Earnings Call Transcript
PERRIGO Co plc (PRGO)
Earnings Call Transcript - PRGO Q4 2021
Operator, Operator
Good morning and welcome to the Perrigo Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. All participants will be in a listen-only mode. 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.
Bradley Joseph, VP of Investor Relations
Thank you, Chad. And good morning, everybody and welcome to Perrigo's fourth quarter and fiscal 2021 earnings conference call. Hope you all had a chance to review the earnings press release we issued this morning. A copy of our earnings release and presentation for today's discussion are available within the Investors section of the perrigo.com website. Joining today's call are President and CEO, Murray Kessler; and CFO, Ray Silcock. I'd like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and safe harbor language regarding these statements in our press release issued earlier this morning. A few quick housekeeping notes. First, unless stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the divested Rx business which was accounted for as discontinued operations prior to its sale. In addition to the other non-GAAP adjustments as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from the prior year period certain costs incurred to support the operations of the Rx business which were reported in continuing operations. Please see the appendix for additional details and reconciliations of all non-GAAP financial measures presented. Second, organic growth excludes acquisitions, divestitures and currency in both comparable periods. And third, Murray's discussion will be focused solely on non-GAAP results. And with that, pleased to turn the call over to Murray.
Murray Kessler, CEO
Thank you, Brad and good morning, everyone. First and foremost, I'd like to start this call by acknowledging and thanking the Perrigo team, 10,000 strong. No matter what COVID-related adversity has been thrown their way over the last two years from lockdowns to multiple COVID variants to cough/cold impact to supply chain disruption, they kept our organization running, providing society with essential products. And they did so without having to shut down a single shift during the last two years in any one of our manufacturing facilities worldwide. Incredible. I also want to take a moment to acknowledge our Ukrainian colleagues that are in the midst of the horrible unprovoked invasion by Russia. Our hearts and support are with you. They were part of the entire Perrigo team that helped us complete our transformation to a consumer self-care company in 2021 despite pandemic disruption by accomplishing our three largest strategic milestones. First, selling the generic Rx business for $1.6 billion which dramatically lowers volatility and places consumer self-care as our sole strategic focus. Second, redeploying the Rx sale proceeds by announcing our agreement to acquire HRA Pharma, a rapidly growing consumer self-care company with a portfolio of leading brands for €1.8 billion. We estimate HRA will add €400 million in revenue and €150 million in operating income in 2023. Third, favorably settling the €1.6 billion Irish Tax NoA that had been a significant overhang on the company since I joined three years ago. This tax assessment could have cost the company $3 billion or more, including interest and penalties. We settled it for €266 million and this issue is now completely resolved and behind us. And we paid for the settlement using the proceeds from a favorable €355 million arbitration award. As a side note, we have some late-breaking news on the $370 million interest rate deductibility in Notice of Proposed Assessment, the NOPA, we received from the IRS in May of 2020. After a number of discussions with the IRS, the tax assessment has been lowered from $370 million to $130 million. That doesn't mean it will end up being $130 million as we will continue to vigorously defend ourselves on the technical merits. But it does mean the risk is dramatically reduced and this is just another example of our determination and success clearing the decks of all major overhangs while protecting shareholder value. With these major achievements behind us, Perrigo is now a pure-play consumer self-care company poised for strong growth, unencumbered by major overhangs of the past. Furthermore, Perrigo has been returned to a company that is consistently growing its top line. In fact, our consumer businesses have grown 3% on a compound annual basis over the past three years despite the historically weak 2021 cough/cold season. Remember, cough/cold related products represent nearly 20% of our total business. But for that, our CAGR would have been even stronger. But 3% is still solid growth, especially compared to the prior 3-year compound annual growth rate of -1%, prior to our transformation. While our big three strategic priorities were accomplished and we have returned to consistent top line growth, our original 2021 financial objectives were not met, although earnings did finish just above the midpoint of our revised guidance. On a total year basis, adjusted EPS finished at $2.06, down 12% versus a year ago due to last year's historically weak cough/cold season and its impact on manufacturing productivity, along with severe