PERRIGO Co plc Q3 FY2024 Earnings Call

Good morning, everyone, and welcome to the Perrigo Third Quarter 2024 Financial Results Conference Call. All lines are currently muted for listening only. After the presentation, we will have a question-and-answer session. I would like to now hand the call over to Bradley Joseph, VP of Global Investor Relations. Please proceed.

Good morning and good afternoon. Welcome to Perrigo's third quarter 2024 earnings conference call. I hope you all had a chance to review our press release issued today. A copy of the 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, Patrick Lockwood-Taylor; and CFO, Eduardo Bezerra. 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 release issued earlier today. A few items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. Continuing operations include the HRA Rare Diseases business which was classified as held for sale after the first quarter-end and does 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 measurement in the prior year's financial statements. And third, Patrick's discussion will focus solely on non-GAAP results, except as otherwise noted. See the appendix for additional details and reconciliations of all non-GAAP financial measures presented. And with that, I'm pleased to turn the call over to Patrick.

Thank you, Brad. Good morning, good afternoon, everyone and thank you for joining today's call. I would like to begin with an update on the advancements we have made towards building One Perrigo and the progress we have made towards our fiscal year expectations. Stepping back, One Perrigo is an operating platform designed to deliver a unified global operating rhythm built on speed, agility, reliability and data-driven decisions. Main building blocks include one optimized organizational structure, one operating model, a way of working, one unified enterprise technology network, one focused and scalable portfolio. Bringing all these pieces together will allow us to significantly advance our vision to provide the best self-care for everyone. During the third quarter, we have taken significant steps to strengthen our One Perrigo culture and brand building capabilities. By expanding our executive leadership team with the appointment of a new Chief Brand and Digital Officer, Dr. David Ball, in addition to appointing a permanent General Counsel, Charles Atkinson. Both David and Charles bring an immense amount of industry-specific experience and will be instrumental to Perrigo achieving value-accretive, sustainable growth over the long term. I wish them both a warm welcome. Turning to our accretive initiatives. The team has executed Project Energize extremely well, achieving $95 million in gross savings year-to-date, partially offset by reinvestments of $16 million. As a reminder, we expect Project Energize to deliver $140 million to $170 million in gross pre-tax annualized savings, while reinvesting $40 million to $60 million of these savings all by the end of 2026. Early reinvestments have been focused on adding or repurposing key talent across the organization. In addition to the appointment of both David and Charles, we reinvested in other areas such as global quality, IT, category management and disruptive growth. These new leaders have added more than 200 years of combined consumer experience to the company. Our supply chain reinvention program is delivering gross savings of $32 million year-to-date, with a corresponding cash outflow of $18 million. This program in total has achieved $72 million in gross savings and a corresponding cash outflow of $42 million, equating to an extremely solid ROI. The supply chain program has delivered gross margin expansion, unlocked capacity in constrained areas to pursue new business, lowered our standard production costs, and increased U.S. OTC service levels which most recently achieved 92% across all U.S. customers, up from 80% in the prior year quarter. Efficiencies gained from this program have partially offset lower production volumes primarily in U.S. OTC and Nutrition. We have also made demonstrable progress to augment and strengthen our infant formula business. Net sales grew 3% versus the prior year quarter and 58% sequentially; more on infant formula in a few moments. Next, we delivered third quarter gross margin of 41%, an increase of 160 basis points compared to the prior year and an increase of 40 basis points sequentially. The strong third quarter expansion is driving year-to-date gross margin expansion of about 90 basis points. Now to our earnings phasing, which remains heavily weighted towards the second half of the year due to the timing of recovery of infant formula and benefits from Project Energize. For the third quarter, we delivered EPS of $0.81, an increase of 27% year-over-year and 53% sequentially. We are reaffirming our 2024 adjusted EPS range of $2.50 to $2.65. In summary, we've made significant progress in 2024. We're delivering on our accretive initiatives. The infant formula business is recovering, and we have taken actions to simplify and consumerize our business. There's a lot more work to do. Now, let's turn to our third quarter earnings highlights. Third quarter net sales decreased 3.2% year-over-year, while organic net sales declined 2.4%, which I will speak to on the next slide. Gross and operating margins expanded meaningfully versus