curious with the plants now back up and running, why wouldn't we wouldn't just see kind of a sequential recovery in those volumes? And then also just on the cost the infant formula business, is that still in line with your original expectations? Thanks.

Speaker 3

Susan, Eduardo here. Thank you for your question. So I'm going to answer your first piece and then I'm sure Patrick is going to cover more the other side, right? So I guess the first thing is, as we planned on the quality release of our products, some of those products we were expecting to take place in the Q2. So as we continue to make progress on our quality processes, we're able to release those products in the Q1 and get to customers that's so much needed.

Speaker 3

So that's just the timing issue. It doesn't change our overall production plans between Q1 and Q2.

Speaker 2

Hi, Susan. This is Pat. Thank you for your question. I guess in a nutshell, the interventions to get to quality compliance and reliability have gone well across all three plants. Probably as importantly, the start ups and the ramp up volumes and the throughputs are at slightly ahead of expectation, but we are in the early stages of executing, frankly, a new set of GMPs.

Speaker 2

It would be premature to take up financial outlook, given we're still really in learning and reacting mode, but so far very good.

Speaker 4

Okay, great. That's helpful. And then so I guess on the destocking in the U. S. Then, it sounds like you said across all categories, but really, I guess, mainly in cold and cough.

Speaker 4

It sounds like it's complete now. Is that correct? And then I'm just curious how inventories ended and particularly in cold and cough, if they're kind of in good shape as we look into like the fall season?

Speaker 3

Yes. Susan, so the way we're looking it and that's what we shared about the CICE of the business, right? So we believe that the majority of that 2.3% reduction is really tied to debt to de destocking, right? As we talked in the beginning of the call, we're seeing that across multiple categories. But most importantly, as you're aware, with a very light cough and cold season, that's something as well that impacted that.

Speaker 4

Yes. Okay,

Speaker 1

great. Just to throw on top, which I think you may have heard from the team here is the consumption is up nearly 2 points, while the sell into the retailers from us, so shipments were down. So you have essentially kind of a 2.5%, 3 point swing between those 2. Yes. And that's kind of a good way to think about.

Speaker 4

Okay, great. And that's just really because the late start to the season, so the retailers were already stocked and it just wasn't strong enough to have to restock?

Speaker 3

Exactly.

Speaker 4

Okay, great. And then one more just on the international business. I was curious what drove the growth in the skincare and personal hygiene. It looks like that was the strongest performance. And then, upper respiratory was weaker.

Speaker 4

Was that also due to similar issues internationally with the weaker flu season?

Speaker 3

Yes. So the skincare, you saw it was very strong on Compeed, right? So and this is aside from the lapping of the distribution transition, we had a very strong growth in the Q1, which is very good also with the extension of compete in spots, right, that increased the overall category that we're playing on. But on the cough and cold, the same that we saw in the U. S.

Speaker 3

With a lighter season happened in Europe as well. So that's why you saw an upper respiratory, including cough and cold, let's say, a reduction in volume there.

Speaker 4

Okay, great. And then if I just add one more on the VMS category, it looks like it was weak both in Americas and international. I don't know if it was the same drivers there between the two regions. But then also are you seeing consumers move away from BMS at all after a pretty strong focus on their health and wellness during COVID and post COVID?

Speaker 2

Yes. Just looking at the bigger picture, Susan, as we go back and look at SARS and other major events that disrupted VMS, you saw an immediate typically 10% to 20% increase in consumption during the SARS or indeed during COVID. You then saw a slight regression of the category for 1 to 2 years post that, but stabilizing at a level that was still 5% to 10% higher than pre the pandemic. And that's been true for about the last three events over the last sort of 20, 25 years. So I think what you're still seeing is some normalization, but we continue to see strong consumption and outlook on those businesses.

Speaker 2

There was also some very near term sort of phasing promotional activity that sort of impacted us as well. But I would say underlying strong consumption trends, these categories are markedly bigger than they were 5 years ago, but just impacted some phasing activity as well.

Speaker 4

Got it. Okay, great. If I could maybe just squeeze in one more. I'm curious what you're seeing on the trade down to private label in the U. S.

Speaker 4

And then I know international, it's a little bit different, but are you seeing anything at all

Speaker 2

more focused on the U. S, which is 90 plus percent of our business. In the last 15 weeks or so, we've seen about a 50 basis point gain from store brand. Store brand volume share gain is actually about 150 basis points. So we are definitely seeing better understanding of what these propositions are, what the molecule is that bioequivalents, but a tremendously better value.