material price inflation and supply chain disruption in the second half of the year. These factors, including the step down in margin due to sales to the divested Rx business, negatively impacted fourth quarter gross margin by roughly 400 basis points which is basically the same as most leading CPG companies. I'm encouraged by our fourth quarter metrics and how we exited the year, however. Fourth quarter net sales grew 5%, adjusted operating income increased 12% and adjusted diluted EPS increased 28% versus a year ago as higher gross profit, new products and lower operating expenses overcame industry headwinds. Fourth quarter net sales growth was driven by: one, a return to strong cough/cold demand, evidenced by 28% growth in our Upper Respiratory reporting category which also includes allergy; two, 12% growth in Nutrition behind share gains in U.S. infant formula and the successful launch of new products and oral electrolytes. In fact, one of our new adult electrolyte drinks won the Product of the Year Award as voted on by one of the largest customers that we have. And it's a tremendous recognition for the efforts of the Perrigo team. And three, lastly, fourth quarter growth was also the result of strong contract tax sales, including sales to the divested Rx business. Also encouraging, as shown on Slide 10, Perrigo sales growth accelerated sequentially each quarter of 2021 as COVID-related disruptions either slowed or were addressed by the Perrigo team. This positive trend has continued into January and February of this year. We entered 2022 with strong top line momentum and strong global consumer demand. The markets we compete in the U.S.A. were up in the fourth quarter 17.5% for OTC, 24.7% for Nutrition and +9.1% for Oral Care. And in Europe, demand for our essential products was +33% and +2% for our self-care products. We also entered 2022 with most major top line headwinds behind us. Higher illnesses and the increased spread of the Omicron variant, which tends to cause traditional cold and flu-like symptoms, has contributed to a significant rebound in cough/cold sales. Customer inventories, which were a bit heavy in 2021 due to the weak cough/cold season, have been worked down to normal levels. And we have taken numerous supply chain and logistics corrective actions allowing us to ship our products, albeit at a higher cost. And I'm proud to say we entered 2022 with a robust offering of innovative new products as shown on Slide 13. For all of these reasons, we expect strong top line growth in our business in 2022. And to be clear, that is before any additional net sales from the HRA acquisition. Worth mentioning, HRA sales and earnings growth were robust in 2021 and were in line with our expectations. While the top line should be strong year-over-year, gross margin pressure will continue to affect the first half of 2022. We expect gross margin pressure to ease in the second half of the year as we start to receive the financial benefit from normalized cough/cold sales, certain input costs start to ease, our pricing actions being fully implemented and the negative margin-only impact from the Rx divestiture annualizes. To be clear, we expect relatively flat gross margin in 2022, excluding HRA, with their second half stronger than the first. Once the deal closes, HRA will be further accretive to our second half gross margin given it is substantially higher gross margin than our products. All of this leads us to an adjusted EPS guidance range of $2.10 to $2.30 per share driven by organic net sales growth of an estimated 7% to 8%. Assuming the acquisition of HRA closes on June 30th, we expect it would add an additional $170 million to $190 million in net sales and approximately $0.30 of adjusted diluted EPS to our base Perrigo guidance. Please note, this guidance does not include any potential impact from the Russian invasion of Ukraine. Our 2022 guidance includes between $10 million and $15 million of operating income from these two countries, two months of which though have already been realized. But it's really too early to estimate the potential full year impact. And frankly, our top priority right now is on the safety of our colleagues and their families in the region. Looking at the path ahead, we believe we are poised to create significant value and it is clear what needs to be done to make that happen. First, continue to execute on the self-care strategy and continue to deliver organic growth, including recovery of cough/cold, strong digital growth and rapid innovation. Second, successfully close and integrate HRA which will provide a step change increase in sales, income, margins and EPS. And third, stabilize and then aggressively grow gross margins through our global supply chain redesign project which will occur concurrent with the HRA integration. So in conclusion, we are excited about the opportunities over the next few years and beyond as the company is well positioned for success. At the same time, we are planning pragmatically given the challenges in the current environment. It remains our goal, however, to complete the job and deliver our original objectives from our investor conference three years ago. With that, I'll turn the call over to Ray Silcock to discuss the financials in more detail. Ray?
