PERRIGO Co plc Q1 FY2022 Earnings Call

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

Thank you. Good morning, and welcome to Perrigo's first quarter 2022 earnings conference call. I hope you all had a chance to review the earnings press release we issued this morning. A copy of the earnings release and presentation for today's discussion are available within the Investors section of the perrigo.com website. Joining today's call are President and CEO, Murray Kessler; and CFO, Ray Silcock. I would like to remind everyone that, during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and safe harbor language regarding these statements in our press release, issued earlier this morning. A few quick items before we start. First, unless otherwise stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the divested Rx business which was accounted for as discontinued operations prior to its sale. In addition to 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. 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 focus solely on non-GAAP results. And with that, I am pleased to turn the call over to Murray.

Thank you, Brad, and good morning, everyone. With our three-year transformation to a consumer self-care company now complete, Perrigo is moving into a new phase, which we're calling, optimizing and accelerating. The Perrigo team is hyper-focused on optimizing and accelerating our self-care platform through, one, supply chain reinvention to improve efficiency, productivity, and customer service. Two, successful integration of our scale HRA Pharma acquisition. And three, gross margin recovery via pricing and portfolio consolidation. I will also note that this will be accomplished as we also continually strengthen our organization and culture, and contribute to the world we live in by making our products and facilities more sustainable. With that in mind, I'd like to share a few words about the announcement we issued this morning. First, I'd like to thank Todd Kingma, our General Counsel for the last 19 years, who just announced his retirement, and Ray Silcock, who I've worked with, on and off, for the last 30 years, and who previously announced his retirement. Both made incredible contributions to the company and our self-care transformation. While they will be missed, I am very excited to share who will be filling their roles. First, Kyle Hanson has been hired from Wolverine Worldwide and will serve as our EVP, General Counsel and Corporate Secretary. And second, Eduardo Bezerra, most recently from Fresh Del Monte Produce, has been hired as EVP and Chief Financial Officer. They represent the next generation of Perrigo leaders who will help drive the newly transformed Perrigo organization. They both have the passion and seasoned relevant experience that embodies the Perrigo advantage. I am confident that their diverse perspectives and deep experience will make valuable and immediate contributions to Perrigo's success. Turning to HRA, I am also pleased to say that we closed the HRA acquisition nearly two months ahead of schedule, and are extremely excited to welcome their team to the Perrigo family. The final purchase price was approximately $1.9 billion; nearly $200 million lower than originally anticipated, tracing to the recent strength of the U.S. dollar, a good outcome for shareholders. More importantly, the company we bought is performing beautifully. HRA results for 2021 were stellar. This is a business that is growing rapidly, finishing up 26% in 2021 versus year-ago, and achieved a robust gross margin north of 70%. HRA's strong growth continued in the first quarter of 2022, with net sales up versus year-ago, on top of double-digit growth versus the prior year. EBITDA was up an impressive 77% versus year-ago in the first quarter. Strong top line growth, strong margins, and a number of budgeted expense decreases including one-time investments included in 2021 operating income that are not expected to repeat in 2022 supports our estimates of HRA achieving approximately €90 million in operating profit in 2022. Since we closed the acquisition early and HRA earnings are historically much stronger in the second-half, due mainly to the seasonality of Compeed, Perrigo is expecting operating income accretion of around €55 million to €65 million in 2022. Beyond 2022, HRA business growth is expected to continue through geographic expansion and new product adjacencies. That, along with cost synergies from the deal that are now estimated at €40 million versus our original €30 million estimate, leads us to reiterate our expectations for HRA to add about €150 million in operating income in 2023, and that excludes any potential short-term impacts associated with capturing the synergies. Turning to slide 11, first-quarter results for Perrigo were generally in line with our expectations despite another wave of cost headwinds resulting from the war in Ukraine. Net sales increased 6% versus year-ago, with organic net sales up a very strong 10%. We attribute