Earnings Call Transcript - PRGO Q2 2021

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Perrigo Second Quarter 2021 financial results Conference Call. All participants will be in a listen-only mode. Please also note today's event is being recorded. At this time, I'd like to turn the Conference Call over to Bradley Joseph, VP of Investor Relations and Communications. Sir, please go ahead.

Bradley Joseph, VP of Investor Relations and Communications

Thank you. And good morning, everybody. And welcome to Perrigo Second Quarter Fiscal 2021 Earnings Conference Call. I hope you all had a chance to review the press release we issued this morning. A copy of the earnings release and presentation for today's earnings discussions are available within the Investor section of the Perrigo.com website. Joining today's call are President 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 notes 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 RX business, which is accounted for as discontinued operations in the second quarter. In addition to other non-GAAP adjustments as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from both periods, certain costs incurred to support the operations of the RX business, which are reported in continuing operations. See the Appendix for additional details and reconciliations of all non-GAAP financial measures presented. And second, organic growth excludes acquisitions, divestitures, and currency in both comparable periods. With that, I'm pleased to turn the call over to Murray.

Murray Kessler, CEO

Thank you, Brad. And good morning, everyone. Self-Care continues to be front of mind for our consumers and customers. And now that our portfolio configuration to a pure-play consumer Company is complete, we believe Perrigo is in a great position to capitalize on this trend. I'm proud of how the Perrigo team has successfully adjusted during these challenging times, which have impacted channel dynamics, sales mix, input costs, and consumer behavior. The good news is that the business and markets we're in are normalizing with sharp rebounds in consumer takeaway, as the world is slowly and steadily reopening. Barring a broad-scale step backward due to new COVID-19 restrictions, I believe Perrigo's broad diversity of product lines and geographies has helped the Company weather this unprecedented storm. Let's look at the metrics. Perrigo's net sales for the second quarter were $981 million, 3.4% higher than a year ago with organic net sales up 0.5%. Second-quarter growth came despite comparison to the prior-year demand surge in April and the residual impact of this year's historically weak cough/cold season. A couple of big takeaways on net sales. It was a solid quarter for all of our businesses. The XP impact of cough/cold and customer inventory adjustments, which I'll detail in just a moment, were noteworthy. The rest of the portfolio and favorable currency covered the entire negative impact of those two issues. As the quarter progressed, it got stronger and stronger, led by a strong consumer takeaway. This top-line growth did not translate to earnings growth for three reasons. First, advertising and promotion. As you will recall, our teams pulled almost all A&P spending in last year's second quarter as the world locked down. There was no point in advertising to empty shelves in Q2. In the face of massive uncertainty, we prioritized liquidity. That spending was moved to the fourth quarter last year to preserve it. In this second quarter of 2021, we deliberately returned that branded advertising and promotional support to its pre-COVID levels, where it has always been and where it is most effective. This, along with higher R&D, negatively impacted the Q2 earnings by $14 million excluding currency. Second, we had unfavorable plant overhead absorption in the quarter as a consequence of the historically low cough/cold season. And third, input costs, including freight, distribution, and commodities rose quickly during the quarter. The team did a great job offsetting these inflationary costs with our project momentum cost savings and pricing actions in the quarter, but as a result, the planned savings did not pass through to the bottom line the way we had planned. They will when input costs normalize. All these factors, in addition to the impact from divested businesses, led to EPS of $0.50 per share, $0.09 below year-ago. While the adjusted EPS was lower than we were looking for, we will get back the A&P impact later in the year. We believe the COVID-related headwinds are temporary. Most importantly, our business remains strong and is getting stronger. As I said earlier, once we lapped the prior year's pantry load and exited the cough/cold season, we experienced higher growth and strong sales momentum across our businesses, with organic growth of plus 1.7% in May, and organic growth of plus 4.2% in June. We expect this strength to continue into the second half of this year, especially as we compare against weak comps from the prior year's