Good morning and welcome to the Perrigo Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Bradley Joseph, VP of Investor Relations. Please go ahead..

Thank you, Chad. And good morning, everybody and welcome to Perrigo's fourth quarter and fiscal 2021 earnings conference call. Hope you all had a chance to review the earnings press release we issued this morning.

A copy of our earnings release and presentation for today's discussion are available within the Investors section of the perrigo.com website. Joining today's call are President and CEO, Murray Kessler; and CFO, Ray Silcock. 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 press release issued earlier this morning. A few quick housekeeping notes. First, unless stated, all financial results discussed and presented are on a continuing operations basis.

They do not include any contributions from the divested Rx business which was accounted for as discontinued operations prior to it's sale.

In addition to the other non-GAAP adjustments 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.

Please see the appendix for additional details and reconciliations of all non-GAAP financial measures presented. Second, organic growth excludes acquisitions, divestitures and currency in both comparable periods. And third, Murray's discussion will be focused solely on non-GAAP results. And with that, pleased to turn the call over to Murray..

one, a return to strong cough/cold demand, evidenced by 28% growth in our Upper Respiratory reporting category which also includes allergy; two, 12% growth in Nutrition behind share gains in U.S. infant formula and the successful launch of new products and oral electrolytes.

In fact, one of our new adult electrolyte drinks won the Product of the Year Award as voted on by one of the largest customers that we have. And it's a tremendous recognition for the efforts of the Perrigo team. And three, lastly, fourth quarter growth was also the result of strong contract tax sales, including sales to the divested Rx business.

Also encouraging, as shown on Slide 10, Perrigo sales growth accelerated sequentially each quarter of 2021 as COVID-related disruptions either slowed or were addressed by the Perrigo team. This positive trend has continued into January and February of this year. We entered 2022 with strong top line momentum and strong global consumer demand.

The markets we compete in the U.S.A. were up in the fourth quarter 17.5% for OTC, 24.7% for Nutrition and plus 9.1% for Oral Care. And in Europe, demand for our essential products were plus 33% and plus 2% for our self-care products. We also entered 2022 with most major top line headwinds behind us.

Higher illnesses and the increased spread of the Omicron variant which tends to cause traditional cold and flu-like symptoms, has contributed to a significant rebound in cough/cold sales. Customer inventories which were a bit heavy in 2021 due to the weak cough/cold season, have been worked down to normal levels.

And we have taken numerous supply chain and logistics corrective actions allowing us to ship our products, albeit at a higher cost. And I'm proud to say we entered 2022 with a robust offering of innovative new products as shown on Slide 13. For all of these reasons, we expect strong top line growth in our business in 2022.

And to be clear, that is before any additional net sales from the HRA acquisition. Worth mentioning, HRA sales and earnings growth was robust in 2021 and was in line with our expectations. While the top line should be strong year-over-year, gross margin pressure will continue to affect the first half of 2022.

We expect gross margin pressure to ease in the second half of the year as we start to receive the financial benefit from normalized cough/cold sales, certain input costs started to ease, our pricing actions being fully implemented and the negative margin-only impact from the Rx divestiture annualizes.

To be clear, we expect relatively flat gross margin in 2022, excluding HRA, with their second half stronger than the first. Once the deal closes, HRA will be further accretive to our second half gross margin given it is a substantially higher gross margin than our products.

All of this leads us to an adjusted EPS guidance range of $2.10 to $2.30 per share driven by organic net sales growth of an estimated 7% to 8%.

Assuming the acquisition of HRA closes on June 30th, we expect it would add an additional $170 million to $190 million in net sales and approximately $0.30 of adjusted diluted EPS to our base Perrigo guidance. Please note this guidance does not include any potential impact from the Russian invasion of Ukraine.

Our 2022 guidance includes between $10 million and $15 million of operating income from these two countries, two months of which though have already been realized. But it's really too early to estimate the potential full year impact. And frankly, our top priority right now is on the safety of our colleagues and their families in the region.