this strength to a global rebound in cough/cold and U.S. nutrition infant formula sales. Price also had a positive impact. Gross profit margin was down 140 basis points sequentially versus Q4 due to one-time items we don't expect to repeat. Note, additional cost pressure was offset by price increases and higher volume in the quarter, resulting in our EPS finishing at $0.33 per diluted share, in line with our expectations. Currency-neutral EPS for the quarter was $0.37, including a $0.02 per share negative impact from the war in Ukraine. While Perrigo's top line continues to accelerate sequentially, what is more important is that our net sales in Q1 '22 are substantially higher than they were back in 2019, before the ups and downs of COVID. On a three-year basis, our first-quarter net sale compound annual growth rate is plus 5.6%, and our organic growth rate on a compounded basis is 2.9%. There can be no doubt that the transformation has returned Perrigo to revenue growth. Looking at our categories in more detail, strong total net sales growth was driven by strong performance across both CSCA and CSCI, with cough/cold and contract-packed sales leading the way. Infant formula was also a big driver in the U.S.A. Strong shipments are aligned with robust global consumer demand for self-care products. After two years of disconnects between shipments and consumption, the system appears to be back in balance. I think it's worth spending a minute on infant formula. This business has turned around nicely. Top-line growth in our nutrition business was up 38% in the quarter, driven by infant formula. Importantly, Perrigo gained more than five share points compared to year-ago. These gains came from the launch of new hypoallergenic formula offerings, continued growth in our organic products, and the roll-off of COVID enhanced benefit programs for formula. Our business also benefited slightly at quarter end from the recall of our competitor’s infant formula. While this didn’t benefit us in the quarter much, we are now seeing higher demand. And Perrigo is doing everything it can to run as much infant formula as possible to help fill the shortages created by the recall. Also during the quarter, I am proud to say the Perrigo team received U.S. Food and Drug Administration approval for over-the-counter Nasonex, the company’s first ever branded Rx to OTC switch. The NDA was a first cycle approval. And we expect the brand to be on shelf at leading retailers in the U.S. this fall, a big win for the Perrigo regulatory team. Turning back to gross margin for the quarter, we are laser-focused on recapturing the margin loss due to supply chain disruptions and cost and freight inflation. And we still see a clear path to gross margin expansion in the second-half of the year consistent with the phasing discussed on our last earnings call. Manufacturing productivity, elimination of one-time costs, price increases, and 90% of expected benefits from price this year are still to come, the sale of the Latin American businesses, and now the addition of 70% gross margin HRA products should allow us to recover 400 to 500 basis points of gross margin by year-end. Now on to guidance, we are increasing our organic net sales growth guidance to 8% to 9% compared to the prior year. Up from 7% to 8% driven by expected strong performance for the rest of the year, partially offset by 0.5 percentage point from expected loss business in Ukraine and Russia. We are also increasing our all-in net sales guidance to growth of 8.5% to 9.5%, up from 3.5% to 4.5% versus the prior year. The primary driver is the addition of HRA which is expected to contribute approximately 5.5 percentage points of growth for this year. This will be partially offset by the impact of unfavorable foreign exchange. We are also increasing our full-year adjusted diluted EPS guidance to $2.30 to $2.40 per share. This range includes approximately $0.35 accretion from HRA and $0.20 headwind from Russia-Ukraine related macro volatility, which led to unfavorable foreign exchange and higher than anticipated refinancing costs. Putting the year together, we are now expecting outsized growth on both the top and bottom line with near double-digit top line growth and approximately 14% diluted EPS growth. In closing, our focus going forward is to optimize and accelerate the business, the supply chain reinvention through successful integration of HRA and through gross margin enhancement and by continually improving our organization and culture. We are focused on controlling what we can in what remains a very dynamic environment. We have inflation-related pricing actions in place to cover rising costs and expect them to fully take hold in the second-half of this year. We are also uniquely positioned in the U.S. consumer self-care market to benefit from an inflationary cycle as evidenced by store brand share gain during the last recession. And with that, I will turn the call over to Ray one last time to discuss the financials in more detail. Ray?