second half. This sales momentum that we observed occurred in both CSCA and CSCI. Despite the impact from cough/cold in the quarter and last year's demand surge, CSCI delivered strong growth. The strong performance in our Self-Care brands, which were impacted last year by country lockdowns amid the pandemic outbreak, drove these results. CSCA experienced a more pronounced headwind from cough/cold, and CSCI as a result of trade inventory adjustments. But the sales momentum throughout the quarter was also evident here as the cough/cold headwind from the prior year waned in May and June. Performance in CSCA increased significantly, with organic net sales in the quarter growing 1.3%. Ending the quarter with organic growth of nearly 4% in June gives us confidence in our topline expectations as we head into the back half of the year. I think it's worth repeating that all of our businesses grew in both the Americas and international compared to last year, except for U.S. OTC. The strong CSCI performance in the quarter was led by our Self-Care brands, many of which were negatively impacted at the height of the pandemic one year ago. These Self-Care products, including weight loss, sun and skincare, and oral care, were up 6% excluding currency. The loosened pandemic-related restrictions across Europe and new product launches, timed with the return of brand advertising and promotional investments, were the big drivers of the performance. Cough/cold was still a headwind for CSCI in the quarter. And while the cough/cold season across Europe will likely be lower than normal as pharmacies take a wait-and-see approach to the season, we expect a strong second half for CSCI. Within CSCA, growth in oral care and nutrition were very strong in the quarter, up 17.9% and 10.7% a year ago respectively. Oral care was driven by POS strength at retail as consumers returned to in-store purchases for their oral care needs. Nutrition had a great quarter, with launches including the first national brand equivalent infant formula for babies with colic. Sales of our electrolyte hydration drinks are increasing due to changes in consumer buying behavior. The strengthening of our business throughout the quarter reflects a sharp rebound in consumer purchasing in the U.S. and Europe. This was exactly what we were looking to see. As you know, consumer takeaway is always the leading indicator for factory shipments. The one exception, as I mentioned, was OTC in the USA, where the rebounding consumer takeaway far outpaced shipments. That's unusual, and we attribute this to factors in both this year and last. Last year, there was a significant restocking of retail shelves and inventories that were wiped out earlier due to the pandemic-related demand surge, which didn't reoccur this year. This year, the opposite happened. Retailers had excess inventories of cough/cold products due to low demand this season, and they appear to be a bit more conservative in buying at normal levels going into the next cough/cold season. So as you see on Slide 10, our shipments were outpacing consumer takeaway for the better part of last year. The good news is that this trend reversed itself in the second quarter. Since April 2021, Perrigo consumer takeaway is now cumulatively outpacing Perrigo factory shipments. This means shipments should begin to realign with consumer takeaway. And to be clear, consumer takeaway for store brands in the OTC categories we compete in are not just up; they're up significantly, growing 12.4% over the last 13 weeks versus the year-ago period. This is true for each of the individual categories for the latest 13 weeks, as shown on the chart on the screen at the moment. So on a year-to-date basis, it once again appears that shipments and consumer takeaway have come into alignment as the 10.7% decline in consumer takeaway aligns with the 11% decline in Perrigo OTC shipments. But the fact that we're exiting the quarter growing very robustly along with the apparent alignment should translate into strong second-half growth. What’s particularly encouraging is the sharp rebound that has also occurred in cough/cold, with consumer takeaway of our cough/cold products up 34.6% for the quarter. This is positive news and aligns with the current trend of cough/cold illnesses, which continue to trend above the prior year according to the most recent IQVIA data. This also supports a stronger upcoming cough/cold season than the prior year, which is essential to our second-half projections. Turning to guidance. Through the first half of the year, we're a bit behind, but we have many second-half tailwinds. Consumer takeaway has rebounded sharply in the U.S. and Europe, including U.S. OTC. Sales momentum realized through the second quarter is expected to continue into the second half of the year, compared to last year's pantry. The upcoming cough/cold season is expected to normalize compared to the historically weak season a year ago. Retailer inventories have come down, and consumer takeaway is now cumulatively above