Looking at the path ahead, we believe we are poised to create significant value and it is clear what needs to be done to make that happen. First, continue to execute on the self-care strategy and continue to deliver organic growth, including recovery of cough/cold, strong digital growth and rapid innovation.

Second, successfully close and integrate HRA which will provide a step change increase in sales, income, margins and EPS. And third, stabilize and then aggressively grow gross margins through our global supply chain redesign project which will occur concurrent with the HRA integration.

So in conclusion, we are excited about the opportunities over the next few years and beyond as the company is well positioned for success. At the same time, we are planning pragmatically given the challenges in the current environment.

It remains our goal, however, to complete the job and deliver our original objectives from our investor conference three years ago. With that, I'll turn the call over to Ray Silcock to discuss the financials in more details.

Ray?.

one, the $308 million paid to the Irish tax authorities to settle the Irish NoA dispute; two, $48 million tax impact arising from the transfer of intellectual property between various Perrigo entities as a consequence of our divesting the generic pharmaceutical business at the end of the second quarter last year; three, the release of $19 million of certain nontax U.S.

reserves; and four, $16 million in tax expense related to BEAT. From this point forward, all dollar numbers, basis points and margin percentages will be on an adjusted continuing operations basis unless stated otherwise.

Net sales for the fourth quarter were $1.1 billion, up 4.9% from the same quarter last year, a 5.5% organic increase primarily from the continued rebound in sales of cough/cold products which we first started seeing in the third quarter.

Gross profit for Q4 of $385 million was $23 million lower than for the same period last year, while Q4 gross margin was 390 basis points lower.

250 basis points of the Q4 decline came from lower operating efficiencies, while another 100 basis points was from margin dilution as we -- as sales to the divested -- from sales of the divested generic pharma business. When we owned that business, the margin was recorded but then the intercompany sales were eliminated.

Q4 operating income increased 12.5% [ph] to $132 million, while the operating margin increased 80 basis points to 11.9% primarily due to lower operating expenses. Moving on now to the full year. Net sales for 2021 increased 1.2% as compared to prior year.

Strong performance by our contract manufacturing businesses as well as favorable currency movements were partially offset by the net impact of acquisitions and divestitures, largely the sale of the Rosemont pharmaceutical business in the U.K.

Organic net sales declined 0.7% principally due to the negative impact of 1.4 percentage points from lower sales of cough/cold products as a result of the weak cough and flu season in the first half of the year.

Gross profit for the year was 4.9% lower than prior year primarily from $18 million in lower operating efficiencies with lower volumes resulting in unfavorable planned overhead absorption as well as from higher raw material costs and increased freight expenses. These same factors drove gross margin for the year down by 240 basis points to 36.5%.

2021 operating income was $479 million, $61 million less than the prior year at lower operating expense, including lower advertising and promotion spend and Project Momentum savings partially offset unfavorable gross profit flow-through. For the same reasons, full year operating margin was 160 basis points lower than in the prior year.

Now let's turn to the segment results, starting with Consumer Self-Care Americas. Fourth quarter CSCA net sales grew by a strong 5% primarily due to the rebound of the cough/cold business and sales to the domestic generic pharma business which is now a third-party customer.

Gross margins in Q4 were adversely impacted by lower efficiencies from lower manufacturing volumes which accounted for approximately 450 basis points of the decline plus unfavorable product mix of an additional 100 basis points. Operating income for Q4 was $110 million.

Full year net sales were flat compared to the prior year, while full year organic net sales declined 1.1%, including a 1.4 percentage point drop in sales of cough/cold products as compared to the prior year.

Gross profit for the year was $793 million, $87 million below prior year driven by lower operating efficiencies and higher material and freight expenses. These lower efficiencies also led to a year-over-year gross margin decline of 320 basis points.

Operating income for the year was $434 million, $94 million lower than prior year primarily due to unfavorable gross profit flow-through and increased distribution expenses, all partially offset by lower operating expenses and Project Momentum cost savings. Moving on to Consumer Self-Care International.

In the fourth quarter, CSCI net sales rebounded strongly, up 4.6% on a reported basis and up 6.4% organically. These increases were led by a sharp rebound in sales of cough/cold products and from continued strength in our ACO skincare product line. Gross profit in Q4 was $183 million, up 4% versus the same quarter last year.