Thank you, Murray. Good morning, everyone. And yes, this is my last Perrigo earnings call as I am going to be retiring from the company. It has been a privilege to work with the talented Perrigo team over the past 3+ years. And I am excited about the path ahead for the company. Currently, I am working diligently to ensure a timely and smooth transition to Eduardo who, with his deep experience, will be a great new CFO for Perrigo. Now let’s review our first quarter financials. On a consolidated basis, the company reported a GAAP loss from continuing operations of $1 million for the first quarter of 2022. A loss of $0.1 per diluted share. On an adjusted basis, consolidated net income from continuing operations was $45 million. And adjusted diluted EPS from continuing operations was $0.33 per share versus $0.50 per share in Q1 last year. The decline in adjusted EPS as compared to the prior year was primarily due to one-time headwinds in CSCA. These included higher customer service claims related to unfulfilled customer orders and lower profitability on contract manufactured products for the now divested Rx business. We also had higher planned advertising and promotion expenses in CSCI in support of our strong top line growth there. And as Murray noted, the inflation impacting cost of goods sold and transportation costs were offset by increased sales volumes and higher prices. Also, unfavorable foreign currency movement hurt adjusted EPS by $0.04. And we experienced an additional $0.02 EPS impact; half from lost business in Ukraine and Russia and half from product donations we made in Ukraine in line with Perrigo’s corporate charitable philosophy. Moving on to non-GAAP adjustments. In the first quarter, pre-tax non-GAAP adjustments totaled $71 million. Major components included amortization of $49 million, HRA acquisition and integration fees of $11.4 million, plus $3.5 million from HRA purchase price hedge costs, and impairment charges rising off a $5 million fixed asset. Further details of these and other adjustments can be found in the non-GAAP reconciliation table attached to this morning’s press release. The non-GAAP tax adjustments are primarily due to the $13.6 million tax expense related to a pre-tax non-GAAP adjustment and the removal of the following reported items. One, a $17.2 million tax benefit on depositions of entities, offset by two, a $6 million tax expense for nonrecurring legal entity restructuring. These led to an adjusted effective tax rate for the quarter of 22.5%, slightly up from the first quarter 2021 adjusted effective tax rate of 22.2%. From this point forward in this presentation, all dollar numbers, basis points, and margin percentages will be on an adjusted continuing operations basis unless stated otherwise. As Murray already covered net sales for the quarter, let’s move on gross profit. Consolidated gross profit in Q1 was 8.3% lower than prior year primarily due to the one-time headwinds I just mentioned including unfavorable foreign currency movements. Gross margin declined 540 basis points versus the prior year due primarily to these one-time headwinds which account for nearly half of the decline, unfavorable product mix from a higher proportion of sales coming from store brand compared to branded, and the timing of pricing actions related to inflation as well as unfavorable foreign currency. Consolidated operating income for the quarter was $87 million; $32 million below Q1 last year primarily from unfavorable gross profit flow-through but also from higher distribution costs and increased advertising and promotion expenses which helped us deliver our strong top line growth. Turing now to the first quarter segment results, let’s start with consumer self-care Americas. CSCA gross profit in the quarter was $178 million; $24 million dollars below last year. Higher sales volumes and positive pricing in the quarter were more than offset by inflation in cost of goods sold and transportation. In addition, in Q1 other cost headwinds including lower profitability of contract sales to the now divested Rx business, customer service claims, and some other headwinds had a total adverse impact of approximately $24 million. In combination, these factors led to a year-over-year gross margin decline of 640 basis points in Q1. Operating income for Q1 was $87 million, $23 million down from Q1 last year, primarily unfavorable gross profit flow-through and increased distribution expenses, partially offset by lower R&D and admin costs. These factors led to a 500 basis point year-over-year decline in adjusted operating margin. Moving on to consumer self-care international, CSCI gross profit was $182 million, down $9 million or 4.8% from the same quarter last year, largely due to unfavorable currency movements. Gross margin for the quarter decreased 180 basis points, primarily due to the impact of product mix as we have higher growth in both store brand and contract manufactured products as compared to our higher-margin branded offerings. In addition, we felt the adverse effect of having carried high-cost inventory made in Q4 last year but expensed in Q1. Adjusted operating income, of $53 million, was $7 million below the same quarter prior year, including a $7 million adverse currency effect. Excluding currency, gross profit was 4.3% higher than in the same period last year driven by higher sales volume in the quarter which came about despite the loss of business as a result of the Russian war in Ukraine. At operating income line, favorable gross profit flow-through excluding currency was offset by higher advertising and promotion spend in support of CSCI's strong top line growth. These factors led to a 130 basis point year-over-year decline in adjusted operating margin excluding currency effects. Moving on now to the balance sheet, cash on the balance sheet amounted to $2 billion at the end of the first quarter, up from $1.9 billion as at year-end 2021. After the quarter ended, we closed on a $2.6 billion refinancing comprising a $1.6 billion term loan and an undrawn $1 billion revolver. The term loan was used to refinance an existing term loan maturing in August, as well as refinance two 2023 bonds, and to provide approximately $500 million in incremental borrowings over and above what was already available on our balance sheet to fund the $1.9 billion acquisition of HRA, together with cash on hand. Operating cash flow for the quarter was $79 million, a strong 176% cash conversion on adjusted net income. As Murray discussed, we continue to operate in a dynamic environment, but remain poised for outsized growth given the contributions from the HRA acquisition and continued strong demand for our consumer products, which is reflected in our updated EPS guidance of $2.30 to $2.40 a share.

