On November 4, 2020 Perrigo Company plc (NYSE; TASE: PRGO), a leading provider of Quality, Affordable Self-Care Products, reported financial results for the third quarter ended September 26, 2020 (Press release, Perrigo Company, NOV 4, 2020, View Source [SID1234569855]).
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President and CEO, Murray S. Kessler commented, "Results for the first nine months of this year reflect the strength of Perrigo’s diversified business model, the successful execution of our transformational activities and the dedication and agility of our 11,000 team members worldwide who are successfully navigating this horrific global pandemic."
Kessler continued, "Year to date, Worldwide Consumer net sales have grown high-single-digits, and importantly, organic growth is well above our 3% net sales goal. Consumer Self-Care Americas once again led the way with robust growth in all major franchises, resulting in record third quarter net sales as the segment benefited from channel shifting to e-Commerce and successful new product launches. Better than expected recoveries in both the CSC International and RX base businesses also contributed as our branded self-care and generic prescription product categories that were negatively impacted by consumer/patient buying dynamics surrounding COVID-19 lock-downs improved to near pre-COVID-19 levels. I am pleased that the strength of our businesses allowed us to reaffirm guidance, despite the disappointing RX albuterol recall."
Kessler concluded, "Our self-care evolution has accelerated Perrigo’s growth over the past 18 months and has us very well positioned in a ‘New World’ where self-care, value and e-Commerce will be more important than ever before. While there is still work to be done on our transformation, our team is energized about the future and remains committed to our long-term growth targets. Looking ahead, we will continue to leverage our unique and durable capabilities, along with more than $1 billion in committed investments to date, to recapture the Perrigo Advantage and create long-term value for our shareholders."
Third Quarter Financial Highlights
Consolidated third quarter net sales were $1.2 billion, an increase of 1.3% compared to the prior year quarter.
Worldwide Consumer third quarter net sales grew 3.6% compared to the prior year. Excluding the impact of currency and divested businesses, net sales increased 4.2%. Organic net sales grew 1.6%.
Consumer Self-Care Americas ("CSCA") achieved record third quarter net sales of $664 million, up 7.3% versus the prior year. Organic net sales grew 4.0% as consumer demand in the U.S. remained strong.
Consumer Self-Care International ("CSCI") third quarter net sales of $339 million were down 2.9% versus the prior year quarter, due primarily to European consumer dynamics surrounding COVID-19.
Reported diluted net loss per share for the third quarter was $1.13 as compared to EPS of $0.67 in the prior year, due primarily to a $202 million dollar impairment of goodwill in the RX segment.
Adjusted diluted EPS for the third quarter of 2020 decreased 10.6% to $0.93 as compared to $1.04 per diluted share in the prior year. Diluted EPS included a $0.14 charge from the third quarter RX albuterol recall.
Year-to-Date 2020 Financial Highlights
Consolidated year to date net sales were $3.8 billion, up 7.8% compared to the prior year. Excluding the impact of currency and divested businesses, net sales increased 9.7%. Organic net sales grew 4.4%.
Worldwide Consumer net sales increased 8.9% compared to the prior year. Excluding the impact of currency and divested businesses, net sales were 11.3% higher year-over-year. Organic net sales grew 4.6%.
CSCA achieved year-to-date net sales of $2.0 billion, 13.2% higher versus the prior year, or 14.9% higher excluding the impact of currency and divested businesses. Organic net sales grew 6.7%.
CSCI year-to-date net sales increased 1.5% versus the prior year, or 5.0% higher excluding divested businesses and the impact of currency. Organic new sales grew 1.0%.
Cash flow from operations as a percentage of adjusted net income was 124%.
(1) Unless otherwise noted, all comparisons of operating results against the prior year period include the previously disclosed third quarter 2019 net sales adjustments for the market withdrawal of Ranitidine, of which $7.4 million was included in the CSCA segment and $1.8 million was included in the CSCI segment, as well as $1.8 million in operating results attributable to the then held-for-sale animal health business in our CSCA segment. See attached Appendix for additional details.
