Perrigo(PRGO) - 2021 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a GAAP loss from continuing operations of $54 million for Q3 2021, translating to a loss of$ 0.40 per diluted share, while adjusted net income was $61 million, with adjusted diluted EPS at$ 0.45, reflecting a 25% decline year-over-year [26][24][25] - Consolidated net sales increased by 4% year-over-year, despite a $43 million impact from supply chain disruptions, with organic net sales growing by 2.6% [10][29] - Gross margin for the quarter was 34.4%, down 480 basis points from the previous year, primarily due to lower operating efficiencies and higher material and freight costs [30][29] Business Line Data and Key Metrics Changes - In the Consumer Self-Care Americas segment, net sales increased by 4.6%, driven by e-commerce and improved cough/cold sales, with organic net sales growing by 4.2% [32] - The Consumer Self-Care International segment saw net sales grow by 2.8%, aided by favorable currency and acquisitions, although organic net sales decreased by 0.6% [33] - The cough/cold sales in the U.S. experienced a 21% year-over-year growth, while global e-commerce sales grew by 36% [9][10] Market Data and Key Metrics Changes - The total OTC category in the U.S. grew by 18.1% year-over-year, with total nutrition (infant formula and electrolytes) up 29.9% and oral care up 9.7% [11] - The company lost approximately 1.5 share points in the store brand OTC market, attributed to increased consumption of national brands rather than a switch from store brands [11] - Consumer takeaway in the CSCI division was up nearly 10% year-over-year, indicating strong market demand [12] Company Strategy and Development Direction - The company completed its transformation to a consumer self-care focus by divesting its generic Rx business for$ 1.6 billion and announcing the acquisition of HRA Pharma for €1.8 billion, expected to add $400 million in revenue and$ 150 million in operating income by 2023 [6][7] - The management emphasized a commitment to long-term profitable growth and plans to recover from temporary adverse impacts caused by supply chain disruptions and higher input costs [22][24] Management's Comments on Operating Environment and Future Outlook - Management acknowledged significant challenges due to global supply chain disruptions, which impacted the ability to meet consumer demand and led to higher costs [6][9] - The company expects strong consumer demand to continue in Q4, but also anticipates ongoing challenges from higher input costs and supply chain issues [14][20] - Management remains confident in achieving long-term growth targets, despite short-term setbacks, and believes that the negative impacts from the current environment will be recaptured over the next two years [22][23] Other Important Information - The company settled a significant Irish tax liability for €297 million, which was a major overhang for the business, and this settlement was funded by a €355 million arbitration award received during the quarter [8][7] - Operating cash flow for the quarter was $350 million, bolstered by the Belgian arbitration award [35] Q&A Session Summary Question: Concerns about gross margins and their volatility - Management acknowledged the complexity of gross margin performance, attributing significant impacts to supply chain disruptions and inflation, with expectations for recovery as conditions normalize [37][39] Question: Clarification on absorption issues and inventory management - Management explained that unabsorbed overhead costs were due to lower production levels during a weak cough/cold season, which would gradually reverse as demand increases [44][45] Question: Market share dynamics in the OTC space - Management indicated that while there were short-term share losses in certain categories, recent management changes have led to significant customer wins, and they are optimistic about regaining market share [48][49] Question: Bridging current EPS guidance to 2023 targets - Management outlined that recovering cough/cold sales and the impact of the HRA acquisition would be key drivers in achieving the 2023 EPS targets, with expectations for gradual improvement in gross margins [52][53] Question: Update on tax issues and potential new products - Management provided insights into ongoing tax matters, including the IRS case linked to previous acquisitions, and discussed the potential for new RX to OTC switches that could enhance future growth [64][71]