We will now begin the question-and-answer session. The first question today comes from Chris Schott with JPMorgan. Please go ahead.

Hey, guys.

Morning, Chris.

Good morning. Just a couple for me here, I guess first on the gross margin front, and there may be a couple different pieces to this. I know you touched on this in the remarks, but I'm still trying to get my hands around the step-down in CSCA gross margins when I look at kind of second-half '21 to 1Q '22, I think that came down about 250 basis points sequentially. And can you just spread a little bit more color of, I guess, how much of this was one-time? What were the one-timers exactly, and then I guess how much of this just kind of sticker supply chain inflation type stuff that you're going to have to work through as a year goes along?

Yes, it's 100% one-timers. We encountered about $7 million in one-time expenses, mainly due to clean-up efforts. This was influenced by the strong resurgence of our cold and cough business, which led to a significant number of customer claims that we are currently addressing and potentially reversing. While this amount is largely one-time, we may manage to recover a sizable portion of it. Specifically, $7 million in claims were automatically generated when we accepted orders without taking deductions, which was automatically processed in both their and our systems. We need to manually contest these claims, which we are actively doing. To illustrate, if we initially forecasted a demand of 100 units, it unexpectedly surged to ten times that during the first week of January. We managed to fulfill two to three times the forecast, but fell short for the remaining seven times. This led to the automatic claims in the system, but we believe that amount will decrease significantly, if not entirely vanish, compared to previous figures. So, that's one aspect to consider. Another aspect, unfortunately, is related to one-off events. Despite being short on cold and cough inventory this year compared to almost two years ago, the inventory created for the 2021 season in 2020 had to undergo some write-offs due to the absence of a cough and cold season. When the conflict between Ukraine and Russia started, we made numerous product and charitable donations which were one-time actions we felt compelled to take. Additionally, there was a necessity for a $5 million or $6 million adjustment to the royalty rates for one of our suppliers. Taking all of these factors into account, this resulted in a couple of hundred basis points impact. Essentially, I am indicating that the gross margin on CSCA, excluding these one-time events, was in line with what it was in the fourth quarter. I am genuinely optimistic about gross margins this year in accordance with our plans. I understand that you anticipated a higher figure, but we actually met our goals despite facing a couple of hundred basis points of gross margin pressure due to one-time events, currency challenges, and a new wave of rising costs that we managed to counteract through pricing. Furthermore, most of our corrective measures, about 90% of them, are still ahead of us, including pricing strategies and other actions we can discuss further.