Speaker 2

So as I think consumers continue to feel the sort of pinch in the U. S, we are seeing good increase in store brand business, which is, of course, very good for our business.

Speaker 4

Great. Okay. Sounds good. Thanks so much. Good luck for the rest of the year.

Speaker 1

Next question please.

Operator

Yes, hello. Your next question comes from the line of Corrine Wolf Meyer from Piper Sandler. Please go ahead.

Speaker 5

Hi, good morning. This is Sarah on for Kareen. On OPAL with the expanded coverage, can you guys touch on how this has shaped your view on total revenue potential this year and then over the longer term? And then, what are you currently baking into guidance from OPO? And if there's potential that this could be less dilutive to EPS now?

Speaker 2

Hi, thank you for that. I'll give some high level on the insurance coverage that you've heard about and you're right to pick up on and then Eduardo more on the sort of near term financial impacts. This was very good news from CVS Caremark, obviously, by far the largest insurance coverage there. We are still modeling through that's only recently announced. We're still modeling through the impact of that, how quickly consumers will convert, the degree of awareness of that, etcetera.

Speaker 2

It's a fairly sophisticated piece of modeling and that's not complete. So I can't tell you what the revenue impact will be, but undoubtedly will be significant and accretive. We are also seeing states starting to provide coverage as well. You would have heard of Wisconsin. We expect others to follow both the state and CVS' move, which we were very, very encouraged by really just improving accessibility and value for this category.

Speaker 2

I think in terms of the more near term effects Yes.

Speaker 3

So I guess, important to mention is we're going to see Opio as margin accretive in 2024, but we continue with because all the investments that we're putting behind not only the brand, but also as we think about how women's health, the whole category will evolve, we want to appeal to be the carrier of the brand for the future. So we want to make sure that the awareness is pretty strong. And so we continue with our plans to see on an EPS be dilutive the effect of OPO over the next 12 to 18 months, okay?

Speaker 5

Very helpful. Thank you.

Speaker 1

Thanks, Sarah. Next question please. Thank

Operator

you. And your next question comes from the line of Chris Schott from JPMorgan. Please go ahead.

Speaker 6

Great. Thanks so much for the questions. Can I just come back to the infant nutritional business? I guess now that we're just another few months into the process, what's your level of confidence that the remediations have solved issues with these segments? I'm just trying to get my hands around, were these plant shutdowns the most challenging piece of the process?

Speaker 6

Or is it the work going forward to make sure you can kind of stay in compliance, representing the biggest hurdle and showing a sense of just like level of confidence of where we are? And then maybe just part of that, could you comment all on just what portion of the $0.65 or so of impact from the remediation you think you're going to be in a position to regain as we look out to 2025? And I just have one follow-up after that.

Speaker 2

Yes. Thank you, Chris. Good to hear from you again. I'll take the first part of Eduardo on the outlook. Each of those three blocks that you went through and characterized very well are equally critical, but they're sequential.

Speaker 2

You can't do the second one up, the first, the third one up, the second obviously. The big intervention in terms of root cause analysis, corrective and preventative actions, the translation of that into new GMPs, protocols, staffing levels, etcetera, is largely done, okay, across the three sites. As we executed in Wisconsin, we were able to accelerate the application of that know how into the other two facilities and all facilities back in production mode, okay? So and as I suggested in my commentary, really putting start up times and throughputs at or slightly ahead of our expectations. So we're very encouraged by that.

Speaker 2

To the point you make though, flip back is a permanent watch and we have to make sure that our environmental cleanliness, monitoring and GMPs keep us at all times quality compliance, so we're not getting any positive hits and therefore having to stop production. We're not and we're not. So that is extremely encouraging, okay? But we're having to continue to learn what needs to be true such that those factors stay true and we maximize production and not seeing the very disruptive interruption to production that we did historically. So far so good.

Speaker 2

Very early. I could not be happier in terms of where we are. It is too soon to say we have a 100% reliable model, but we are inching closer to that.

Speaker 3

And Chris, to your question, right? So remember, we're talking about our expectation to get the infant formula business on an annual basis should contribute about $140,000,000 right? So that's about $35,000,000 a quarter. And so everything that we're working right now is to make sure that in the Q4, we can achieve those levels. And that's why it's so critical.

Speaker 3

We may not see that fully between Q2 and Q3, but we expect by Q4 to be at that run rate that will give us the confidence with all the actions that we're taking to make sure that from a production, from a quality standpoint, reliability, market share, we can really consistently deliver against that $140,000,000 OI objective, okay?

