Good Day and welcome to the Perrigo Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Bradley Joseph, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good morning, and welcome to Perrigo’s second quarter 2023 earnings conference call. I hope you all had a chance to review our release issued this morning. A copy of the earnings release and presentation for today’s discussion are available within the Investors section of perrigo.com website. For the time, I would like to introduce and welcome Perrigo’s newly appointed President and CEO, Patrick Lockwood-Taylor to the call. Take note, as a shareholder we are thrilled to have you at Perrigo. Your consumer self-care experience and expertise will bring fresh perspective and help inspire the organization achieving the greater height. Again, welcome. Also joining this call this morning is Perrigo CFO, Eduardo Bezerra. 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 items before we start. 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 its sale. Second, 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 measurements in the prior year's financial statements. And third, Patrick’s discussion will focus solely on non-GAAP results, except as otherwise expressly noted. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. And with that, I'd like to turn the call over to Patrick.

Thank you for the warm welcome, Brad. And thank you everybody for joining us this morning. Nearly 40 days into my Perrigo tenure, I greatly appreciate the warm welcome I've received from my Perrigo colleagues. Their pride and excitement for our business comes through in every interaction, and I’m very energized to join them in the next phase of Perrigo’s growth. I also want to recognize and thank Murray Kessler, our outgoing CEO for his leadership in positioning Perrigo as a major player in global self-care. I'd like to start the call today by sharing what excites me most about the opportunities at Perrigo and also provide thoughts on our framework for building long-term sustainable growth. I've actually followed Perrigo for several years now, and I have always believed this is a truly unique business. It's well positioned in the right industry with numerous strengths. Let me highlight a few of those. It has tremendous manufacturing scale in the US, the ability to produce over 50 billion doses every year, across a wide range of formats, including tablets, liquid, sprays, lozenges, and creams to name but a few. This manufacturing capability translates into nearly 1,600 doses produced every second of every day. That's incredible consumer reach. As a global company, Perrigo has strong customer relationships with a top US retailer, in addition to strong pharmacy relationships across Europe, with over 100,000 direct pharmacist partners. Perrigo embodies a solid focus on cash and cash flow mindset, which helps generate an annual cash conversion ratio of approximately 100%. This is driven by several actions that include prioritization, simplification, standardization, and pricing. Finally, Perrigo has a strong innovation engine and the ability to fast follow across nearly every major OTC category. In fact, Perrigo has more approved OTC ANDAs than any other company. This fast-follow ability is exemplified by the launches of store brand equivalents to Voltaren Pain Relief Gel and Advil Dual Action tablet, both of which were launched the day after the national brand exclusivity expired. This innovation and speed to market enables our retail partners to truly differentiate their brands on the shelf. Another exciting example of innovation is Opill, which I will discuss further in a few minutes. There's been a lot of work accomplished over the past five years to position Perrigo as a leading company in the consumer self-care space. But there's still an awful lot of work to do, to consistently win and to fully capitalize on our assets and our opportunities. A few thoughts on the building blocks that will drive sustainable growth. First is to continue to refine where we're going to play. Perrigo has made great progress defining where to play within branded self-care. Yes, store brands are indeed branded self-care, but this will continue to evolve. Within consumer self-care, Perrigo participates in attractive segments that are set to benefit from favorable tailwinds. Ageing world populations, a heightened focus on self-care treatment, and ever more cost burden shifting to consumers are expected to drive attractive category growth. Next is to define how we're going to win. It is early in my tenure, but I can tell you Perrigo has a lot of tools to differentiate from competition and win with consumers, including e-commerce leadership, an extensive portfolio with deep category insights, and world-class manufacturing, innovation, and scale. It is our job to better leverage these tools to win consistently with consumers in a differentiated and impactful way. We need to focus on how we can further leverage our existing capabilities, in addition to new capabilities that we might need in order to sharpen our approach to drive further differentiation. Our supply chain reinvention project is a good example of this, and it is on track to drive down costs, increase efficiencies, and better leverage our manufacturing scale. Going forward, we will look to accelerate additional capabilities, including brand building and more meaningful consumer-driven innovation, so that we might differentiate our products at show. Finally, we need to optimize the Perrigo operating model, and to perform better as one Perrigo. While there's already been a lot of progress here, for example, our supply chain reinvention program, we have more to do to harmonize our global operating model. We need to sync to one operational drumbeat with common systems, structures, and KPIs that can deliver our products to consumers in the most efficient, value-creating way. Now, a brief update on our accretive initiatives versus the progress we continue to make on our supply chain reinvention program. The Perrigo work system is being rolled out across our manufacturing footprint. This foundational technology is enabling the work systems that have already been installed in 35% of our line and generating very meaningful actionable data. As part of our winning portfolio focus, we optimize the production of higher margin SKU, which drove 