It sounds like, based on your answer, you've outlined the margins for the second half, which is a positive development. However, when I think about the sequential performance for the second quarter, should we anticipate the Americas business and pre-HRA to align more with what we experienced in the latter half of 2021, or should we expect it to be closer to the 25.5 to 25 level that seems to be a reasonable estimate for the second quarter? I just want to ensure I'm accurately focusing on that specific number as we progress through the next few quarters.

Yes, HRA will be a factor. However, could you clarify the period you were referring to? Sequentially, it's expected to increase.

That's what I was trying to get my hands on.

Right, I understand.

Yes, I think we were around 27.5 in the second half of '21. Is that a reasonable level to consider for the second quarter before HRA?

I think it will be around well, you're talking, I'm looking at consolidated. Give me a second to get down to that.

Sure, I can't understand that part.

To CSCA, yes, I think that's sort of thinking about it the right way.

Okay, perfect.

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

The other topic I wanted to discuss is HRA, which had a very strong first quarter. I know you plan to elaborate on HRA growth targets later this year. Looking back at the 2021 results and projecting into 2023, it seems to imply a mid-20% annual growth rate. Can you remind us of the growth drivers that will support this increase in HRA growth over the next few years? This question has come up frequently since the proxy, and I would appreciate a reminder on how we should view the drivers of HRA in the next couple of years.

I'm currently in Europe attending HRA integration meetings. Just two days ago, I was at HRA headquarters meeting with the general managers from various hubs worldwide. There is a strong sense of confidence, with many saying this is the best start the company has ever had, as travel resumes. The figures released in the 8-K reflect the impact of COVID on our business, particularly Compeed, which was significantly affected, similar to our cough/cold segment. With less travel, fewer people were in need of our products. We also see regular growth from expanding into more countries and converting ellaOne from prescription to over-the-counter. Looking ahead, we have the entire Hana line, an everyday birth control pill, which could be crucial, especially in light of recent discussions around Roe versus Wade. We’re optimistic about launching it in 2023 and expanding its market reach. The brand is already gaining traction beyond just wounds and healing, with new applications for treating fever blisters and more. Expanding into the U.S. is a top priority for our growth strategy. I'm highly impressed by the team's confidence, marketing strategies, and belief in our growth numbers. This suggests we could continue to see double-digit top-line growth without relying on revenue synergies, aiming for $150 million in operating income next year. As Brad mentioned regarding operating income, we are reconciling it back to our operating income figures from our earlier discussions. Overall, it feels like we have unlimited potential right now, and we've increased our synergy estimate from €30 million to €40 million, making this acquisition one of the best decisions of my career.

Excellent, appreciate the color. I will jump back in queue. Thanks.

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

Thanks, good morning.

Hey, Elliot.

Hey, Murray, how are you?

Good.