Raymond Silcock, CFO
Thank you, Murray, and good morning, everyone. Before we begin, I want to emphasize the significant milestones that the Perrigo team achieved in 2021. These accomplishments were made possible through the dedication of our colleagues worldwide, and I sincerely thank the Perrigo team for their hard work. I also want to express my heartfelt concern regarding the situation in Ukraine and reaffirm our commitment to supporting our Ukrainian colleagues and their families. Having reached these major strategic objectives, our focus is now on driving long-term profitable growth. Let’s delve into our fourth quarter and full year 2021 results, paying particular attention to the full year. For the fourth quarter of 2021, our consolidated earnings from continuing operations were $32 million, or $0.24 per diluted share. The adjusted net income from continuing operations for Q4 was $82 million, amounting to $0.60 per diluted share. For the full year of 2021, we reported a loss from continuing operations of $131 million, translating to $0.98 per diluted share. On an adjusted basis, the consolidated net income from continuing operations was $278 million, with adjusted diluted earnings per share from continuing operations at $2.06, a decline of 11.6% compared to the previous year. This decrease is primarily due to lower operating efficiencies stemming from adverse plant overhead absorption attributed to reduced volumes, especially in cough/cold products, alongside higher material and freight costs throughout the year. These results were somewhat mitigated by reductions in operating expenses, including lower advertising and promotional spending, ongoing Project Momentum cost savings, and price increases. The 2021 pretax non-GAAP adjustments totaled $97 million, including $216 million in amortization, $173 million in impairment charges related to the divestiture of our businesses in Mexico and Brazil, $52 million in unusual litigation expenses, $38 million in acquisition costs mainly linked to HRA, and $17 million in restructuring charges. These were partially offset by excluding the $418 million Belgian arbitration award received in Q3 from non-GAAP earnings. Further details of these adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release. The adjusted effective tax rate for 2021 was 22%, down from 24% the year before. Significant non-GAAP adjustments for the year included $308 million paid to the Irish tax authorities to settle the Irish NoA dispute, $48 million in tax consequences from transferring intellectual property among Perrigo entities due to the divestiture of the generic pharmaceutical business, the release of $19 million of certain non-tax U.S. reserves, and $16 million in tax expenses related to BEAT. Moving forward, all financial figures, basis points, and margin percentages will be based on adjusted continuing operations unless stated otherwise. Net sales for the fourth quarter were $1.1 billion, reflecting a 4.9% increase year-over-year, with a 5.5% organic growth driven by a resurgence in cough/cold product sales that began in Q3. Gross profit for Q4 reached $385 million, which is $23 million lower than the same period last year, leading to a decline in gross margin by 390 basis points. Of this decline, 250 basis points were attributed to lower operating efficiencies, while 100 basis points resulted from margin dilution of sales from the divested generic pharma business. Q4 operating income increased by 12.5% to $132 million, with the operating margin rising 80 basis points to 11.9%, primarily due to decreased operating expenses. Now regarding the full year, net sales for 2021 rose by 1.2% compared to the previous year, bolstered by strong performance from our contract manufacturing and favorable currency fluctuations. However, this was partially offset by acquisitions and divestitures, particularly the sale of the Rosemont pharmaceutical business in the U.K. Organic net sales dipped by 0.7%, mainly because of a negative effect of 1.4 percentage points from decreased cough/cold product sales due to a weak cough and flu season in the first half. Gross profit for the year decreased by 4.9% compared to the prior year due to $18 million in reduced operating efficiencies from lower volumes, resulting in unfavorable planned overhead absorption, combined with higher raw material and freight costs. Gross margin for the year fell by 240 basis points to 36.5%. Operating income for 2021 was $479 million, down $61 million from the prior year as a result of lower operating expenses, including reductions in advertising and promotion spending and savings from Project Momentum, although this was partially offset by unfavorable gross profit flow-through. Consequently, the full year operating margin dropped by 160 basis points compared to the previous year. Now, let’s discuss the segment results, starting with Consumer Self-Care Americas. In the fourth quarter, CSCA net sales rose by an impressive 5%, primarily due to the recovery of cough/cold product sales, along with business from the domestic generic pharma segment, now categorized as a third-party customer. Q4 gross margins were negatively affected by reduced efficiencies due to lower manufacturing volumes, accounting for around 450 basis points of the decline, along with an unfavorable product mix contributing an additional 100 basis points. Operating income for Q4 was $110 million. For the full year, net sales remained flat compared to the prior year, while organic net sales decreased by 1.1%, including a 1.4 percentage point drop in cough/cold product sales compared to the last year. Gross profit for the year totaled $793 million, which is $87 million lower than the previous year due to reduced operating efficiencies and higher material and freight costs, leading to a year-over-year gross margin decline of 320 basis points. Operating