40 of the 260 basis points year-over-year gross margin uplift within our Americas business. We also continued to realize synergies from acquisitions, which are tracking slightly ahead of expectations through the second quarter. The HRA distributor transitions are already providing meaningful cost savings and margin expansion. As you know, the 2023 unfavorable EPS impact of $0.16 to $0.18 from distributor transitions is not expected to repeat in 2024. All these initiatives contributed to another quarter of consistent year-over-year results, with total Perrigo net sales growth of more than 6%, gross margin expansion of 220 basis points, and 18% operating income growth leading to 47% EPS growth. Importantly, we ended the quarter with a very solid cash position. Other notable highlights from quarter two include strong organic net sales growth of 7% in our international business, where we continue to hold share and grow markets and categories. This growth was broad-based, which included cough cold, anti-parasites, insect repellent, and skincare offerings. In the US, more consumers are choosing store brands as compared to national brands, evidenced by store brand volume share growth of 70 basis points over the last 13 weeks. An expected Perrigo share of total store brand was lower over the same 13 weeks due to planned SKU prioritization actions during the quarter, which again enhanced gross margin. Late last month, the FDA approved Opill, the first-ever daily oral contraceptive available OTC in the US. It was a momentous day for our organization, and one that comes at a pivotal time in the women's health space. I'd like to once again congratulate the entire women's health care team that worked for nearly a decade to achieve this milestone. This approval highlights Perrigo’s strong innovation that I just mentioned, and Opill will be an important part of the building blocks of our long-term sustainable growth. This switch will define a new category within women's health and break down traditional barriers for the 64 million women that make up the total addressable market in the US. Uptake has the potential to be broad across consumers who are uninsured, new to the category, or using less effective methods who will choose to switch from the prescription to the OTC product. I've worked on a number of prescriptions to OTC switches in my career, and this is the most exciting. Switches can be an effective pathway to brand building, as they typically go on strong retailer support, drive net new growth, and in the case of Opill, open up an entirely new category in the OTC space. Retailers are also excited about this upcoming product launch. As you may have seen from news reports, two leading drug chain stores have disclosed that they expect to offer Opill. We made this decision to fund pre-launch investments for Opill coinciding with expected retailer channel fill later this year. We continue to expect Opill on retailer shelves in early 2024. This is a meaningful opportunity for our US OTC business, and we plan to invest judiciously and with intent to smartly maximize the reach of the overall brand. As with any branded launch, we do not expect the product to be accretive to earnings for the first 12 to 24 months. In addition to Opill, I also want to provide early thoughts on our infant formula business. We recently completed the gateway facility and GoodStart brand acquisition and that integration remained on track. In the second quarter, this acquisition contributed $44 million of net sales in our nutrition category, which was partly offset by $5 million from a discontinued product line, and $5 million of lower net sales from pediatric drinks. Within the nutrition business, net sales of our legacy infant formula products were up $6 million or 6%, despite lapping a strong comparison in the prior year, due to a national brand supply issue. More on that in a moment. Second quarter gross margin in nutrition expanded 730 basis points compared to the prior year and nearly 1,200 basis points sequentially. This is a solid business. As for the prior year, national brand supply issue that I just mentioned, Perrigo stepped up to supply as much infant formula to parents as possible by running our facilities 24x7 and prioritizing our highest volume SKU to reduce production complexity, achieving over 115% infant formula output, a truly heroic effort by the team. Looking at the current landscape for infant formula, the market is normalizing as the impacted national brand has returned with many of its SKU. Additionally, recent changes to FDA guidelines are impacting the entire industry, resulting in lower manufacturing volumes, higher production costs, and a higher risk of scrap. Reassuringly, there is more demand for our store brand formula than we can supply. We have not lost any distribution and we've used pricing actions to offset higher costs. We're now working to reintroduce SKU that we deprioritized last year and to restock all customer shelves. But given the impact of the new regulations, this will take time. The healthy growth of our youngest consumers is our utmost priority, and our team is working relentlessly to ensure families have the nutritionally equivalent store brand formula that they need at the lowest price on shelf. I'd like to conclude by reinforcing a few essential points for achieving Perrigo’s full potential. Perrigo is well positioned in the self-care industry and has a number of tools that differentiate against competition. I know how hard my colleagues have worked to make that happen. Our job now is to put these pieces together and to continuously innovate in everything we do to better serve consumers. People at Perrigo are very talented and very driven. They're focused on the right priorities, including cash flow generation and de-leveraging. Our 2025 growth algorithm shared in February remains on track. I'm focused on plans to optimize and unlock our full potential and accelerate and sustain top performance. As you may expect, I'm working with our global businesses to assess our market positioning and our long-term plans. Work is already underway on winning initiatives. I look forward to sharpening my thinking as I continue getting to know the organization and team and then sharing more details in due course. With that, I'd like to thank you all. I will now turn it over to our CFO, Eduardo.