our shipments. While we cannot precisely predict retailer inventory behavior, this data suggests the major portion of the inventory headwinds should be behind us. We've taken several pricing actions that have been accepted by retailers given the global inflationary environment, and those actions will help as well. Furthermore, the divestiture of the Latin American businesses, which would have been a $50 million headwind in the second half, is now expected to be offset by sales to our former RX business, which is now a major contract customer. Lastly, we expect strong momentum from new products in the second half. All these factors support higher net sales in the second half, allowing us to reaffirm our revenue guidance. We expect this robust top-line performance, along with lower variable expenses, specifically, the Q4 reduction in A&P I referred to earlier and productivity improvements, to generate strong second-half adjusted EPS growth. Although for the full year, we will be shy of our operating income growth target of 5% due to the already realized lower volumes in the first half and higher input costs in the second half. So we expect our adjusted EPS to fall within our original range, but towards the lower end of the $250 to $270 per share. This EPS guidance is before we utilize any of the nearly $2 billion in cash we have at our disposal. Now let's turn to the efforts to restore certainty to our business and your investment. Over the last few months, we have made substantial progress on reducing uncertainty in the Irish tax notice of assessment. For those of you less familiar with this dispute, Perrigo received a notice of assessment of EUR1.65 billion at the end of 2018 following an audit of a 2013 tax return for Elan, the Company Perrigo subsequently merged with. The assessment relates to the tax treatment of Elan's sale of its Tysabri drug. It asserts that intellectual property sales transactions were not part of Elan's trade. As a result, the notice argues that these transactions should have been treated as chargeable gains subject to a 33% capital gains tax, rather than the 12.5% applicable to trading income. Perrigo maintains that Elan filed correctly. On July 13th, we filed an 8-K stating that after extensive exchange of information, we received written confirmation from revenue that, based on the information that they now have, that they didn't have back in 2018, they would not object if the tax assessment adjusted the amount of the assessment to less than 1 billion euros, equating to a reduction of at least 40% from the original 2018 assessed amount. To clarify, this was agreed to without revenue conceding any point; they used the same methodology that they've been using all along, with that more current information. This is not any discussion or settlement, it is just a restatement of the high end of the range. As I said in the interview within the Irish Times, although we still believe that Elan filed correctly and that, ultimately, in a long-drawn-out battle, we will win, we believe the right thing to do right now is to settle this case at a number that makes sense that can be accomplished. The starting point for any negotiation would be from this new lower starting point, and from that point, we either come to a shareholder-friendly settlement through our ongoing discussions, or we will proceed to the Tax Appeals Commission hearings to be held this November, where we strongly believe in our position. We also completed the sale of our generic RX business this quarter in July. This completed Perrigo's transformation to a pure-play consumer Self-Care leader. We were able to announce and close the sale within four months, which is an impressive effort by many in the organization to make this happen quickly. As I mentioned, we now have nearly $2 billion at our disposal to drive shareholder returns and accelerate our growth. Our priority is to be acquisitive going forward and put this cash to work. This is a significant value-enhancing opportunity for Perrigo, but it must be done with discipline and within our five areas of focus. A North American-based investment would likely center around private or value labels, while a European-based investment would likely center on branded assets. Ultimately, any acquisition would need to be both revenue and margin accretive and deliver a return above our weighted average cost of capital. We have a strong track record in this area and see it as a huge value creation opportunity. In summary, we have momentum and some tailwinds heading into the second half of the year. We've made significant progress to reduce uncertainty for shareholders and are looking to put our balance sheet to work with accretive acquisitions. Perrigo's pure-play consumer business model is highly defensible. Our Self-Care solutions are differentiated and on-trend. Our portfolio offerings are well diversified across categories and geographies. We have world-class consumer industry talent and our business fundamentals are extremely admirable.