income for the year was $434 million, which is $94 million below the prior year, primarily due to unfavorable gross profit flow-through and increased distribution expenses, though this was partially offset by lower operating expenses and Project Momentum savings. Transitioning to Consumer Self-Care International, in the fourth quarter, CSCI net sales saw a strong rebound, increasing by 4.6% on a reported basis and 6.4% organically. These increases were driven by a significant recovery in cough/cold product sales and continued strength in our ACO skincare line. Q4 gross profit reached $183 million, up 4% compared to the same quarter last year. Operating income surged by 78% to $60 million, attributed to lower expenses, including a planned reduction in advertising and promotion, resulting in a substantial increase in operating margin to 16.3%, a 670 basis point improvement relative to the previous year. For the full year, net sales for 2021 grew by 3.6% to $1.45 billion, positively impacted by favorable currency movements that offset the negative effects of acquisitions and divestitures. On an organic basis, net sales were flat compared to the prior year, adversely affected by a weak cough and flu season in the first half. CSCI gross profit for the year reached $719 million, which is 1.3% higher than the previous year, mainly due to favorable currency impacts that outweighed the negative consequences of acquisitions and divestitures. These factors, along with a negative sales mix, led to a gross margin decline of 110 basis points for the year. Operating income rose by $13 million to $212 million, spurred by the previously discussed gross profit increase and favorable operating expenses, including a planned reduction in advertising and promotion and Project Momentum savings. Now, referring to the balance sheet and operating cash flow, the cash balance at the end of the year was $1.9 billion, down from $2.1 billion at the end of Q3, primarily due to settling the Irish tax NoA, which was accounted for in the fourth quarter. Operating cash flow for the year was $156 million, and our cash conversion rate stood at 56%. I would like to provide some further details regarding our 2022 guidance. We expect full year earnings per adjusted diluted share to be between $2.10 and $2.20, with an estimated 40% for the first half and 60% for the second half. Other assumptions in our guidance include negative variances carried over from 2021, which will affect margins during the first half of the year. However, the higher volumes we are presently seeing should continue and contribute to improved productivity and margins in the second half of the year. Share-based compensation will be higher in the first quarter compared to the subsequent quarters due to the timing of awards. In summary, 2021 posed significant COVID-related challenges that impacted our full year results. Nonetheless, we are pleased to conclude the year with strong positive momentum and are looking forward to pursuing profitable growth as we move past these COVID-related impacts. Our base guidance for 2022 is centered on recovery from these headwinds. We remain confident and eager to successfully complete and integrate the HRA transaction, which will significantly enhance our future earnings potential.
Operator, Operator
And the first question will be from Chris Schott with JPMorgan. Please go ahead.
Chris Schott, Analyst
Good morning.
Murray Kessler, CEO
Hi, good morning.
Chris Schott, Analyst
Hey guys, what’s going on. Just a couple maybe to start with on the gross margin dynamics. I guess the first question I'm having is just on the second half margin improvement and your line of sight on that. Can you just talk through a bit what still needs to occur for results to improve in the second half versus the first half versus, I guess, the actions you've already taken or some of the things like the volume increases you're seeing today that will imply second half margin improvement? I'm trying to get a sense of what are the kind of pushes and pulls we need to watch that could impact, I guess, that rate of margin improvement during the second half? And then I have a couple of follow-ups after that.
Murray Kessler, CEO
There are several factors that will influence our results. We experienced a 100 basis point loss due to the sale of Rx, which was previously an intercompany transfer. This will normalize in the second half. Additionally, reduced productivity and inventory-related costs will affect us, especially since last season's cough/cold impact was significant. We’ll address the inventory and increase production as plants are now fully operational for cough/cold. The volume, which serves as a leading indicator, is available. While there have been some material price increases, freight costs have slightly improved. However, we’ve implemented notable price increases in the market, especially in the U.S., where customer cooperation is necessary to accept these increases as cost-related. Historically, we have seen slight decreases in pricing, which is stabilizing and expected to rise a few percent as the year progresses. Importantly, our customers are accepting these price increases, which has not led to any significant loss of business. Furthermore, there are additional cost-saving measures in place, although full recovery will take a couple of years. The initial actions we've taken will begin to show results soon. Regarding HRA, their gross margins and growth rates are significantly higher than ours, which will positively affect our gross margin and mix moving forward. To provide some context from the fourth quarter numbers, CSCI's gross margin improved by a couple of hundred basis points from the third to the fourth quarter, and OTC also saw a 150 basis point improvement. However, we faced challenges in Oral Care due to increased freight costs from China.