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

Let me address the second question first, as that’s where you wrapped up. The recall occurred in the last week of March, which contributed to a stronger performance during that week, but it wasn’t substantial. However, it is significant in the second quarter. We are maximizing our current capacity and are exploring ways to potentially increase it in collaboration with the FDA. We hope some aspects will remain consistent, but we cannot predict how long the current conditions will persist. We are working to adapt to the cost increases and shortages, and our customers have been understanding regarding necessary price adjustments. While we hadn’t seen much trade-down in the first quarter, I believe this will present an opportunity for Perrigo. National brands have made significant investments to revitalize their advertising and have introduced new products, growing slightly faster than store brands. Our analysis shows that increases in consumption have come from their existing customer base, not from a shift away from store brands. The consumption growth we’ve experienced is driven by category growth, not significant switching. While national brands have been able to implement higher prices than us, we have negotiated pricing that is expected to amount to $125 million this year, with over $100 million still to come from agreed price increases. This represents about 2% to 3% from pricing, compared to larger companies reporting volume increases of 10% to 11%, with a 5% contribution from pricing. We recorded an 8% increase from volume and 2% from pricing. This positions us well for future growth as price gaps widen. We're dealing with inflation pressures, including a second wave driven by global events affecting energy and commodity prices, which is resulting in an additional $45 million in input costs. However, these costs have been offset by the pricing we’ve implemented. We anticipate finishing the year with double-digit growth, specifically close to 20% on a constant currency basis for the top line, with margins improving in the latter half of the year. Overall, I believe this quarter will be our lowest point.

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

Yes, I believe it will be sufficient to counterbalance the challenges for the entire year. However, there was a delay; unlike a national brand, we cannot simply implement a price increase immediately. We need to negotiate these changes when the stores are being updated. Many of the price increases are just now coming into effect, with some having taken effect late in the previous quarter or at the start of the second quarter. In the first quarter, we faced around $0.15 in material and freight inflation, but we likely offset about 80% of that through pricing alone, with the remainder balanced by volume. Going forward, I expect we will completely offset this or potentially even exceed it slightly. Additionally, we experienced a significant currency impact on the business, which is an unknown factor for us.

I wanted to revisit the gross margin issue. We've discussed this numerous times in the last year and a half. In your prepared remarks this morning, you mentioned optimizing and accelerating, as well as a supply chain reinvention. That sounds like a facelift rather than a significant change. Can you provide some early insights into your thinking? Are we looking at a physical alteration of our operations, or is this more about improving processes, procedures, and material planning strategies to avoid large inventory fluctuations and gain better visibility into production? I’m trying to grasp your thoughts at this early stage regarding the supply chain reinvention.

Yes, let me be very clear. When I mention acceleration, I am not referring to the 2023 or 2022 forecast. I do have some assumptions for 2023 that I am working with. If you don't mind, I would like to address this year's question directly to emphasize the clear path to recovery. The absence of one-time events from the first quarter adds a couple hundred basis points. When we resolve the absorption issues we faced at the beginning of the year in the second half, that adds 120 basis points. Removing the low gross margin and zero operating margin from Mexico, which represented $100 million in sales, contributes as well. Adding in a rapidly growing HRA business with a 70% gross margin provides another 200 gross basis points, even without any benefits from pricing. These factors position us to recover 400 to 600 points, alongside a growing portfolio with double-digit growth in both revenue and EPS, making for an exciting outlook, especially without the $3 billion tax risk. Looking ahead, we are beginning to explore ideas that could greatly benefit Perrigo. We have completed five divestitures and eight acquisitions, restructuring the company around consumer self-care. The Omega acquisition from a few years ago and the entire supply chain have yet to be fully optimized. So, in response to your question, we will be addressing all of these aspects over a five-year period. We’ve already cut $100 million, and we’ve received positive feedback for being strict with operating expenses. However, our cost structure remains significantly high. There are three to four phases we are looking at: short-term, mid-term, and long-term, spanning 12 to 18 months, 18 to 36 months, and beyond for larger initiatives like consolidating distribution centers. I will share insights on these plans at our Investor Day. In the near term, our focus will be on restoring our service levels following COVID disruptions and addressing supply chain issues that have led to one-time events and obsolete inventory. This alone may present a $100 million profit opportunity. Moreover, I want to highlight an emerging opportunity, which isn't reflected in our current numbers, estimated to be between $100 million and $300 million. This will require significant effort, as it involves in-depth analysis of costs at the SKU level and obtaining demand data for our SKUs distinct from the entire store brand industry to create improved demand models. Enhancing our service levels into the 90% range will greatly influence our ability to increase distribution and minimize lost revenue. Effective demand planning and scheduling will be essential to this process. Additionally, we found that when national brands launch significant SKUs, we often attempt to market 500 variations, a practice rooted in our historical approach. What is alarming is that 80% of these variations do not appeal to consumers but rather cater to minute customer requests, which complicates our production lines. Thus, there is a tremendous opportunity for productivity improvements, as most of our production lines are already operating at full capacity. We believe that approximately 30% of our production lines create 90 to 95% of our contribution margin. Therefore, our immediate short- to mid-term goals will focus on demand planning, forecasting, improving service levels, and reconfiguring our product portfolio. Following these steps, we will seek opportunities for consolidating distribution centers and optimizing operations. We are excited about the transformation into a consumer self-care company, and now it's time to elevate our performance further. I am committed to addressing the margin issues so our entire team can share in the excitement about the business’s potential.