(2) See attached Appendix for details. Organic net sales growth excludes the effects of acquisitions and divestitures and the impact of currency.
Refer to Tables I – IV at the end of this press release for a reconciliation of non-GAAP adjustments to the current year and prior year periods and additional non-GAAP information. The Company’s reported results are included in the attached Condensed Consolidated Statements of Operations, Balance Sheets and Statements of Cash Flows.
Third Quarter 2020 Consolidated Results Versus Third Quarter 2019
Consolidated net sales for the third quarter of calendar year 2020 were $1.2 billion, an increase of $15 million or 1.3%. Organic net sales declined 0.4% and included a 0.7 percentage point net negative impact from RX albuterol sulfate as product sales early in the quarter were more than offset by the establishment of the estimated albuterol reserve associated with the September recall.
The $15 million increase in consolidated net sales was driven by 1) $48 million in year over year growth in the CSCA segment driven by $24 million of increased demand across most product categories reflecting continued consumer channel shifting from traditional brick and mortar outlets to e-Commerce and $24 million from the Dr. Fresh oral self-care acquisition, and 2) $10 million in net favorable currency movements. These consolidated gains were partially offset by 1) a $20 million decline in the RX segment as $23 million in net sales of albuterol sulfate in the quarter were more than offset by a $31 million impact from the reserve for the estimated albuterol sulfate recall costs and $9 million in lower-margin discontinued products, 2) $15 million from divested businesses, and 3) a decline of $8 million in CSCI mainly driven by categories impacted by COVID-19 lock-downs.
Reported net loss was $155 million, or $1.13 per diluted share, versus net income of $92 million, or $0.67 per diluted share in the prior year period. Excluding certain charges as outlined in Table I, third quarter 2020 adjusted net income was $128 million, or $0.93 per diluted share, versus $142 million, or $1.04 per diluted share, for the same period last year resulting in a 10.6% decrease in adjusted diluted EPS.
Worldwide Consumer Self-Care Third Quarter 2020 Results Versus Third Quarter 2019
Worldwide Consumer is comprised of the CSCA segment, the CSCI segment and Corporate.
Worldwide Consumer Self-Care third quarter net sales increased $35 million, or 3.6%, to $1.0 billion with organic net sales growth of 1.6%, driven by growth in CSCA.
Third quarter reported gross profit margin was 37.0%. Adjusted gross profit margin of 39.2%, was 120 basis points lower year-over-year due to strong growth in the lower gross margin store brand business and the net gross margin impact of acquisitions and divestitures.
Reported operating margin was 8.5%. Adjusted operating margin decreased 180 basis points year-over-year to 14.0% due primarily to gross margin flow-through and higher variable compensation costs.
CSCA Third Quarter 2020 Results Versus Third Quarter 2019
Consumer Self-Care Americas achieved record third quarter net sales of $664 million, an increase of 7.3% or $45 million, which included $24 million from the acquisition of Dr. Fresh oral self-care and unfavorable currency movements of $3 million. Organic net sales grew 4.0% driven by increased demand across most categories that benefited from robust e-Commerce growth as consumers continued to shift purchasing towards online where Perrigo has greater market share, more than offsetting lower traditional brick and mortar purchases as measured through IRI MULO.
In OTC, increased demand was led by the pain, allergy, and digestive health categories resulting from strong e-Commerce growth and incremental volume from new products including Prevacid(R) and the store brand versions of Diclofenac Gel 1% and Esomeprazole Mini. Partially offsetting these were lower net sales of cough and cold products within the upper respiratory category and normal pricing pressure.
As a component of transforming to a consumer self-care company, Perrigo has made investments to enhance its consumer analytical and digital capabilities. Historically, CSCA measured its market share using only IRI’s MULO or Multi-Outlet data, which does not capture certain retailers and sales through the e-commerce channel. For the first time, the Company has the capabilities to measure, analyze, and benchmark omnichannel performance for Perrigo, store brand and the overall OTC category using IRI MULO point-of-sale (POS) data, IRI panel e-commerce data and POS data from Perrigo’s leading customers.