Thank you, Patrick. And good morning, everyone. Before diving into the quarter, on behalf of our entire operating committee, I would like to welcome Patrick to the Perrigo team. His joining has brought a tremendous amount of energy and knowledge to our business, and we look forward to working with him as we continue to execute on our self-care strategy. Now, of course, it's music to my ears when I hear Patrick talk about our intense focus on cash. Starting with our GAAP to non-GAAP summary, the company reported GAAP income of $9 million for the second quarter or GAAP earnings of $0.06 per diluted share. Adjusted net income was $87 million and adjusted diluted earnings per share was $0.63 per share versus $0.43 per share in the prior year quarter. Adjustments to the quarterly pretax non-GAAP P&L include a net total of approximately $70 million driven primarily by amortization expenses of $70 million, restructuring charges of $6 million, and the removal of $10 million of legacy royalty income received in the second quarter. Full details can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward, all dollar numbers, basis points, and margin percentages will be on an adjusted basis unless stated otherwise. Total Perrigo reported net sales grew 6.4%. Organic growth was 80 basis points, including an unfavorable 2.7 percentage points impact from proposed SKU prioritization actions to enhance margin. For CSCA, organic sales declined 2.7%, including an unfavorable 4.1 percentage points impact from the SKU prioritization I just mentioned. A light allergy season in the US also impacted organic growth by negative 1.8 percentage points. Within CSCI, organic growth remained robust at 7.1% compared to the prior year, as our brands continue to resonate with consumers. Gross profit increased $52 million or 13% driven by strategic pricing, acquisitions, and favorable mix. These were partially offset by inflation, primarily in CSCI, lower manufacturing productivity in CSCA and nutrition stemming from the infant formula regulations Patrick discussed, and the HRA distribution transition sales returns. Operating income increased $21 million, or 80%, driven by gross profit flow-through partially offset by operating expenses from acquisitions. Before we discuss margins, a dip on the second quarter effective tax rate, which was 7.3% versus 23.9% last year. The difference was due primarily to the release of reserves and other tax attributes associated with the settlement of various tax matters, including a discrete benefit of $0.08 per share in the second half. In total, these factors led to an impressive 46.5% EPS growth versus the prior year. Total Perrigo growth and operating margins expanded by 220 and 110 basis points year-over-year. Expectedly in CSCA, gross margin expanded by 160 basis points driven by the same factors that drove gross profit in addition to the benefit from SKU prioritization. Operating margin increased by 80 basis points due to favorable gross margin flow-through but was partially offset by higher operating expenses due to the addition of Gateway and increased promotional investments. In CSCI, gross margin expanded by 30 basis points due to the same factors that drove gross profit, while operating margin increased by 210 basis points driven by favorable operating leverage. Cash on hand at the end of the quarter was $555 million, reflecting an increase of $70 million from the second quarter last year. Operating cash flow for the quarter was $53 million, and operating cash conversion of 61% to adjusted net income in line with our assumptions. We're still projecting approximately 100% cash conversion for the full year driven by anticipated phasing of cash generation and improvements in working capital. Also, in the quarter, we invested $20 million in capital expenditures and returned $37 million to shareholders through dividends. We continue to make steady progress in reducing our net leverage as we ended the quarter at 5.1x net debt to adjusted EBITDA versus 5.5x at the end of 2022. Turning now to guidance. We are confirming our 2023 reported and organic net sales growth guidance and EPS range, which is comprised of several factors including: unexpected adjusted tax rate for the second half of 2023 of approximately 19.5%, leading to a full-year adjusted tax rate of approximately 17%, including the second-quarter adjusted earnings per share discrete tax benefit of $0.08 per share; investments in Opill pre-launch activities, including building large quantities in marketing and advertising plans to support our late fourth quarter retail channel fill ahead of product getting to shelves in early 2024; the current dynamics in the infant formula industry that Patrick discussed; and an assumed normal 2023 cough cold season. In total, our guidance reflects the strength of our business and the balancing of opportunities and risks that we're currently managing. Given these assumptions and our typical earnings phasing, we anticipate second half earnings per share will be more heavily weighted toward the fourth quarter, approximately 60% of our second half earnings. In closing, I would like to thank our colleagues around the world for their efforts. We continue to progress our strategic initiatives while meeting the needs of consumers around the world. With that, I will now turn the call back to Brad.

