On November 8, 2022 Perrigo Company plc (NYSE: PRGO) ("Perrigo" or the "Company"), a leading provider of Consumer Self-Care Products, reported financial results for the third quarter ended October 1, 2022 (Press release, Perrigo Company, NOV 8, 2022, View Source [SID1234623342]). All comparisons are against the prior year fiscal third quarter, unless otherwise noted.
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President and CEO, Murray S. Kessler commented, "Perrigo third quarter results were strong. Net sales, adjusted gross margin, adjusted operating income and adjusted diluted EPS grew substantially compared to prior year in the face of continued macro-economic headwinds. We gained market share globally, including increases across every segment as store brands continued to gain share from national brands. Although revenue growth in the quarter was robust, it was below our estimates due to unfavorable currency translation, labor shortages effecting supply and slower category growth rates."
Kessler continued, "Importantly, business fundamentals are strong, the labor issue has improved and we just announced the first major step in our Supply Chain Reinvention Program through the infant formula investment. These, along with other margin enhancement programs being implemented, including further strategic pricing initiatives, will enable Perrigo to deliver outsized growth in 2023."
Kessler concluded, "Going forward, our focus is on execution. Successful integration of HRA, achievement of HRA synergies, integration of the Gateway plant, implementation of supply chain initiatives and reducing leverage as planned will position Perrigo to achieve strong top and bottom line growth for years to come."
Refer to Tables I – VI 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 Consolidated Statements of Operations, Balance Sheets and Statements of Cash Flows.
Third Quarter 2022 Perrigo Results from Continuing Operations
Third Quarter 2022 Net Sales Change Compared to Prior Year
Reported
Net Sales
Net Acquisitions
& Divestitures
Adjustment
Foreign
Exchange
Adjustment
Organic
Net Sales
CSCA
4.0 %
3.3 %
— %
7.3 %
CSCI
8.4 %
(20.3) %
20.2 %
8.3 %
Total Perrigo
5.5 %
(4.5) %
6.7 %
7.7 %
Reported net sales increased 5.5%, constant currency net sales increased 12.3% and organic net sales increased 7.7%. Reported net sales were driven by 1) $81 million in constant currency net sales from the acquisition of HRA, 2) $55 million in strategic pricing actions across both Consumer Self-Care segments, 3) U.S. store brand share gains versus national brands and store brand competitors, and growing share in the E.U. marketplace, and 4) an increase of $25 million in cough/cold-related product sales3 that primarily benefited the Upper Respiratory category. These drivers also benefited from e-commerce growth and new product sales. This growth was partially offset by 1) the impact of unfavorable currency translation of $70 million, 2) $31 million from the divested Latin American businesses and ScarAway brand, and 3) lower net sales in certain categories, particularly in the CSCI Healthy Lifestyles category.
Third quarter reported operating income was $33 million, compared to operating income of $438 million in the prior year period. This decrease was due primarily to $418 million related to the Omega arbitration award received in the prior year. Adjusted operating income grew $21 million, or 19.2%, to $133 million. Constant currency adjusted operating income increased 32.2% driven by 1) higher gross profit flow-through resulting from strategic price increases, higher sales volumes and the addition of HRA, and 2) the absence of two product recalls that occurred in the prior year. These increases were partially offset by 1) a $36 million impact from inflation, including higher freight & distribution expenses, 2) higher operating expenses, driven primarily by the addition of HRA, and 3) divested businesses.
Reported net loss was $52 million, or ($0.39) per diluted share, compared to reported net loss of $54 million, or ($0.40) per diluted share, in the prior year period. Excluding certain charges as outlined in Table I, third quarter 2022 adjusted net income was $76 million, or $0.56 per diluted share, compared to $61 million, or $0.45 per diluted share, in the prior year. Constant currency EPS for the quarter was $0.65.
(3)
Cough/cold-related net sales includes the cough/cold sub-category within Upper Respiratory and the Pain and Sleep Aids category.
Third Quarter 2022 Business Segment Results from Continuing Operations
Consumer Self-Care Americas Segment
Third Quarter 2022 Net Sales Change Compared to Prior Year
Reported
Net Sales
Net Acquisitions
& Divestitures
Adjustment
Foreign
Exchange
Adjustment
Organic
Net Sales
CSCA
4.0 %
3.3 %
— %
7.3 %
CSCA reported net sales of $722 million increased 4.0%, and organic net sales increased 7.3%. Net sales growth was driven by strategic price increases, U.S. store brand share gains versus national brands and store brand competitors, and new product launches. Primary category drivers are provided below.
Upper Respiratory
Net sales of $132 million increased 8.4% due primarily to share gains from national brands and store brand competitors in cough/cold and allergy, and the new launch of Nasonex24HR. This growth was partially offset by an unfavorable 4.8 percentage points from the divested Latin American businesses.
Nutrition
Net sales of $124 million increased 18.1% due primarily to store brand share gains in infant formula, due in part to a national brand recall, as well as third-party contract sales. Oral electrolytes also contributed positively to sales in the quarter.
Digestive Health
Net sales of $120 million increased 8.1% due primarily to increased manufacturing capacity and demand for Polyethylene Glycol 3350, and new products, including Omeprazole Cool Mint. Growth in the category was partially offset by an unfavorable 2.2 percentage points from the divested Latin American businesses.
Pain & Sleep-Aids
Net sales of $104 million decreased 4.1% due primarily to the unfavorable impact of 7.7 percentage points from the divested Latin American businesses, partially offset by higher demand for children’s analgesics products.