Yes, absolutely. Two quick additional ones for you, given all the external issues that the company has faced on logistic side and input cost side that have hampered gross margins in the U.S., I guess I find it surprising or relatively impressive anyway that the CSCI margins have held up substantially better. We’ve really seen very little margin compression there. How much of that is just supply chain related with respect to that business versus the ability to just take higher and more immediate pricing actions to offset whatever incremental costs you are seeing? And then as a closure, given that you now own HRA, the company has been working on a potential OTC switch of a daily oral contraceptive in the U.S. market for some time. Now, just wondering if there are any action or regulatory updates that are on the clock for the next 6 to 12 months? Thanks, Murray.

The next step is the official filing. We will address all the questions and regulations, and we expect to file with the FDA in the U.S. within the next few months. This will be a major milestone, and then the costs will begin to accumulate. I encourage you to refer to the political article from earlier this week. This addresses a significant need, as there are 6 million abortions annually in the United States, and 30% of women have difficulty accessing birth control. Our efforts improve accessibility, which aligns with our company’s mission, and we are also applying in multiple countries for products like ellaOne. Additionally, we have Nasonex. There are many positive developments on the horizon. Regarding pricing, that’s primarily what I can say. I want to acknowledge Svend Andersen and his team for their work on the portfolio reconfiguration I mentioned earlier. Five years ago, our international business had 1,500 SKUs, but now there are about 5,000. Svend suggests that we still have about 1,000 too many, indicating further opportunities, and this reconfiguration has also positively impacted gross margins.

This concludes our question-and-answer session. I would like to turn the conference back over to Murray Kessler for any closing remark.

As I mentioned earlier, I am currently in Europe for the first time in over two years, meeting with our sales team. Just two days ago, I was in Paris with the entire HRA team, and I can’t express how excited our organization is about the future. We committed to achieving double-digit growth in both the company and earnings this year, and we are ready to deliver on that promise. After spending a year downsizing and securing cash, we have invested significantly, and you will soon see these numbers reflected. Although we faced challenges with supply chain issues and increased freight costs, these were not unique to Perrigo, as they affected the entire consumer industry, including companies like ConAgra, Procter & Gamble, and TreeHouse. Our team has managed these challenges effectively and we believe we can recover with minimal pricing adjustments, which we hope will benefit the company in an inflationary market. In similar past situations, we gained market share during inflationary periods, and I anticipate that we will maintain our volume while some national brands see declines. Overall, we have kept every promise made three years ago to restructure the company and we believe the benefits are starting to materialize. If we exclude currency impacts, we are exceeding expectations, and that should improve as well. We are currently dealing with a challenging Euro exchange rate, but we continue to see strong organic growth, effort towards improving margins, and great potential with our brands. Additionally, we have a supply chain reinvention underway. I'm optimistic about our position and it’s time for us to demonstrate our progress. While we faced unexpected global events like the war, we will persevere. I want to share a final anecdote: a member of our Ukrainian sales force remarked during a meeting that they believe they can still achieve 70% of their goals, demonstrating the resilience of Perrigo’s team. Thank you for your interest in Perrigo.

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