Chris Schott, Analyst
Okay. So it sounds like a lot of these, I guess, processes are either in motion or you've got line of sight on getting to that recovery is what it sounds like from these various kind of drivers. I guess the second question was just elaborating a bit more on the 2023 kind of EPS range. I know that's something you're still striving towards. But obviously, it seems like the world is in a little bit different place than it was a few years ago with supply chain and everything else. So just give us a sense of, I guess, how reasonable is that target? And just how are you thinking about kind of '23 overall in terms of, I guess, the ability to recover some of the kind of impacts that we saw in '21? Like is it reasonable to get a lot of that back in '23? Or could that be a little bit more of an extended process for us?
Murray Kessler, CEO
I have been very clear about my position. Regardless of whether I get complete recovery or not, I’m standing firm on the mid-$3 EPS target for 2023. A significant driver of this will be the recovery in the cough/cold segment, which is expected. If you consider the gross margin for the second half of the year, it should provide a substantial productivity boost in 2023, exceeding the underlying growth of 3 to 5 percent. If I were modeling this, I would focus on our core businesses, projecting growth of 3 to 5 percent based on our initial model. I would factor in a rebound in cough/cold sales and, by 2023, include HRA, which we anticipate will contribute $150 million of EBITDA, approximately translating to a dollar in EPS. When considering our estimates for the year's finish or the base estimates, if you apply that growth rate and add a dollar, you’ll be in the right range. Additionally, we expect to benefit from synergies related to HRA and our project on supply chain reinvention, as we’re exploring significant savings opportunities within our global supply chain—a focus that hasn't dominated our first three years, which were more about optimizing the portfolio. If you follow the calculations, we require less than $0.20 or $0.30 in 2023 to meet our targets. I plan to share more detailed information about this by the end of summer or early September, during a full Investor Day, which will outline our progress while remaining close to our original expectations.
Chris Schott, Analyst
Appreciate all the color. Thank you.
Operator, Operator
And the next question is from David Steinberg with Jefferies. Please go ahead.
David Steinberg, Analyst
Good morning. Thank you. I have a couple of questions. The company demonstrated strong management of general and administrative expenses this quarter. Are there additional opportunities for improvement in that area? Also, with reduced research and development expenses, can you maintain an efficient pipeline of new products at these lower levels? My second question is about your leverage ratio. Could you provide an update on your leverage ratio after the close of HRA and for fiscal year 2023? Thank you.
Murray Kessler, CEO
Why don't you do the leverage ratio? I just want to just quickly look at the number that David was referring to.
Raymond Silcock, CFO
Yes. On the leverage ratio, we anticipate that once we complete HRA, there will be a significant increase in cash generation compared to our current levels. Our goal is to return to a leverage ratio of a little over 4x by the end of 2023. Moreover, by 2025, we aim to reduce our leverage to our target range, which is around the mid-2s, specifically in the 2.5x range.
Murray Kessler, CEO
Yes. And I'm trying to get to the R&D number that you were talking about. I mean, we're still right around 3% of net sales and it was part of Project Momentum overall. Every department had to give back a bit of operating expenses but it was a difference of a couple of million dollars year-over-year, right? And if I look at R&D for the total year, it was the same as it was.
Raymond Silcock, CFO
Not changing.
Murray Kessler, CEO
Yes, it hasn't changed at all. I'm pleased with how well the company has managed operating expenses worldwide over the past couple of years as part of Project Momentum. However, it's important to put this in perspective; we are talking about $100 million in savings from a pool of operating expenses that was around $300 million to $350 million. Our focus, as it should be, is on gross margins, especially given the current situation. We are now targeting efficiencies of about $2.5 billion to $2.6 billion. I believe that by the time we present to you in September, you'll see that this is a significant opportunity for Perrigo.