prior year, 160 basis points and 340 basis points, respectively. These factors led to an operating income growth of 21.3% and EPS growth of 26.6% to $0.81 as just shared. Now to organic net sales which declined 2.4%, including an impact of 2.8 percentage points from lost distribution of lower-margin products in U.S. store brands, in line with our second quarter earnings call discussion. Organic net sales from the rest of the business improved 0.4 percentage points driven by women's health and healthy lifestyle categories. The nutrition category had a 0.2 percentage points impact on organic sales as lower sales of low-margin oral electrolyte solutions more than offset growth in infant formula. Organic sales of our global OTC brands grew 2.1% versus the prior year, stemming from strong performance of Compeed, Nasonex, Bronchostop and Bronchenolo. Overall, our brands continue to perform well. Regarding infant formula, our number one priority was to recover and complete our self-remediation actions so that all our sites produce reliable, quality-assured infant formula. We have done this and are now achieving high attainment of quality, production, and packaging. Our number two job in infant formula is focused on bringing back service levels across all retailers and contract customers, in addition to building safety stock to lessen any potential shock to this business. Our highest volume store brand SKUs are now back on shelf and we are currently achieving approximately 85% in stock across our largest customers. Looking ahead, we expect all customers, including contracts, to be in stock with our highest volume SKUs by year-end, that is for the largest store brand customers who have inventory. The third job for infant formula is sales activation, which entails driving demand creation to promote switching to store brand formula through online ads, promotions and other activities. This work has recently begun, resulting in store brand volume share of non-WIC powder increasing 160 basis points compared to the prior period, as of the latest consumption data. The consumption spike during the first week of October was likely due to pantry loadings from the port strike and Hurricane Milton, which also contributed to the store brand share gains. Our contract customers recently began reintroducing SKUs and we are leaning in to support and optimize their business, including the launch of several new products. However, early volume share gains for these customers have been slower than the store brand share gains. While a lot of focus this year is being placed on infant formula, we are also driving consumer-preferred innovation. Perrigo is strategically positioned to leverage emerging trends and partner with retailers to drive growth in categories where we operate. One trend worth highlighting is the increasing usage of GLP-1 medications, particularly for weight loss. This market is expected to grow from approximately 6 million users today to approximately 30 million users by 2030. GLP-1 users often experience multiple side effects which can be managed with OTC products, creating an opportunity for Perrigo and our retail partners. For example, GLP-1 may require multiple products to treat nausea, diarrhea, headache, constipation, and gas. By focusing on specific claims related to GLP-1 side effects, we can provide retailers with a one-stop hub of convenient and accessible OTC offerings that cater to consumers seeking relief. Retail activation of this innovative program is expected to begin later this quarter. This program is just one example of leveraging Perrigo's scale and agility to quickly provide unique solutions for an emerging OTC trend. To provide a brief overview of our strategic initiatives, I've spent considerable time over the past 16 months assessing our organization, our portfolio, and the competitive landscape to determine where we operate and how we want to win. This work has identified several attractive growth opportunities that have the potential to be impactful in the long term. It has also uncovered additional initiatives necessary to rewire Perrigo and set us on a path to achieve sustainable value-accretive growth. These initiatives are: 1) stabilizing key areas of our business; 2) streamlining our operations; and 3) strengthening our foundation for the long term, referred to as the Three-S model. We will provide more detail on these initiatives during our Investor Day early next year. In summary, we're on track to deliver against our 2024 EPS commitments and expectations. We have made significant progress stabilizing core businesses. We have invested in world-class CPG capability and leadership and we're executing excellence against our accretive initiatives. I believe we are much better positioned for more reliable earnings per share and revenue growth and we're also advancing our work to consumerize, simplify, and scale One Perrigo. Our 9,000 Perrigo team continues to provide significant value to consumers, customers, and society as a whole by delivering our important and necessary self-care solutions. The dedication to our purpose is truly remarkable. They embody the One Perrigo ethos and together, we are committed to making life better through trusted health and wellness solutions accessible to all. With that, I will turn our call to our CFO, Eduardo Bezerra, to cover the financials. Eduardo?