Oral Care
Net sales of $84 million increased 9.0% due primarily to Plackers and REACH, in addition to growth in store brand offerings, primarily manual toothbrushes.
Healthy Lifestyle
Net sales of $74 million increased 2.4% due primarily to increased distribution of store brand smoking cessation products, partially offset by the discontinuation of diabetes products.
Skin Care
Net sales of $49 million increased 5.4% due primarily to the addition of HRA brands, including Mederma and Compeed, partially offset by the unfavorable impact of 3.0 percentage points from the divested Latin American businesses and ScarAway brand, and discontinued products.
Women’s Health
Net sales of $12 million increased 19.2% due primarily to the addition of HRA brands, including ella.
Vitamins, Minerals, and Supplements ("VMS") and Other
Net sales of $23 million decreased 44.8% due primarily to the unfavorable impact of 17.0 percentage points from the divested Latin American businesses.
Reported operating income was $75 million compared to operating income of $90 million in the prior year quarter. Adjusted operating income decreased $1 million to $104 million due primarily to 1) a $31 million impact from inflation, including higher freight & distribution expenses, 2) higher operating expenses primarily related to the inclusion of HRA, 3) lower profitability of contract sales to the divested Rx business, and 4) the impact of divested businesses. These factors were offset by higher gross profit flow-through resulting from net sales growth and the addition of HRA.
Consumer Self-Care International Segment
Third Quarter 2022 Net Sales Change Compared to Prior Year
Reported
Net Sales
Net Acquisitions
& Divestitures
Adjustment
Foreign
Exchange
Adjustment
Organic
Net Sales
CSCI
8.4 %
(20.3) %
20.2 %
8.3 %
CSCI reported net sales increased 8.4%, constant currency net sales increased 28.6% and organic net sales increased 8.3%. Organic net sales growth was driven by strategic price increases and higher sales volumes led by new product launches. Primary category drivers are provided below.
Skin Care
Net sales of $132 million increased 15.9%, or 37.2% excluding the impact of currency, driven primarily by the addition of HRA brands, including Compeed, strategically priced new products in the Sebamed and ACO skincare lines, and higher net sales of anti-parasite offerings that are outpacing strong category growth.
Upper Respiratory
Net sales of $63 million increased 20.8%, or 43.8% excluding the impact of currency, led by strong demand for cough/cold products, including Bronchostop, Bronchonolo, Coldrex and U.K. store brands.
VMS
Net sales of $46 million decreased 15.9%, or 0.2% excluding the impact of currency, due primarily to lower overall category consumption and lower sales of the nutraceutical products including Granufink and Zaffranax were mostly offset by the restocking of the Abtei brand in Germany following the third quarter 2021 recall of certain batches.
Women’s Health
Net sales of $30 million increased 123.1%, or 163.4% excluding the impact of currency, due primarily to the addition of HRA brands, including ellaOne and NorLevo.
Pain & Sleep-Aids
Net sales of $29 million decreased 13.9%, or an increase of 2.4% excluding the impact of currency, due primarily to higher demand for Solpadeine, a paracetamol-based analgesics product.
Healthy Lifestyle
Net sales of $25 million decreased 32.6%, or 19.9% excluding the impact of currency, due primarily to lower category consumption in weight management and smoking cessation, impacting XLS Medical and NiQuitin, respectively.
Digestive Health, Oral Care and Other
Net sales of $53 million increased 21.5%, or 44.2% excluding the impact of currency, due primarily to the addition of the HRA Rare Diseases portfolio in the Other category.
Reported operating income was $1 million for the quarter compared to $4 million in the prior year. Adjusted operating income increased $17 million, or 36.5%, to $62 million. Constant currency adjusted operating income grew 66.8%, driven by 1) higher gross profit flow-through resulting from higher net sales growth and the addition of HRA, and 2) improved manufacturing productivity. This growth was partially offset by inflation and higher operating expenses, primarily driven by the inclusion of HRA.
Fiscal 2022 Outlook
The Company reiterates its fiscal 2022 organic net sales growth range outlook of 9.0%-10.0% versus the prior year. The Company also reiterates its fiscal 2022 total net sales growth range outlook of 8.5%-9.5%, as expected accretion from the Gateway plant, along with the U.S. and Canadian rights to the Good Start infant formula brand, are expected to offset the worsening impact of currency translation. If foreign currency exchange rates hold near current levels, we now expect net sales in the full year to be unfavorably impacted by 5%-6%.
The Company is updating its fiscal 2022 adjusted EPS range outlook to $2.00-$2.10 from $2.25-$2.35, as solid year-to-date performance in CSCI and accretion from the purchase of the Gateway plant, along with the U.S. and Canadian rights to the Good Start infant formula brand, are expected to be more than offset by lower sales volumes in CSCA, and $0.10 from the worsening impact of currency translation. If foreign currency exchange rates hold near current levels, we now expect adjusted diluted EPS in the full year to be unfavorably impacted by approximately $0.25. The Company now expects to achieve a constant currency adjusted diluted EPS range outlook of $2.25-$2.35.
The Company cannot reconcile its organic net sales growth to reported net sales or its expected adjusted diluted EPS or constant currency adjusted EPS to diluted EPS under "Fiscal 2022 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. These items include taxes, interest costs that would occur if the Company issued debt, and costs to acquire and or sell a business if the Company executed such transactions, which could significantly affect our financial results. These items depend on highly variable factors and any such reconciliations would imply a degree of precision that would be confusing or misleading to investors.