Speaker 6

Great. Thank you. And just a bigger picture question. I guess, as you think about Perrigo going forward, seeing about kind of your 2026 and beyond plans, you feel like you have the right portfolio in place at this point? Or can we think about further refinements or divestitures as you look to focus the company on some of the more of these growth objectives over time?

Speaker 2

Yes. We will narrow our portfolio. We're much clearer on which categories and brands offer the most attractive growth, the most scalable growth, I. E. We can execute the same thing, the same innovation through the same production in more parts of the world.

Speaker 2

So we are completing that analysis now. I'm sure going forward, you will see a more focused portfolio for Perrigo and faster growth rates that are at a higher OI and we will share that thinking at the Investor Day late fall.

Speaker 6

Thanks so much.

Speaker 7

Thanks, Chris.

Operator

Thank you. And your next last question comes from the line of Daniel Baillofy from Hedge I. Please go ahead.

Speaker 7

Hi. Thanks for taking the question. So could you spend some time on the inventory destocking outside of cough, cold like in sleep aid, healthy lifestyle, oral care? Is that permanent, just timing or loss of shelf space?

Speaker 3

Well, at this stage, we believe that there is an overall focus on retailers destocking the cost of that and also trying to better understand what that is the focus of consumers, right? So as we're seeing more and more consumers trading down, now Sogou has been playing a key role. I think retailers at this stage are very careful. And given a year that they saw a lot of price increases in 2023 and volume impact, they're trying to be more careful about how they're going to manage their working capital as well as their inventories. And so I think that's across categories is not specific to cotton coal.

Speaker 3

And so we're going to be watching that closely. But if there is an area where and consumers start to make those changes that we believe Perrigo has an advantage, it's really store brand. And we're seeing that coming along pretty well as we gain some share in the quarter. And so as consumers continue that direction, we believe store brand will continue to be very affordable opportunity for consumers to continue to take care of their self. And so we are very well positioned in those categories.

Speaker 3

But I think your question is and your hypothesis is right. You're seeing more categories in self care with a fixed amount of shelf space and an increasing focus by retailers on cash, return on working capital. And so I think you have seen some destocking. I think there is

Speaker 2

a natural floor to that for obvious reasons, otherwise they can't service their customers we believe we're approaching that.

Speaker 7

And then if I could ask one more. What should we expect for the gross margin impact from infant formula in Q2? If Q1 was a minus 520 basis point impact, and we got earlier shipments, what should we expect in Q2 when we're going to lose those shipments?

Speaker 3

Well, so we expect in Q2 margins to be in a much better situation. Remember, we had the 2 key effects there, right? So we had first is lower shipments, but also we had variances that impacted because we had some stoppages in our manufacturing operations. We do not expect those onetime impacts take place in Q2. And so our margins should rebound significantly versus Q1.

Speaker 3

As compared to as we look into that into the second versus last year, volumes are not going to be at the same level of last year, but we should see an improvement on margins on a gross profit level as compared to what we did last year?

Speaker 2

I think the quarter 1 gross margin decline overall for the business was 90, and that included a 280 basis point impact from infant formula. That was the calculation for Q1. Yes.

Speaker 3

But that's what I'm saying. Q2, we do not expect that magnitude. In fact, it should be improvement as compared to what we saw last year.

Speaker 1

Great. Thank you, Daniel.

Operator

Thank you. That ends our Q and A. I will now hand the call back to Mr. Patrick Clifford Taylor for closing remarks.

Speaker 2

Thank you very much. So versus what we outlooked in February, what we said is what happened, what we said we were going to do is what we've done and where we thought it would net out is where it netted out. So we feel we're on track to hit our 2024 commitments. As we've talked several times today, the InfoForma recovery is progressing per a critical path. Our start ups and throughputs are encouraging versus our financial commitments.

Speaker 2

Additionally, we have and we have not talked much about it today, but Energize product Energize was extremely well executed, and we're on or ahead of our targets there. Opal, it's very early, but we should be encouraged. It's a new standard for Perrigo in terms of launch excellence and much to learn and reapply from that. We remain laser focused though on executional excellence of our key 25 priorities and seeing through the financial commitments we've made. Thank you very much for joining us today.

Operator

Thank you. That concludes our conference for today. Thank you for participating. You may all disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Chegg Q1 2024
00:00 / 00:00
Remove Ads