Ray Silcock, CFO

Thank you, Murray. And good morning, everyone. Before we get into the quarterly results, I would like to echo Murray's comments on the strong business trends we saw develop during the second quarter. Although we experienced some turbulence this quarter, which made for a difficult comparison to the prior year, as Murray explained earlier, I too remain encouraged by the sequential monthly top-line growth trends. We had improved growth versus the prior year in each month of the quarter. In addition, we saw a continued normalization of consumer takeaway in the quarter. This is not an easy operating environment, but our team performed exceptionally well in managing the various and evolving trends across our businesses. I would like to thank all our colleagues for their dedication and continued efforts in driving our business forward. With that, let's take a look at our second-quarter results. As a reminder, all the figures presented today are from Perrigo's continuing operations and exclude the RX business, which was divested on 07/06. The RX business was accounted for as discontinued operations in the second quarter. On a consolidated basis, the Company reported a GAAP loss from continuing operations of $112 million for the second quarter of 2021 or a loss of $0.84 per diluted share. On an adjusted basis, consolidated Net Income from continuing operations was $68 million, and adjusted diluted EPS from continuing operations was $0.50 a share, a 15.3% decline compared to the prior year. The adjusted EPS decline versus the prior year is primarily because we reinstated advertising and promotion spending in the quarter to pre-COVID-19 levels. Lower cough/cold volumes were partially offset by strong performance across the balance of our portfolio, while unfavorable overhead absorption was offset by operating expense reductions. We also had a higher effective tax rate in the quarter of 23% compared to 18% in Q2 last year. Last year's adjusted ETR was favorably impacted by the passage of the CARES Act. Non-GAAP expense adjustments of $179 million included impairment charges of $159 million, primarily from the Health for Sale Latin American business, $54 million of amortization, which we always add back, $13 million of unusual litigation expenses, and $9 million of restructuring costs. Non-GAAP adjustments to the tax rate for the quarter include the $11 million of tax expense arising from the pre-tax non-GAAP adjustments, and 62 million from the intra-Company transfers of intellectual property as a result of the RX divestiture, as well as the effective evaluation allowance release in the U.S. Full details of these and other adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward in this presentation, all dollar numbers, basis points, and margins will be on an adjusted continuing operations basis unless stated otherwise. Since Murray has already covered net sales for the second quarter, I will begin with our gross profit. Consolidated gross profit was $4 million higher than the prior year, primarily due to favorable currency translation, partially offset by adverse plant overhead absorption. Increased material costs, including resin and inbound freight, were largely offset by pricing and procurement actions taken in the quarter. Consolidated gross margin for the quarter was 38.4%, 90 basis points lower than the prior year, primarily due to lower overhead absorption and also to a less favorable product mix as compared to last year. Consolidated operating income for the quarter was $118 million, 14 million below the prior year, primarily driven by the reinstatement of the advertising and promotion spend. Now let's turn to the segment results, starting with the CSCA. Gross profit in the quarter for CSCA of $197 million was 9 million lower than the prior-year as the impact of new product introductions and a strong performance in oral care were more than offset by lower plant overhead absorption and lower sales in OTC, as well as by raw material cost inflation. Procurement actions helped offset increased freight and raw material costs. Importantly, we were able to take some pricing in the quarter, and overall CSCA pricing was held flat to the prior year. Lower plant overhead absorption was the primary driver of a 120 basis points margin decline in the quarter. Operating income was $107 million, 17 million lower than the prior-year due to unfavorable gross profit flow-through and higher operating expenses, including customer freight and investments in A&P and R&D this quarter. Moving onto Consumer Self-Care International, CSCI's gross profit was $179 million, up $13 million from last year, an 8% increase. Favorable currency translation and proactive pricing and procurement actions in the quarter combined to more than offset higher input costs, reduced volumes, and the impact of the Rosemont divestiture. An adverse product mix, primarily comprised of higher growth in lower-margin categories like pain and cough/cold, led to our 180 basis point decline in gross margin versus last year. Operating income was $47 million, $3 million lower than last year, as gross profit flow-through was more than offset by an increase in operating expenses, primarily driven by adverse currency translation impact and by the reinstatement of our advertising and promotion spending to pre-COVID-19 levels. Moving now to the balance sheet and operating cash flow. Consolidated cash on the balance sheet at the end of the second quarter was $336 million, down $145 million from the $491 million cash balance at the end of the first quarter. This decrease was driven by three primary factors: $100 million in various RX-related tax payments with no P&L impact; $60 million in investing and financing activities, including Capex, all offset by cash collected during the quarter. Importantly, we believe that our goal of achieving 100% operating cash flow conversion for the full year is achievable based on the positive business trends we see as we exit the second quarter. These trends include increased consumer takeaway, as well as monthly sequential sales volume increases. I would like to note that our $336 million cash balance for the second quarter does not include the $1.5 billion in proceeds from the sale of the RX business, which closed after the quarter ended. In conclusion, our second-quarter results reflect the tremendous efforts made by the entire team as we continue to navigate through a challenging business environment. The positive trends we saw during the quarter, including increased consumer takeaway and growth momentum across our businesses, give us confidence in our strong second-half expectations.