Thank you, Patrick and hello, everybody. Looking at the third quarter financials, starting with the GAAP to non-GAAP summary. Primary adjustments to our third quarter non-GAAP P&L were: 1) amortization expenses of $51 million; 2) the removal of $31 million related to gains on exited businesses and product lines; 3) unusual litigation of $25 million; and 4) restructuring charges of $19 million, primarily related to our Supply Chain Reinvention and Project Energize programs. Full details can be found in the non-GAAP reconciliation tables attached to today's press release. From this point forward, all financial results discussed will be on an adjusted basis, unless otherwise noted. Turning to our third quarter and year-to-date P&L. Since Patrick covered Q3 net sales, I would like to highlight the meaningful Q3 year-over-year operating income growth of 21.3%, driven by the recovery in infant formula, including favorable production efficiencies, net favorable pricing across the enterprise, and benefits from Project Energize. Net sales year-to-date decreased 7.5%. Year-to-date, organic sales were down 6.3%, including a 3.7 percentage points impact from infant formula and a 4.7 percentage points impact from lower first half seasonal demand for cough, cold, and allergy products and SKU prioritization, and now lost distribution in the U.S. Store Brands. These impacts more than offset the 2.2 percentage points of growth across the rest of the business. Year-to-date, operating income increased 1.8% as net favorable pricing and benefits from accretive initiatives more than offset a 10.4 percentage points impact from infant formula and a 3.5 percentage points impact from exited businesses and product lines. Year-to-date EPS declined $0.09, due primarily to discrete tax benefits in the prior year of $0.11, inferring a $0.02 increase at a constant tax rate. Additionally, year-to-date EPS included a 0.26 negative impact from infant formula, highlighting EPS momentum underpinning the business, driven partially by management taxes. The team continues to focus on achieving margin expansion. This expansion was driven by 1) infant formula recovery which drove operating margin expansion of more than 1,900 basis points in the Nutrition category; 2) benefits from our accretive initiatives; 3) favorable mix within Store Brands and across the global portfolio; and 4) operating margin expansion in the U.S. oral care business of 830 basis points due to pruning of the portfolio and cost optimization. I should also note that CSCI delivered a record quarterly operating margin in Q3. Great job done by the team in the quarter. Switching to organic top line performance by segment starting with CSCI. Organic growth in the quarter was 1%, driven by positive 3.5 percentage points from the Upper Respiratory, Skin Care, and Women's Health categories. Growth across these categories was driven by share gains in key brands, including Bronchostop, Compeed, and EllaOne. This growth was partially offset by supply constraints in Pain & Sleep Aids categories and lower consumer demand for VMS products. In CSCA, organic net sales declined 4.4% due primarily to a 4.4 percentage points impact from the lost distribution in U.S. Store Brands, which we mentioned in the previous quarter. Lower sales in the Nutrition category of 0.4 percentage points were offset by growth of 0.4 percentage points across the rest of the portfolio. Sales of U.S. brands, including Nasonex, Prevacid, and Opill, were significantly higher compared to the prior year. Turning to third quarter operating income; both segments delivered double-digit growth versus the prior year. Record quarterly operating income in CSCI included benefits from accretive initiatives, lower variable expenses, and favorable pricing. These drivers more than offset the impact of lower volumes and exited businesses and product lines. The FDA growth was driven by infant formula business recovery, benefits from accretive initiatives, and favorable store brand mix. These factors more than offset the lower volumes, including loss of distribution and higher advertising and promotion investments which support the growth of our U.S. brands. Third quarter EPS of $0.81 increased $0.17 or 26.6% versus the prior year, driven by both business performance and accretive initiatives. Q3 EPS also included a net impact of $0.03 from currency translation and exited businesses and product lines. Now a bit of color on our three major initiatives and their projected cash outflows. Our Supply Chain program kicked off in 2022 and is expected to achieve $100 million to $120 million in gross pre-tax annualized savings by the end of 2025. The cash cost to achieve these benefits was originally estimated at $160 million. Given our heavy scrutiny on every single dollar spent, we now expect to achieve the same benefits for $30 million less than originally projected. Our infant formula self-remediation actions began in January of this year, following updated manufacturing guidelines introduced by the FDA last year. The focus of this initiative is to ensure all infant formula sites are producing reliable, quality assured infant formula. We now project a cash outflow of approximately $25 million in 2024 related to these initiatives, which is a positive development as this outflow is below our original projection of $35 million to $45 million. Finally, to Project Energize, our global investment and efficiency program to drive the next evolution of capabilities and organizational agility. We now project cash outflow for this program below our original estimate by approximately $5 million, another positive note as we remain on track to deliver our previously stated benefits. In summary, these three actions are necessary to help stabilize key parts of our business, streamline our organization, and strengthen the company for the long term. Through a stringent approach to capital allocation, we now expect the total cash outlay from these three initiatives to be approximately $50 million lower than originally projected. Turning now to our recent refinancing. During the third quarter, we enhanced our debt structure by issuing $715 million and EUR 350 million notes, both due in 2032. Both issuances were highly oversubscribed and well received by fixed income investors resulting in lower coupon rates than the initial price. Proceeds from these notes were used to redeem our $700 million notes due in March of 2026, which came off our balance sheet early in the fourth quarter, and to prepay $390 million of our existing Term Loan B. These refinancing actions will result in a lower weighted average interest rate after executing derivatives, while having no impact on our total long-term debt outstanding or credit ratings. Cash on the balance sheet as of the third quarter end was $1.5 billion, an increase of $921 million from the second quarter, including the $700 million supplied to redeem the notes due in 2026. Cash inflows included $205 million of upfront proceeds from divesting the rare disease business which closed in July, approximately $1.1 billion in proceeds from the refinancing I just discussed which closed in September, and third quarter operating cash flow of $42 million. Cash outflows for the quarter included $27 million of capital expenditures, and $38 million returned to shareholders through dividends, translating to a current dividend yield above 4% and the prepayment of approximately $390 million on our Term Loan B. On October 2, after the third quarter ended, we completed our refinancing activities by fully redeeming our $700 million notes due in 2026. Deducting these amounts from the third quarter end balance implies a pro forma cash balance of approximately $764 million at the end of the third quarter. Next, fourth quarter operating cash flow is expected to be substantial as this is typically the largest cash generation quarter due to natural phasing. Separately, in the second quarter of this year, we settled and paid a $97 million shareholder lawsuit. This quarter, we received $70 million from insurance coverage related to this segment. We believe we are entitled to recover at least the remaining $80 million of the shareholder settlement and we will continue to vigorously pursue recovery during the fourth quarter. These factors are expected to translate into meaningful fourth quarter operating cash flow conversion. Lastly, we intend to fully repay $400 million of Perrigo notes when due in December 2024, with cash on hand, resulting in an end-of-year net leverage of approximately 4x, down from 4.5x at the end of the third quarter. Taking all these moving parts into account, we continue to plan for year-end cash on the balance sheet of between $500 million to $550 million, assuming insurance recovery of the remaining shareholder settlement. Turning quickly to guidance, our 2024 outlook remains largely unchanged. While we expect organic and all-in net sales towards the lower end of their respective outlook ranges, adjusted gross margin between 39% to 40% and meaningful year-over-year adjusted operating margin expansion. In addition, we now expect a full-year adjusted effective tax rate of 19% to 20%, slightly lower than before. And finally, we are reaffirming our EPS outlook of between $2.50 to $2.65. In closing, the team has taken swift action to offset known and unknown headwinds, achieving year-to-date operating income growth compared to the prior year. We remain on track to deliver significant benefits from our accretive initiatives at a lower cash cost than originally planned. We bolstered our balance sheet by refinancing $1.1 billion of debt and expect to lower our total debt outstanding and interest expenses in 2025. Looking ahead, we will continue to focus on free cash flow generation and investing in our business for the long term. Thank you for your ongoing support as we further our journey to fulfill our vision as One Perrigo. With that, I'll turn back to you, Brad.