David Steinberg, Analyst
Just a question on new product flow. On the last call, I'm thinking about Rx, OTC switches and how the landscape looks there. And on the last call, you discussed potentially this major opportunity that you're starting to see in the U.K. and hopefully transferring to the FDA with a once-daily birth control pill. Can you update us on that? And then anything new on some of the lower-hanging fruit like Sklice, Flonase, etc., say, in 2022 and 2023?
Murray Kessler, CEO
Yes. Brad can provide the specifics on some of the smaller items in a follow-up call. The first one, which is the HRA, is still progressing. We are currently in an FTC review period, and we cannot engage in detailed planning until we receive final FTC approval, which we hope will come soon. We believe this remains on track and represents a significant opportunity for the company to introduce the first daily oral contraception. Their L1 product continues to achieve switches globally, similar to Plan B in the U.S. More importantly, you should look at the slide I presented to see the results of our innovations, moving from national brand equivalents to differentiated and improved national brands, like the first capsules, Burt's Bees, and organic infant formula, along with several others. We are back in the game with one of the leading infant formulas that recently won a major customer award for oral electrolytes, and we are launching NASONEX as our own switch this year. Additionally, we are expanding the Probify line of probiotics in Europe and introducing Nervisin and XLS Forte 5. Overall, we have a strong portfolio. When I joined Perrigo, I was told there would be no more Rx-OTC switches, but that has proven false. We've successfully transitioned products like Voltaren, and while I don’t have exact timing, I noticed a press release yesterday from GSK regarding their new consumer health company, highlighting expectations for above-normal growth, partly driven by Rx-to-OTC switches in the coming years. The industry's transformation, with J&J, GSK, and Sanofi spinning off their consumer health divisions, is creating a $150 billion sector that will require growth driven by innovation. In the U.S., this also opens up private label opportunities, as well as competition in the branded space. Gross margins are a concern, but we have demonstrated our capability on the top line and will continue to excel. HRA is expected to contribute double-digit growth over the next few years, and we all need to focus on restoring those gross margins.
David Steinberg, Analyst
Great. Thanks very much. Helpful.
Operator, Operator
Next question is from Elliot Wilbur with Raymond James. Please go ahead.
Elliot Wilbur, Analyst
Thanks, good morning. First question for Murray just with respect to your relative growth outlook or organic relative growth outlook for the whole business of 7% to 8% in 2022. Just wondering if you could provide a little bit of color in terms of the relative growth profile of each of the two segments, CSCA versus CSCI? CSCI being smaller, I would expect that maybe it has a slightly higher growth rate than that all-in number but just want to get a little bit more color behind that? And then specifically with respect to the performance of infant nutrition in the U.S., maybe just some commentary in terms of sort of what led to the relative share gains in some recent media reports around some issues that a competitor of yours is experiencing. And just wondering if, in fact, that may be something you're seeing a net benefit from or you just really don't overlap in terms of product offerings?
Murray Kessler, CEO
Okay. We have seen positive results over the last four or five months, gaining two or three share points after years of decline. The business has truly turned around. This was part of our plan; we intended to launch the Hypoallergenic product a year earlier, but COVID delayed us. However, we successfully launched it. We also have a direct-to-consumer branded product that is performing exceptionally well and receiving significant media attention. We are the exclusive packer for this product and played a key role in its development, making it a strong contributor to our success. At the same time, national brands have faced service challenges. The numbers we discussed do not yet reflect recent events, including a major product recall from one of the leading companies in infant formula, prompting retailers and regulatory agencies to reach out to us for additional volume to ensure babies are fed. We are doing our best to respond given our size. While it's important to recognize these challenges, we have also made considerable positive strides. Regarding overall business performance, I don't have specific figures for CSCI versus CS; they are not drastically different for next year. Even though a growth rate of 7% or 8% may seem large, when analyzed, the core growth remains around 2% to 3%. Additionally, we are seeing growth in the cough/cold segment, and its consumer takeaway currently sits at around 60%.