Operating income grew 78% to $60 million due to lower expenses, including a planned reduction in advertising and promotion. This also led to a sizable increase in the operating margin to 16.3%, a 670 basis point improvement versus prior year. Moving to the full year.

Net sales for 2021 increased 3.6% to $1.45 billion, helped by favorable currency which offset the net unfavorable impact of acquisitions and divestitures. On a full year organic basis, net sales were flat to prior year, adversely impacted by the weak cough and flu season in the first half.

CSCI gross profit for the year was $719 million, 1.3% higher than prior year due to favorable currency movements which more than offset the adverse net impact of acquisitions and divestitures. These impacts, together with adverse sales mix, led to gross margin for the year being down 110 basis points.

Operating income was $212 million, up $13 million driven by the gross profit increase just discussed and by favorable operating expenses, including a planned reduction in advertising and promotion as well as Project Momentum savings. Moving now to the balance sheet and operating cash flow.

Cash on the balance sheet at the end of the year was $1.9 billion, down from the cash balance at the end of Q3 of $2.1 billion. This decrease was primarily due to our settling the Irish tax NoA which we paid for in the fourth quarter. Operating cash flow for the year was $156 million and our cash conversion rate was 56%.

I would like to provide some additional detail now regarding our 2022 guidance. We anticipate, as Murray said already, full year earnings per adjusted diluted share of $2.10 to $2.20 [ph] with an approximate 40%, 60% weighting between the first and second halves of the year.

Other assumptions in our guidance include negative variances carried over from 2021 which will depress margins in the first half of the year. The higher volumes, including those we are currently experiencing, will continue and will translate into improved productivity and margins for the second half of the year.

First quarter share-based compensation will be higher in Q1 than in subsequent quarters due to the timing of awards within the year. In closing, 2021 was another year of significant COVID-related challenges which weighed on our full year results.

We are pleased, however, to be exiting the year with strong positive momentum and look forward to driving profitable growth as these COVID impacts normalize. Our 2022 base guidance is rooted in this recovery from the COVID headwinds.

We also remain confident and excited about being able to close and successfully integrate the HRA transaction which will meaningfully accelerate our future earnings trajectory.

Operator, can you please open the line for questions?.

[Operator Instructions] And the first question will be from Chris Schott with JPMorgan. Please go ahead..

Good morning..

Hi, good morning..

Hey guys, what’s going on. Just a couple maybe to start with on the gross margin dynamics. I guess the first question I'm having is just on the second half margin improvement and your line of sight on that.

Can you just talk through a bit what still needs to occur for results to improve in the second half versus the first half versus, I guess, the actions you've already taken or some of the things like the volume increases you're seeing today that will imply second half margin improvement? I'm trying to get a sense of what are the kind of pushes and pulls we need to watch that could impact, I guess, that rate of margin improvement during the second half? And then I have a couple of follow-ups after that..

A, significantly higher than ours; and B, their growth rates are significantly higher. So the good news about that is it will have an immediate gross margin positive impact. But then it will have a positive mix impact going forward. And just, if you look under the fourth quarter numbers underneath, Chris, just to add a little bit of color.

CSCI actually, from third quarter, came back up a couple of hundred basis points in gross margin and -- from third quarter to fourth quarter. And OTC came up with 150 gross margin points from third quarter to fourth quarter but we got beat up pretty good in Oral Care with freight costs out of China..

Okay. So it sounds like a lot of these, I guess, processes are either in motion or you've got line of sight on getting to that recovery is what it sounds like from these various kind of drivers. I guess the second question was just elaborating a bit more on the 2023 kind of EPS range. I know that's something you're still striving towards.

But obviously, it seems like the world is in a little bit different place than it was a few years ago with supply chain and everything else.

So just give us a sense of, I guess, how reasonable is that target? And just how are you thinking about kind of '23 overall in terms of, I guess, the ability to recover some of the kind of impacts that we saw in '21? Like is it reasonable to get a lot of that back in '23? Or could that be a little bit more of an extended process for us?.