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

Your first question is from Susan Anderson from Canaccord.

It's encouraging to see the Infant Nutrition business getting back on track. How should we anticipate growth in the fourth quarter? For 2025, can we expect sales to follow a typical run rate? Regarding the improvement in margins, specifically the 1,900 basis points, should we expect that level to be sustained moving forward?

Okay. As we examine the infant formula segment in the fourth quarter, we remain optimistic about the recovery we anticipated at the beginning of the year. The first half is expected to be impacted, followed by a ramp-up. Our store brand is performing well, and in the third quarter, we concentrated on regaining our distributor share, successfully repositioning our product with five of our major customers. In the last quarter, we aim to extend that to all our retailers, which is part of our growth strategy. The main uncertainty lies with our contract business. As noted, we increased our store brand share by 160 basis points, while the overall notable increase was 40 basis points. Given the current dynamics, particularly on the branded side, we are closely monitoring developments in our contract business, which is a crucial element. Looking ahead to 2025, we foresee a continued recovery of our store brand market share and expect strong progress throughout the year while keeping an eye on the contract business. There is a new competitor in the branded market that is gaining considerable share, and we are observing how this will affect branded shares. Lastly, concerning margin improvements, it's important to note that last year, we faced significantly low margins. We anticipate that the margins we achieve this year will continue to progress, heavily influenced by the contract business's performance. We expect substantial advancement in both gross and operating margins to continue into 2025 as we address most of the challenges encountered in the first half of 2024.