Total Perrigo omnichannel POS data was up 3.5% for the 13-weeks ending October 4, 2020. Total OTC omnichannel POS data was estimated to be up 1.2% in the categories in which Perrigo competes, resulting in a Perrigo share gain of 70 basis points.
In Nutrition, higher net sales were led by the December 2019 store brand infant formula launch at a major retailer, greater shipments in the infant formula contract manufacturing business and growth in customer e-Commerce activities. In Oral Self-Care, net sales were driven by the Dr. Fresh acquisition and strong e-Commerce growth.
Third quarter reported gross margin was 32.7%. Adjusted gross margin of 33.5% was 50 basis points lower than the prior year as higher margin new products were more than offset by normal pricing pressure. Third quarter 2020 adjusted gross margin was 60 basis points higher and 210 basis points higher than the second and first quarters of 2020, respectively.
Reported operating margin was 18.6%. Adjusted operating margin increased 30 basis points to 20.1%, due primarily to operating leverage on gross margin flow-through.
CSCI Third Quarter 2020 Results Versus Third Quarter 2019
Consumer Self-Care International net sales were $339 million, a decrease of $10 million, or 2.9%. Organic net sales were lower by 2.7%.
The decline in net sales was due primarily to 1) divested businesses of $15 million and discontinued products of $3 million, 2) lower sell-in activities to customers of cough and cold OTC brands within the upper respiratory category, and 3) lower consumer demand for anti-parasite products within the skincare & personal hygiene category due primarily to COVID-19 related school closings. These were partially offset by gains in 1) new products, including line extensions in the ACO dermatology product line and new innovations to the XLS Forte Five weight management brand, 2) $12 million in favorable currency movements, and 3) higher net sales in the pain and VMS categories, both of which benefited from consumer behavior surrounding COVID-19.
Reported gross margin was 45.5%. Adjusted gross margin of 50.4% declined 150 basis points due primarily to divested businesses, less favorable product mix and higher input costs on a particular OTC brand.
Reported operating margin was 3.0%. Adjusted operating margin decreased 310 basis points to 15.1% due to gross profit flow-through and divested businesses.
RX Third Quarter 2020 Results Versus Third Quarter 2019
RX net sales were $211 million, $20 million or 8.5%, lower than the prior year. Net sales from albuterol sulfate in the quarter of $23 million were more than offset by a $31 million reserve for the estimated impact from the albuterol sulfate recall and $9 million in lower-margin discontinued products. The RX base business, which excludes albuterol sulfate and discontinued products in both years, was down 1.2% compared to the prior year and reflected a faster than anticipated recovery in dermatology prescriptions from the second quarter of 2020.
Reported gross margin was 27.0% and adjusted gross margin was 37.1%. The 380 basis point decline in adjusted gross margin was due primarily to impact from the reserve for the estimated albuterol sulfate recall costs.
Reported operating margin was (85.7)%, driven primarily by the $202 million goodwill impairment charge taken in the quarter. Adjusted operating margin was 20.7%, down 330 basis points as lower gross profit was partially offset by lower R&D and administration expenses.
Fiscal 2020 Outlook
The Company reaffirms its fiscal 2020 outlook with expected net sales growth of 6% to 7% with organic net sales growth of at least 3%. Adjusted diluted EPS is expected to be in the range of $3.95 to $4.15. The reaffirmed guidance reflects strong business fundamentals and a lower expected tax rate for the year, offsetting $0.12 – $0.15 per adjusted diluted share of incremental COVID-19 related costs, $0.14 per share impact from the RX albuterol sulfate recall, and $0.06 per share from the divested Rosemont Rx business, which the Company sold on June 19, 2020. Future waves of COVID-19 could present both incremental risks as well as opportunities for the Company’s business.
The Company cannot reconcile its expected adjusted diluted earnings per share to diluted earnings per share under "Fiscal 2020 Outlook" without unreasonable effort because certain items that impact net income and other reconciling metrics are out of the Company’s control and/or cannot be reasonably predicted at this time.