I mean, from -- I've been very clear on it. Now if I get 100% back of it or not but I'm not backing off that mid-$3 EPS number for 2023. And the big components of that are cough/cold coming back.

It is, right? So if you carry the second half gross margin forward, you should get a big productivity benefit in 2023 above and beyond the underlying 3/5, right? So, when I model it in the way if I was you and I was modeling it, I take our core businesses, I'd say 3/5, that was our 3/5/7 model from the beginning.

I'd layer in a cough/cold rebound, then I layer in HRA which by 2023, we said is $150 million of EBITDA, we believe. And that's getting close to $1 of EPS. So you take our estimates of where we're going to finish this year and you have -- or the base level estimates, grow at 3/5, add $1, you're starting to get into that neighborhood.

And then the big pieces above and beyond that become our ability to get HRA synergies above and beyond and our supply chain reinvention project I talked about. We are given an opportunity of bringing this big company in to take a look at our entire global supply chain which has not been the focus of the first three years.

It was getting the portfolio, right? And we believe there are significant savings opportunities there to close that like if you're following me in the math, that less $0.20 or $0.30 we would need in 2023.

And again, I hope to lay all that out before the end of the summer, early September, somewhere around there and a full Investor Day that shows the details of this progression and staying pretty close to our original expectation..

Appreciate all the color. Thank you..

And the next question is from David Steinberg with Jefferies. Please go ahead..

Good morning, David..

Hey good morning. Thanks. A couple of questions. The company showed pretty strong G&A management this quarter.

And I was just curious, are there further opportunities there? And related to that, with lower R&D levels, can you sustain your pipeline of new products efficiently at these lower levels? And then, the second question -- related question is just on your leverage ratio.

Can you update your thoughts on your leverage ratio post close of HRA and then for fiscal year '23? Thanks..

Why don't you do the leverage ratio? I just want to just quickly look at the number that David was referring to..

Yes. On the leverage ratio, we see -- once we complete HRA, we see significant positive cash generation, increased cash generation over where we are today. And our target would be by end of 2023 to be back into 4x leverage, a little over 4x.

And quite frankly, by 2025 to get our leverage down into our sort of target range which is in the mid-2s in the 2.5x range..

Yes. And I'm trying to get to the R&D number that you were talking about. I mean, we're still right around 3% of net sales and it was part of Project Momentum overall.

Every department had to give back a bit of operating expenses but it was a difference of a couple of million dollars year-over-year, right? And if I look at R&D for the total year, it was the same as it was..

Not changing..

Yes, it hadn't changed at all. I got to tell you, the -- I'm pleased with that how well the company worldwide managed operating expenses over the past couple of years as part of Project Momentum. But I do want to put in perspective, you're talking about $100 million of savings on what was like a $300 million, $350 million pool of operating expenses.

Now our focus as it should be because the world is concerned about gross margins, especially on the way it's gone, now you're talking a couple -- $2.5 billion, $2.6 billion target to go after on efficiencies. And I think you'll see by the time we get to you in September, that is a meaningful opportunity for Perrigo..

Just a question on new product flow. On the last call, I'm thinking about Rx, OTC switches and how the landscape looks there. And on the last call, you discussed potentially this major opportunity that you're starting to see in the U.K. and hopefully transferring to the FDA with a once-daily birth control pill.

Can you update us on that? And then anything new on some of the lower-hanging fruit like Sklice, Flonase, etcetera, say, in 2022 and 2023?.

Yes. I mean, Brad in a follow-up call can give you the specifics of some of the smaller ones. I think the point -- the first one which is the HRA one, is still in the process, moving along. Remember, we're in an FTC review period.

So we are bound by gun-jumping laws that we can't get too deep into any kind of planning or future planning until we get final FTC approval which we're optimistic will be soon. But there's no reason to think that's not on track and a huge opportunity for the company to have the first daily oral contraception.

They continue to have -- continue to win switches around the world on their L1 product which is similar to Plan B here in the U.S.