Okay, great. And then, maybe if I could add one more just on Opill, if you could talk about. Obviously, some nice growth there. But I guess, how it's trending versus your expectations, how the new customer acquisition is going and the marketing around the product. And then maybe just any thoughts around expectations for Opill for next year?

Yes. Susan, this is Patrick. So Opill, it continues to gain momentum. It's almost a 3% share now of all contraceptives over the last 4 weeks. As you rightly say, we are experiencing week-on-week sequential growth. Awareness has grown very well over this quarter. Trial is good and repeat rates, well over 40% is actually the benchmark. So we're pleased with it. However, we are not completely satisfied; we still think there is upside to it. It's a new category in OTC, so there's a lot of learning to be done, a lot of optimization. We need to improve in-store visibility; we'd like to see more display that can generate significant awareness. We are also continuing to learn who our key user groups are. We seem to have three key user groups, and we're conducting research to understand why they use, how to convert them faster, and how to really focus our marketing to grow share with those three user groups. There's good work to be done to make it even bigger. We expect to see continued growth going into '25.

And Susan, just to add to what Patrick said, while we do not expect Opill to be accretive to EPS, we're seeing it being accretive on our gross margin, both in '24 and we expect this to continue in '25.

Yes. Okay, great. And do you expect it to be accretive to EPS in '25?

So remember, as we said, more towards the end of the year, right? We stated from the beginning that we didn't expect it to be accretive in the first 18 months. So we must continue to rationalize our A&P to drive the margin because remember, it's very important to maximize this opportunity, given the 3-year exclusivity period, to get the Opill brand in the hands of consumers. So we're maximizing that opportunity. When we come back with the store brand product, we want to be able to capture the most value in that category.

Maybe just starting with the restructuring programs and I guess the cash outflows are coming in better than expected. Can you provide some context on how that changes your priority list for investing or if some investments are being pulled forward? If so, what areas of the organization would that be in?

Well, Keith, Eduardo here. So we continue to prioritize our investments, right? We still have some investments that we expect to do in the organization. As Patrick highlighted, we want to build and strengthen our business, ensuring our R&D and A&P are at a level similar to the branded companies. That's one key area we are looking at. Additionally, we are continuing to drive efficiencies in our operations, investing in our systems, etc., as part of our One Perrigo strategy to unify and standardize, so that we can benefit from Project Energize and Supply Chain Reinvention for the long term. These are some key areas we are continuing to focus on for reinvestment.

Got it. That's helpful. Maybe secondly then on just adding to your comments around the seasonal nature of cough/cold season and really just your exposure to the drug and pharmacy channel. What are you guys seeing there? I know there are some unique pressures in the U.S. with some key customers of yours. So any context on the potential impact, one, from a seasonal nature and cough/cold trends in the U.S.? And then secondly, just what you're hearing from some of those key customers in that channel and how that might impact your thoughts on the U.S. OTC business?

Yes, this is Patrick. The cough/cold business is about 10% to 15% of our business. So we're relatively well insulated if it is a weak season. The indications are for a fairly normal season, but of course, we benefit from any upside. Good question on shopper dynamics and channel switching. Typically, we don't see an impact when shoppers move channels. But most shoppers use all channels anyway. If they're moving their purchase from one channel to another, that's really a neutral effect for us. We actually enjoy higher shares outside of the pharmacy channel; if anything, this is a slight tailwind for us.

I want to touch a little bit on the customer controls you're putting in and exiting relationships with some of the key customers that may be a little bit lower margin. Can you talk a little bit about the true margin differential of these customers? And then, I believe in the press release, you talked a little bit about the lower volume, maybe being a little bit of a margin headwind. So at what point would this flip and become more of a tailwind versus a headwind given the volume impact you're seeing?