Operator, Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. Our first question today comes from Elliot Wilbur from Raymond James. Please go ahead with your question.

Elliot Wilbur, Analyst

Thanks. Good morning.

Murray Kessler, CEO

Good morning, Elliot.

Elliot Wilbur, Analyst

Good morning. The first question for you, Murray, is just to go back to some of your comments related to first-quarter results and specifically looking at your expectations for the recovery of cough/cold based on the IQVIA FAN data. Assuming you're still relying on that tool to gauge your expectations to some extent, I wanted to know if there's been any meaningful change in IQVIA's outlook for second-half volumes. Given that they had expected such a significant increase, I think they expected volumes to roughly double in the current year cough/cold season versus last year. Wondering if even your guidance was indicated to be conservative. You're still looking for recovery of roughly half that. It still seems like a significant increase in volumes versus what we're currently seeing. Just want to know how good your line of sight is into customer orders for the balance of the year, or do we really need to see these actual cough/cold numbers turn in terms of incident rates?

Murray Kessler, CEO

Well, I think you rightly characterized it as a bit complicated. I think all the IQVIA numbers versus the first quarter are trending in the same direction. The bigger issue, Elliot, for me is that our consumer takeaway numbers and our shipment numbers are usually within a point or two of each other. If you look at the second quarter, our cough/cold consumer takeaway was up 40% while our actual factory shipments were still down— I don't have the exact number in front of me, but it's something like 30%. It's like a 50 or 60-point swing, which is unusual. And again, when you're looking at shipments versus consumer takeaway, they always come back to it. There will be periods when it is up and down, and that's what I tried to illustrate in that one graph. There was a time when our shipments were outpacing consumption, they caught up, and now it's reversed itself. Fortunately, consumption is leading the way. So, to make our projections based on how consumer takeaway is trending, then we'll hit our projections easily. I'm not going to say there's upside at this point, but our consumer metrics on all of our businesses are exactly what we forecasted. The lag in shipments is coming back a little slower due to some inventory adjustments. When you look cumulatively over the past seven or eight months, they've come pretty darn close to even. In terms of other factors, will there be—will buying be as high or will there be a little more caution? This might result in the retailers, if it is a good cough/cold season, scrambling to order more later on. So, we'll see how it plays out. But this has been quite a ride for the last two years, and we're still trying to get back to normal and manage our way out of a lot of volatility in a dynamic marketplace.

Elliot Wilbur, Analyst

Okay. And if I could follow up that question and your response with just a query into the reduction in overall customer inventories. Was it pronounced in any one channel more than another? And on the RX side of course, most companies have fairly good insight into inventory held by the big three. I imagine that's not necessarily true for you guys, but how good is your line of sight into actual inventory levels held by your biggest brick-and-mortar customers?

Murray Kessler, CEO

Well, there are two things to note— we're normally very good at this as well, but these are not normal times. Typically, you're looking at patterns that are consistent. What's happened over the last year is you had a complete shutdown last year in various drug channels, as an example, and then it shifted to e-commerce and grocery stores. Now it's shifting back from grocery stores to normal store traffic levels and back into e-commerce. Some things are still growing, but they are reverting back to where they were last year. Your normal patterns don't apply, and inventory relative to the customer and the way they are managing it has a numerator and denominator and must be divided by consumer takeaway. As consumption continues to grow, their weeks of inventory will decrease, and they are trying to adjust for that. As long as consumption continues to grow as it has been, we should be fine, but it's been interesting to track compared to what we have historically done well.

Elliot Wilbur, Analyst

Okay. And then maybe the last question from me. I understand many of the factors that caused gross margins to underperform external and internal expectations for the quarter. However, we still expect improvement in the second half of the year in both CSCA and CSCI. Can you provide a better sense of what you think is now a good number in each of those segments or, for lack of a better term, sort of an aspirational target? I know we talked about 33% in the CSCA business; in the second half of the year, that may be more challenging to reach in light of these issues we're talking about today, but is that still your longer-term expectation? What do you consider a good baseline number to improve off of? Is the same question valid for the CSCI business?