Thank you, Eduardo. Shavi, can we now please open the line for questions.

Our first question comes from Chris Schott with JPMorgan.

Hi, great. Thanks so much for the questions. And Patrick, great to have you on the call. Maybe the first question is you mentioned several areas of focus in the framework for sustained growth. Could you help us a little bit understand in terms of your top priorities moving into this seat? Which of these are the biggest opportunities you see for Perrigo as we think about some of the performance issues that companies had; is it about portfolio? Is it about the focus? Is it consistency in manufacturing? Help us think a little bit about how you're prioritizing those initiatives.

Good morning, Chris. Thank you for the question. I've worked through in detail, the strategic plan for the company. Job Number one is we have to deliver those priorities that are going to have the most impact on cost and cash and our OI growth. They include the supply chain reinvention, the integration, and that's both HRA and the new production facility that we have. So call that landing the big strategic initiatives right, and those are foundational to the 2025 growth algorithm that we've committed. I see no reason to challenge that. The second part of my focus is really just getting to a greater level of operating discipline. I’m starting to see that, and that’s particularly needed in the US business. So the second tranche of my focus is primarily in the US. That does involve really looking at our portfolio and where we need to double down, where we have the greatest right to win, and it’s the most attractive financially; that work is happening now. We need to look longer-term, continuous work of sustainable growth. So as we look to the future, we will look within our categories, which are most attractive, and within our brands, within our country brand combinations, and where do we see the greatest opportunities for growth. And what are the investments and capabilities needed to support that? That block of work will probably start later on in the fall. And that will really guide where we focus on the future. Planning initiatives drive our 'one Perrigo' operating system and discipline, then we must ensure we're focused on what it takes for sustainable growth.

Perfect. And just as part of that answer, it sounds like my second question was just on the 2025 targets that the company provided earlier this year. It sounds like you're comfortable with those ranges that were provided?

I am comfortable, I've worked through them as you would hope and expect in detail. I think they're very well considered; I think we have the right action plans and governance in place, but they have to be delivered. I will stay on top of that governance personally to ensure each of them is on track and how we help the teams to stay on track.

Right. And then my final question was just a little bit more color on how you're thinking about Opill, in terms of both the investment needed to build that market and how large of an opportunity. So I guess specifically, I know you've mentioned it’s not going to be an earnings contributor in the first 12 to 24 months, but I think investors have been worried this actually could be a meaningful drag on results in that timeframe. So just any color that would be appreciated. And then if you're willing to share a peak sales forecast for that product will also be of interest. Thanks so much.

Thank you, Chris. I’ll let Eduardo talk more to the financials. We're deep in the commercialization process of that. We will start to ship later on this fall and get it on shelves early ‘24. The commercial package for that is really what you would expect for any CPG brand launch. As I look at the plans, they’re solid. It's a complex sell to consumers, given the nature of the category. We're doing a lot of work on what is that awareness to trial conversion process, what investment and consumer touch points are required, and how long that takes. At this stage, I think until we have a detailed plan that I’m happy with, I wouldn't want to predict what the sales will be. However, I will have a much better idea at the next earnings announcement. But for further financials, Eduardo?

So thanks, Patrick. Just to complement, Chris, what Patrick mentioned. As you heard us mentioning, in the second half, we're going to have an important investment to fund these activities. We're using the tax benefit that we realized in the second quarter to fund that. The important thing is, we do not expect at least in the first 12 to 24 months for the Opill to be accretive. We are building the brand nationwide to ensure this is going to be a successful launch for the long term.

Our next question comes from Susan Anderson with Canaccord.

Hi, good morning, Alec Legg on for Susan. First welcome, Patrick, and congratulations on the new role. Just a quick question on the US business. What are you seeing with the inventory levels at retail? Do you think you're back to more stabilized levels there or are there still categories that have some pockets of restocking opportunities left?