Yes. Thank you, Korinne. One important point is that we didn't exit the customer, right? We operate with all the retailers in the U.S., and that's very common that at different times of the year or multiple years, they conduct their RFPs. That was a portion of the business with one specific customer that we walked away from, because those were very low margins. As you see, in the third quarter, we had a positive impact on our margin because of the margin of that net loss business. To us, it's margin accretive in terms of that decision. We're always watching that closely so as not to have an impact on absorption. To your second question, some of these actions we took in the first half are starting to show results now. We're seeing the impact in Q3 and Q4. Those exited specific parts of the business will impact our top line and that may extend further into the first half of 2025. But with the wins we had over the last 3 to 5 months, we expect to start offsetting that in 2025. I would say starting in the second quarter, but more consistently in the second half of 2025. Just to be clear, those businesses present a higher margin versus what we lost, okay?

I appreciate the detailed insights. I would like to ask about the selling expense, which appears to have decreased slightly this quarter. Is there any timing shift in the spending that we should consider as we approach Q4? Additionally, how should we view the appropriate run rate for that selling expense moving forward?

Yes. So when you look into the overall operating expenses, right, as we launched Project Energize in the first quarter, we expected to see significant benefits in the second half of the year. What you're seeing there is coming down in the third quarter. In the first quarter, we expect that to continue. But as we look into 2025, right, we took a very strong position on A&P and R&D, given some of the top line impacts we had. So as we work on our plans for 2025, we expect those two lines to recover compared to this year. Still, as we shared, Project Energize will deliver incremental savings in 2025 versus what we are delivering in 2024, which, by the way, year-to-date were $95 million.

This is Ethan on for Chris. To start, what has been the early feedback on demand for your private label and store brand formula from both consumers and retailers during this phase of the infant formula recovery? Are there any updates or changes to your overall market position? Do you have any concerns about selling the product you produce considering the new competitor in the industry?

Yes, Chris, this is Patrick. I'll respond to that and then Eduardo will provide additional insight. We are seeing an increase in store brand market share among consumers, which aligns with our expectations. We've factored in the number of new mothers entering and exiting the category each month. We understand how to attract them to our store brand and when to do so, and we have resumed our marketing efforts. We are aligned with U.S. store brands. Many are focusing on units sold, but the better metric is non-WIC powder pound consumption. This is important because many units transitioned from smaller to larger tubs due to the industry's need to streamline its SKU selection following new FDA regulations and improved manufacturing efficiencies. Consequently, we are observing poundage closely matching our recovery expectations. That's the first point, and we anticipate continued growth in store brand share as we roll out innovations and new SKUs next year. We actually aspire to exceed historical share levels, which we expect to achieve by 2025. The remediation process has been very successful, with our high-quality plants setting a benchmark for the industry. Our production and packaging are at or above historical levels, meaning we are operating higher-quality plants more efficiently than ever before. Our recovery in stores and with store brand consumers is fully meeting our expectations and is set to accelerate. As you've mentioned, the industry has faced disruptions over the last few years due to COVID, the new FDA regulations, and the emergence of foreign brands that have secured a significant market presence. These brands have taken market share from some established players, including those we contract manufacture for. There are some short-term dynamics at play, and we will stay vigilant and adaptable to ensure our plants are utilized fully. However, the responsibility to maintain market competitiveness and consumer appeal lies with those brands. That summarizes our current position and outlook on infant formula.

One other question is just on 2025 more broadly at this point, how are you thinking about the pushes and pulls to EPS given the ongoing infant formula recovery along with the contract wins coming on board in 2025 and a number of other dynamics that are working through the business?

Yes, I'll start and then Eduardo will definitely add some more detail. We are highly sensitive to the $3 EPS target. We are literally in the middle of our detailed budget planning for '25. Yes, you are correct, there are some headwinds which are common across anyone in CPG: consumer, regulatory, channel shifts, etc. However, there are also tailwinds for us. We have a recovering business and a stabilized U.S. Store Brand business, and again, we have a broader growth arena than any of our competitors. We compete at three price points across hundreds of molecules. We can read where the growth is, where the seasonality spikes are, and pivot accordingly. We’re working through those growth opportunities, determining where to focus, and assessing the relative ROI of those. But again, we are very committed to the $3 EPS target. Eduardo?