Murray Kessler, CEO

Yes. I’ll answer the question, and Ray, feel free to jump in. As Ray mentioned, we had a significant increase in input costs in numerous areas. If you're looking at operating margin versus gross margin, just consider the advertising and promotion spending we redeployed after the fourth quarter when we shifted it back from last year to 2019 levels. The bigger issue is that with a weak cough/cold season, you're feeling the margin impact—first off, as those items tend to be high-margin, but for the 20% of our business taking a significant hit, it's impressive that we were able to still hold our franchises and grow. And while we are weathering the storm, when you add back A&P, we were relatively flat at the gross margin line. It also impacts overhead absorption; when there are fewer cough/cold products being produced, you're experiencing those declines in throughput. Your question about whether that is permanent is easy to answer—no, it’s not permanent. When the cough/cold season returns, throughput through the plants will normalize, and you'll no longer need to worry about that overhead absorption factor impacting future years. You will get the gross margin back on the sale of cough/cold products. Several of those factors are temporary in nature. Input costs regarding freight difficulties getting some products out of China for oral care and others have also pushed us back. Our purchasing team originally thought we would return to normal by the third quarter; now they're saying early next year. Hence, while we may lose a little margin there, we're pushing harder on price increases, and I want to highlight that for the first time in years, we have been able to take price increases, which has not been the case previously. Our customers are working with us on this, and some of that will start to impact margins. To summarize, I'm not backing off our margin goals. I don't think we'll achieve them in the second half of this year, but we will achieve them in due time. Ray, do you want to add anything?

Ray Silcock, CFO

No.

Murray Kessler, CEO

Okay. Thank you.

Operator, Operator

Our next question comes from Chris Schott from JPMorgan. Please go ahead with your question.

Katarina Liskova, Analyst

Hi. This is actually Katarina on for Chris. Thank you so much for taking our questions. I'll jump on your price increase comment. I think you've mentioned this year for the first time in a while. Can you elaborate a bit more on the customer relationships and broader market dynamics that are enabling you to take price increases? My second question would be, can you talk a bit more on the demand trends that you've been seeing across consumer categories in July and maybe the first two weeks of August? Any early visibility into what 3Q could look like there? Thank you so much.

Murray Kessler, CEO

Okay. As for the second part of your question, we had shown through the first couple of weeks—now we're on July 11—so that data we presented just a couple of days ago for the first half of July shows that we moved those numbers up a little bit, not down. So from right now, the data that we have shows that consumer takeaway is through July 11, and that trend has accelerated, meaning it didn't slow down. That’s positive news, which is very encouraging. The shipments ultimately have to align and catch up, but that is taking a bit longer. To remind you, the first part of your question was regarding price increases, right?

Ray Silcock, CFO

Yes.

Murray Kessler, CEO

Yes, the price increases. Typically, when we began to implement changes and I joined Perrigo two years ago, we were experiencing price erosion every quarter or year, moving from minus 1% to 2%. Over the past year, we have been able to stabilize that towards a flat environment versus what we’d projected—expected around minus 1% to 2%. This has helped offset some volume reductions. Our pricing has increased by almost $19 to $20 million due to higher input costs. This was completely offset by the contributions from our purchasing team. The lower volume has also been offset to some extent with pricing and by the input costs. Thus, combining all these aspects, we would have had our EPS roughly flat versus a year ago, except for a few tax implications. As it relates to customer relations, our customers are partners. Under normal circumstances, if they thought we were coming in just to take price increases for margin enhancement, they would have heavily resisted that. However, they’re aware of the current environment, they see the rising input costs affecting the overall market, and therefore, they see the price increases from their national brand competitors. They are now partnering with us, accepting these price increases as part of our relationship.

Katarina Liskova, Analyst

Great. Thank you so much.

Operator, Operator

Our next question comes from David Steinberg from Jefferies. Please go ahead with your question.

Murray Kessler, CEO

Good morning, David.