Elliot Wilbur, Analyst
Okay. And I want to ask you a question with respect to cough/cold inventory in the U.S. at least. I know the number you provided in the deck indicates it's based on internal estimates. But I guess sort of just based on kind of walking around pharmacies and seeing sort of what occurred in December and January. I mean, I can't recall last time we saw such significant stock out of cough/cold products, at least based on locations we visited. So I was sort of expecting that we'd see kind of more of an inventory benefit in the current year and maybe even a little bit higher stocking relative to last couple of years headed into the 2022, 2023 season. So maybe I was a little surprised to see things kind of indicated to move back to normal, just saw kind of given the strong demand and stock-out conditions that we have seen over the past couple of months. So I just want to get your thoughts on that observation.
Murray Kessler, CEO
Can I please make sure that I understand your question? Are you saying, you think it looks like we're being too conservative in our forecast, saying it's not all the way back to '19? Or are you saying you thought the fourth quarter numbers should have been higher? Which are you saying?
Elliot Wilbur, Analyst
With respect to your forecast. It seems like replacement of inventories would have a bigger lift than what seems to be kind of implied in your guidance.
Murray Kessler, CEO
Yes. It really depends on how much impact Omicron had, but it is decreasing quickly. You're correct that this is probably a cautious aspect of our plan. However, with a projected 7% to 8% organic top-line growth, I believe that's a solid starting point; it's about three times our usual level, and I hope it's a conservative estimate. You're not mistaken; if you do the calculations, it could potentially be higher.
Raymond Silcock, CFO
Yes. We did not include it in our forecast at the same level as we had in 2019, which was the last 'normal year.'
Murray Kessler, CEO
Yes, that's what he's saying.
Elliot Wilbur, Analyst
Okay. And then just one last question. We've been discussing the negative effects on gross margins due to various manufacturing inefficiencies, which have been an ongoing issue. You hinted at a larger strategy to address these concerns later this year. Conceptually speaking, can this issue be resolved without extensive facility rationalization and restructuring? Or is it necessary to invest significantly over several years to substantially reduce your overall manufacturing capacity?
Murray Kessler, CEO
It's not a manufacturing footprint because our business is so complicated that it cannot be viewed as one supply chain. We actually have five very distinct supply chains, and I don't see manufacturing rationalization as a major factor in this. Given the complexity of our business and how it has shifted, the level of scrap and obsolete inventories has been excessively high over the past few years. This requires better planning and better demand forecasting.
Raymond Silcock, CFO
SOP planning.
Murray Kessler, CEO
Exactly. So there's north of a $50 million savings opportunity on planning. But you have to be able to get it down to the SKU level and with our customers and there goes along with that. I'm previewing you here a little bit but there's opportunities for SKU rationalization. We say yes to everybody. I don't launch you that item. 500 items later, we matched that one item. So I mean, I'm being literal. If they launch one, we launch 500. And there are ways to consolidate that amongst customers, etcetera, that increases efficiency, that increases service. There's a big number on service. My Head of Supply Chain and I just recently attended with a very small group of CEOs at Walmart in their new distribution center talking about the same issue for them, how much they're leaving on the table for service. And the same issue is for us of ways to get out of it. It's a big number on the unfulfilled demand that goes by every month, so getting after that. There is some opportunities on other kinds of rationalization and automation. And I've spent the last three years getting different parts of the company making the investments in IT. But on the plant floor, there needs to be an ability to be able to measure KPIs of productivity and the priority of orders that are coming in at a higher levels than they are now. That's my way of saying I think there are short-term, mid-term and long-term supply chain savings which we'll show you.
Elliot Wilbur, Analyst
Okay, great. Thank you.
Operator, Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Murray Kessler for any closing remarks.
Murray Kessler, CEO
Yes, I want to thank everybody for your interest in Perrigo. At any of our Ukrainian colleagues if you're listening which you're probably not given the circumstances but if you are, we're with you and you know you have our support. And my big message to everybody is, we have changed this company over the last three years, dramatically changed it. It is now a consumer self-care company and we have gotten the top line growing. We are fully aware of the gross margin issues and we're after it. The first job for us as a management team was to put this thing together and get out of businesses, get out of these billions of dollars of overhang. And we have done that. The job now with laser, laser focus is now profitability and profitable growth going forward and we believe we'll get there. And I am not letting go of those 2023 original of that objective. So, thank you for your interest in Perrigo.
Operator, Operator
And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.