Yes. Thank you for the questions, Eduardo here. As we look into the inventory levels at the retail now, we see them pretty normalized. After last year, we had a very strong cough and cold season that went up to Q2, and we saw depletion of inventories. This year, we saw in the first quarter a strong pick up, but very normalized season in the second quarter. We believe this gives time for more normalization of inventories in the retail channel. Of course, we expect that for the ’23-’24 cough and cold season in particular to be a normal season. We expect that there should be a pickup in sales in the third and fourth quarter that were built into our guidance that we shared this morning.

Perfect. And then just to follow up on the units versus pricing dynamic in the US and internationally, it looks like pricing added, I think, 4.8 points of sales growth in the quarter. Are you expecting more pricing to flow through the rest of the year? How are you thinking about potential price ticking the rest of the year and long term?

Yes. In the first half mainly on the OTC, we had the pickup of the remaining price actions from last year. We continue to look for opportunities in the second half in the US. However, very importantly, as we mentioned in the first quarter, because of the disruptions in the infant formula business, we had to take stronger price actions, and those were communicated in early July. We remain on track on our price projections for the second half in the nutrition business, as well as in the international business. We continue to price to the value proposition of our brands, and we're more than offsetting inflation that we continue to see impacting our costs.

Thank you. And then last question on the European consumer. It looks like they've held up pretty strong, and the consumption habits there have been trending pretty high. What else are you seeing over there? Is there any risk of trade down? It seems like it's the opposite, whereas in the US, we're not really seeing as much trade down to the private label. But it appears that the opposite is true, benefiting Perrigo in Europe.

Yes, we continue to see a very strong pick up there. With our HRA brands, we’re seeing very good performance. Now it's starting in the second quarter. It becomes organic growth. We saw also in several different categories, cough and cold, parasites, insect repellent, and skincare. A very strong update in the second quarter. We continue to see that, and we expect that to continue for the second half of the year.

And Alec, this is Brad. I’ll just jump in on the US comment that you made. We're starting to see a little bit of that trade down impact you saw in the materials, the earnings materials from today, in that the volumes within the US store brand in particular are starting to gain some share. Of course, there's a little differential on the dollars as some of the national brands may have taken more sizeable dollar price increases. But the volume is starting to pick up in store brands, which I think is just an important factor to consider going forward.

Our next question comes from Daniel Biolsi of Hedgeye.

Hi, thanks for the question. I was wondering if you could go into a little more detail about what the early learnings from the supply chain reinvention program are? It sounds like you've seen some gross margin benefits; any reactions from customers about products that you're not going to make?

Yes, so two key things that we're seeing is, as you saw in the second quarter, we had about 40 basis points improvement in gross margin tied to the SKU prioritization, and that’s really part of our winning portfolio pillar on the supply chain reinvention. Remember, our first 1,000 SKU that we mentioned we're going to focus on were SKUs that we didn't have a major impact on overall on how we handle with the retailers. We're going to be moving soon to the next phase on how do we continue to simplify our portfolio and continue to drive more value in our OTC category mainly. The other thing that is important to highlight is we’re on our Perrigo work systems. Patrick mentioned about the number of lines that we are moving these new redzone equipment. We’re seeing a very important improvement in the efficiency on our lines. This is helping not only to expand the capacity for certain categories that are so needed, like in cough and cold. But also this will help us manage better our inventories and our working capital towards the end of this year and in years to come.

Thank you. And then could I also ask what you're seeing in M&A in the consumer healthcare space? It seems like it's picking up, and maybe you can remind us where deleveraging falls as a focus for the balance sheet.

Yes, we're seeing several activities going on in the marketplace with different companies trying to streamline their portfolios. In terms of our guidance and our commitment, we expect to be around 3x EBITDA in terms of net leverage by 2025. Our three main commitments regarding how we're going to use our cash generated over the next three years include: making sure we reinvest in our business to ensure our supply chain renovation is fully successful, also looking into how we optimize our nutrition production capabilities, as well as returning value to our shareholders and reducing our debt. We have a trench of $700 million that matures at the end of next year.

And Daniel, this is Brad again, just to reinforce Eduardo's comment here. We've basically taken out through EBITDA growth over the last six months, almost a half a turn. Leverage is just sitting a little bit north of five here, down from about 5.5 six months ago.

This concludes our question-and-answer session. I would like to turn the conference back over to Bradley Joseph for any closing remarks.

Well, great. Thanks, everybody for joining the call. We look forward to speaking with you soon. Thanks for your interest in Perrigo.

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