But I think the more encouraging part is you should look at the slide I put up there and see the fruits of a lot of our labor on innovations and moving from national brand equivalent to a national brand different to national brand better, first capsules, the Burt's Bees, natural line infant formula, numerous ones, a contract back on sort of the hottest infant formula out there winning the new Product of the Year Award from a major customer on oral electrolytes to NASONEX launching which is our own switch happening in this year to just -- and probably 15 more in the expansion of Probify [ph] line of probiotics in Europe and the launch of Nervisin [ph] and XLS Forte 5.

So I mean, across the board, we have a robust portfolio. My point on Rx-OTC switches from the beginning is, I was told when I joined Perrigo, they weren't going to be anymore. And that's just not true. I mean, we've had Voltaren. We've taken on some of our others and I don't know the exact timing.

I do know I read a press release yesterday on GSK's separation of their new consumer health company. And they made it quite clear that they expected above-normal growth and some of that future growth was for the next couple of years to come from two Rx-to-OTC switches.

So, I think what's happening in the industry with J&J spinning off their consumer health, GSK spinning off their consumer health, Sanofi spinning off their consumer health. You're creating a $150 billion segment and that will now be a focused major consumer segment that will be -- need to be growing and driven by innovation.

And in the U.S., that presents a lot of private label opportunity as well as us to compete on a branded front. So I think gross margins are an issue. Top line, we've been proven we can do it. We'll continue to do it. We've got HRA that will even carry us probably a nice double-digit growth for the next few years.

And this company needs to -- we all need to dig in and focus where we are on getting those gross margins back..

Great. Thanks very much. Helpful..

[Operator Instructions] Next question is from Elliot Wilbur with Raymond James. Please go ahead..

Thanks, good morning. First question for Murray just with respect to your relative growth outlook or organic relative growth outlook for the whole business of 7% to 8% in 2022.

Just wondering if you could provide a little bit of color in terms of the relative growth profile of each of the two segments, CSCA versus CSCI? CSCI being smaller, I would expect that maybe it has a slightly higher growth rate than that all-in number but just want to get a little bit more color behind that? And then specifically with respect to the performance of infant nutrition in the U.S., maybe just some commentary in terms of sort of what led to the relative share gains in some recent media reports around some issues that a competitor of yours is experiencing.

And just wondering if, in fact, that may be something you're seeing a net benefit from or you just really don't overlap in terms of product offerings?.

Okay. Well, the last one, we were benefiting for the last four or five months by -- we gained two or three share points and it had been years of decline. So the business really turned around. It was both offensive on our plan, right? We had planned on launching Hypoallergenic a year earlier and we couldn't because of COVID but we did get it launched.

We have a branded product that we packed for that's direct-to-consumer, that's doing incredibly well and has been in a lot of the new shows and morning shows. And we're the sole packer for that one in the -- and helped develop it. So I mean, that's been a positive contributor.

At the same time, you're right that national brands were having service issues.

And these numbers are before what's most recently which is the largest or one of the big two in infant formula has had a product -- a significant product recall in the past few weeks which has every customer in the country calling us for additional volume and even the regulatory agencies saying, "You need to do it.

You can help out to make sure babies are fed." And we're doing what we can, given our relative size. So there's a lot there but I don't want you to think it's all like their weakness. It's just as much all the positive things that we're doing. As you look at the overall business, I don't have CSCI versus CS [ph].

They're not that far different next year. I think the big components of it is, even though it sounds like a big number at 7% or 8% when you break it down, the underlying is still the 2% to 3% that it's been. And then you layer on top of that cough/cold. And then you layer on top of that a meaningful number in pricing over top of that.

And then you layer in another six months of the Rx divestiture of Perrigo is coming in. And all of those factors are sort of what build up to the 7% or 8%. But again, if you peel it back, the core products are still at that 2% to 3% but we're growing our cough/cold business. Right now, north of it's consumer takeaway is like 60% or something..

Okay. And I want to ask you a question with respect to cough/cold inventory in the U.S. at least. I know the number you provided in the deck indicates it's based on internal estimates. But I guess sort of just based on kind of walking around pharmacies and seeing sort of what occurred in December and January.