David Steinberg, Analyst

Thanks. Good morning. I have a couple of questions. First, regarding new product flows, you've mentioned that you're expecting strong momentum in the second half. Could you provide a flavor of some of the products you are launching? Additionally, in the medium-term, thinking about potential RX to OTC switches, can you elaborate on any progress in that arena? What is the line of sight for potential switches towards bigger categories like dermatology or migraine over time?

Murray Kessler, CEO

Okay. Let’s start with the first question. We have launched several new products recently that are now public. However, I cannot disclose anything that is not already public. I can mention that we have launched new versions of XL-S throughout Europe, as well as Probify, which is a launch involving probiotics across Europe, and we expect this to have an impact in the second half of the year. We have also launched a hypoallergenic infant formula and signed a meaningful contract with a newly branded infant formula, which looks incredibly promising. Additionally, we rolled out Burt's Bees infant formula that had previously been planned for later this year. Those are just a few examples. Concerning RX switches, the most significant ones currently are relatively newer items. We also have combo products from Advil, pairing ibuprofen with acetaminophen; we're not done with having all sizes of our Voltaren equivalents launched yet. These are just a few examples. As for the big potential RX switches like Cialis, we still hear continued rhetoric indicating that these companies are launching and spinning off their consumer divisions. So yes, RX to OTC switching seems to be positively contributing, and we expect this momentum to persist.

David Steinberg, Analyst

Okay. To follow up on the cough/cold season, I am not sure whether this is good research or not, but I understand Australia had the lowest historic levels of cough/cold in 2021, and it's just coming out of the winter season. They had even lower levels than last year's with zero hospitalizations. Do you see any correlation or indicators from the Australian market that might affect what happens in the U.S. this fall and winter? Also, could you elaborate on the price issue? You've stated that you're finally taking prices for the first time versus the declines in prior years. If the price is better, why did margins erode?

Murray Kessler, CEO

The second question is straightforward: the prices were just offsetting rising input costs.

Ray Silcock, CFO

Also due to inflation.

Murray Kessler, CEO

Yes, it all comes down to inflation. As for Australia, I think they provide a unique example of what would occur if the world were to completely shut down, but this is not the norm. Australia has experienced ongoing lockdown measures and rigorous mask mandates. As I mentioned earlier, if any areas were to fall back to those extreme measures, it would certainly impact our plans. However, it seems that everywhere is ready to completely reopen, and we have seen a significantly higher level of illnesses occurring across the globe. Moreover, this is documented in the consumer takeaway numbers that are showing significant increases. To sum up, if a more serious variant were to arise and provoke a global shutdown again, it would impact our business. But no locations seem eager to revert back to stringent restrictions. Everyone seems to want to move forward with vaccinations.

David Steinberg, Analyst

Great. Thanks.

Operator, Operator

Ladies and gentlemen, at this time, showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Murray Kessler, CEO

Thank you. As I said, this has been a challenging 18 months, but I'm proud to say that the team continues to make adjustments and is very close to being right on track compared to where we set out about two years ago with our transformation. You have seen the progress we've made, which has been remarkable considering the massive disruptions we've faced. Despite these challenges, we have completely reconfigured this company while managing a massive hit on cough/cold, which only represents 20% of our business, and to still be showing growth is an achievement we should recognize. The completion of our RX sale, which wasn't anticipated by the sector, has allowed us to now have considerable resources with nearly $2 billion at our disposal to generate robust results toward our long-term financial commitments. Moreover, I believe we have effectively cut the most significant risks, such as uncertainty for our business.

Bradley Joseph, VP of Investor Relations and Communications

The Company is still progressing and setting itself up long-term for ultimately making lives better through our self-care vision. With that in mind, I like where we sit and I'm optimistic about the future. We just have to work our way through these inventory issues and input costs, which we will, but they don't change the fundamental strength of the Company and the long-term trajectory. Ultimately, our investors will gain from all of this hard work over the past few years. I thank all of the employees who have helped in making this happen, and I thank you for your interest in Perrigo.

Operator, Operator

Ladies and gentlemen, that does conclude today's Conference Call. We do thank you for attending. You may now disconnect your lines.