Yes. Just to provide a little bit of color, we expect to announce our guidance in our Q4 earnings in late February. In terms of tailwinds, as Patrick mentioned, we continue to see category growth. The new business wins we’re seeing in Store Brand offset the volume loss that we expect. In the second half of 2025, we anticipate a stronger position too. The store brand infant formula recovery that we started to see is shifting upwards now. As it continues from Q4, so does the brand growth. In CSCI and CSCA, we observe great strides in our brand portfolio. Some ongoing headwinds include continued competitive marketplace pressures, particularly in U.S. Store Brand and as previously highlighted, the U.S. infant formula branded business and the potential impact on our contract business. Furthermore, as mentioned by Korinne, we anticipate a return to more normal levels in variable expenses for 2025, both in A&P and R&D as we progress through the year. Finally, we witnessed strong pricing in CSCI this year but given the competitive dynamics impacting all major brands, we expect pricing to be tighter next year. There are numerous moving pieces, yet we steadfastly focus on achieving the $3 target and will provide further updates in February.

I wanted to follow up on that last answer from Eduardo. The price gap between national brands and store brands, do you think that should widen or narrow? Would that benefit sales or pricing? And would that be a boost to your sales?

To clarify, the question is what will happen with the price gap between national brands and store brands across all categories or specifically? As we discussed before, we saw a widening that over the last 18 months. We are starting to see national brands engaging in further promotions to recover volumes. Consequently, we notice a slight reduction in that widening. However, it is challenging to see if this is becoming a robust trend. We will carefully monitor the situation, especially during cough and cold season, as national brands may strive to recover volumes, likely leading to heightened competitiveness in the marketplace.

Yes, this is Patrick. Just to provide an additional data point on your first question. Store brand volume share is up 120 basis points in the most recent 13-week period. More consumers are shifting to store brands as they recognize these are identical bioequivalents at a much better value. We are witnessing increased investment and requests for demand-creation investments from our retailers to support the store brand proposition and grow share. These are significantly more profitable for retailers, offering better value in an economic cycle. Regarding innovation, we will discuss it in further detail in February. Our focus has been on scaling innovation investments more strategically. We believe we can enhance our innovation efficiency by concentrating on consumer-preferred innovations, specifically targeting categories and brands we want to drive growth for. Historically, we have pursued smaller innovations for specific brands in particular countries, which often yielded insufficient returns. We are shifting our strategy to focus on larger innovations with better NPVs that can be scaled across brands and countries to optimize benefits. Overall, there has been a slowdown in innovation over the last few years, which is not favorable for consumers or category growth. We anticipate bringing more substantial and better innovations to the market. While I cannot comment specifically on competition, I assure you that we will emphasize innovation as a crucial growth and performance driver for us in February.

Thank you. There are no further questions at this time. I will now hand the call back to Patrick for the closing remarks.

Yes. Thank you very much, and thank you for joining us today. We do have a strong quarter, and we hope what you see is the internal structure of this company getting demonstrably better and stronger, positioning us for more reliable growth going forward. We think the blueprint for Perrigo's sustained growth is now becoming clear. We can categorize it under the Three-S model of stabilizing four parts of our business, continuing to streamline our structure, our operating systems and our manufacturing, and then strengthening those key growth vectors that we see for the long term while disproportionately maintaining our branded growth. We've made a lot of progress this year, and it was a challenging year to stabilize essential facets of our business, including infant formula, which recovery is excellent and fully in line with expectations at a lower cost than we had first outlooked. We are back to a competitive position in our U.S. Store Brand business. As we mentioned last quarter, we are winning tens of millions of dollars of business, and we will see that growth playing through in '25 in the second half. This work of stabilizing these core businesses, I'm pleased to say, is largely behind us. We continue to progress actions to streamline and simplify our business to improve costs, cash, and operational reliability. We are approximately halfway through this work. That represents cash upside that positions us well. There is more work to do to strengthen our business and maintain the excellent branded growth we see internationally to sustain that, and to ensure we're achieving that in the U.S. This really is the third component of achieving sustainable value-accretive growth. We remain hyper-focused on delivering and deleveraging through 2025 to improve operational financial reliability and cash flow generation. Cash flow generation remains our top priority, and we believe the Three-S strategy will significantly enhance cash efficiency, which I will outline with Eduardo in February. We are delivering on our commitments in 2024 through both improved financial steering and operational reliability, along with enhanced market competitiveness. We operate in a dynamic and competitive market, but we will continue to address the daily business challenges that arise on our journey to realize the full potential of our significant asset base. Again, very good work and progress structurally. My thanks go to the entire Perrigo team, and thank you for joining us today.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.