I mean, I can't recall last time we saw such significant stock out of cough/cold products, at least based on locations we visited. So, I was sort of expecting that we'd see kind of more of an inventory benefit in the current year and maybe even a little bit higher stocking relative to last couple of years headed into the 2022, 2023 season.

So maybe I was a little surprised to see things kind of indicated to move back to normal, just saw kind of given the strong demand and stock-out conditions that we have seen over the past couple of months. So I just want to get your thoughts on that observation..

Can I please make sure that I understand your question? Are you saying, you think it looks like we're being too conservative in our forecast, saying it's not all the way back to '19? Or are you saying you thought the fourth quarter numbers should have been higher? Which are you saying?.

With respect to your forecast. It seems like replacement of inventories would have a bigger lift than what seems to be kind of implied in your guidance..

Yes. Well, I mean, it just depends how much of it was from Omicron that Omicron is tailing back off very quickly. You are right. That's probably an area we're conservative in our plan.

But at 7% or 8% top line -- organic top line growth, I felt like that is a good, robust -- 3x our normal level is a good place to start to and let's hope that's a conservative estimate. But you're not wrong. If you do the math, that it could get higher..

Yes. And we're still -- we didn't put it in our forecast for the same level as we had in 2019, the last "normal year.".

Yes, that's what he's saying..

Right. We agree..

Okay. And then just last question. So, we've continued to talk about the negative impact on gross margins from various manufacturing inefficient reason and this has kind of been going on for some time. And you sort of alluded to maybe a larger game plan in terms of addressing these going forward. You're going to detail later this year.

But just thinking about this just conceptually, I mean, is this something that can be sort of remedied without sort of massive facility rationalization and restructuring? Or is this really something that you sort of need to spend -- it's like a multiyear plan that you need to really kind of significantly reduce your overall manufacturing footprint?.

It's not a manufacturing footprint because our business is so complicated that you can't even look at it as one supply chain. We kind of have five very distinct supply chains and I don't see manufacturing rationale as a big point of it. But just given the complexity of our business, how this thing has swung.

If you look at the level of SSSO, that scrap and obsolete inventories and things like that, they're way too big a number over the past few years. That's better planning. That's better demand planning.

That -- say again?.

SOP planning..

SOP planning, all of that. So there's north of a $50 million savings opportunity on planning. But you have to be able to get it down to the SKU level and with our customers and there goes along with that. I'm previewing you here a little bit but there's opportunities for SKU rationalization. We say yes to everybody. I don't launch you that item.

500 items later, we matched that one item. So I mean, I'm being literal. If they launch one, we launch 500. And there are ways to consolidate that amongst customers, etcetera, that increases efficiency, that increases service. There's a big number on service.

My Head of Supply Chain and I just recently attended with a very small group of CEOs at Walmart in their new distribution center talking about the same issue for them, how much they're leaving on the table for service. And the same issue is for us of ways to get out of it.

It's a big number on the unfulfilled demand that goes by every month, so getting after that. There is some opportunities on other kinds of rationalization and automation. And I've spent the last three years getting different parts of the company making the investments in IT.

But on the plant floor, there needs to be an ability to be able to measure KPIs of productivity and the priority of orders that are coming in at a higher levels than they are now. That's my way of saying I think they're short-term, mid-term and long-term supply chain savings which we'll show you..

Okay, great. Thank you..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Murray Kessler for any closing remarks..

Yes, I want to thank everybody for your interest in Perrigo. At any of our Ukraine colleagues if you're listening which you're probably not given the circumstances but if you are, we're with you and you know you have our support. And my big message to everybody is, we have changed this company over the last three years, dramatically changed it.

It is now a consumer self-care company and we have gotten the top line growing. We are fully aware of the gross margin issues and we're after it. The first job for us as a management team was to put this thing together and get out of businesses, get out of these billions of dollars of overhang. And we have done that.

The job now with laser, laser focus is now profitability and profitable growth going forward and we believe we'll get there. And I am not letting go of those 2023 original of that objective. So, thank you for your interest in Perrigo..

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