On November 7, 2023 Perrigo Company plc (NYSE: PRGO) ("Perrigo" or the "Company"), a leading provider of Consumer Self-Care Products, reported financial results from continuing operations for the third quarter ended September 30, 2023 (Press release, Perrigo Company, NOV 7, 2023, View Source [SID1234637153]). All comparisons are against the prior year fiscal third quarter, unless otherwise noted.
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President and CEO, Patrick Lockwood-Taylor commented, "I have immersed myself in all facets of our global business since becoming CEO four months ago and remain excited about our opportunities ahead. We have created a ‘One Perrigo’ blueprint that will guide us to build an operating model where our portfolio, operating systems and behaviors will be simplified, standardized and scaled. This will position us to win in self-care through the creation of a sustainable and value accretive growth engine that will drive Perrigo for the long-term."
Lockwood-Taylor concluded, "The Perrigo team delivered third quarter double-digit gross profit, operating income and EPS growth year-over-year led by strong business fundamentals across the global portfolio, which more than offset continued volatility in infant formula. While we have updated our expectations for infant formula and the adverse impact from currency translation, the strength of our diversified portfolio, greater than originally anticipated margin expansion and a lower expected adjusted tax rate allows us to maintain the mid-to-lower end of our original 2023 EPS guidance range."
Refer to Tables I through VIII 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 Perrigo 2023 Results from Continuing Operations
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Third Quarter 2023 Net Sales Change Compared to Prior Year(3)
Reported
Net Sales
Growth
Foreign
Exchange
Impact
Constant
Currency Net
Sales
Net
Divestitures,
Acquisitions,
& Product
Line Exits
Organic
Net Sales
Growth
CSCA
(2.6) %
— %
(2.6) %
(2.6) %
(5.1) %
CSCI
11.2 %
(6.0) %
5.2 %
1.0 %
6.2 %
Total Perrigo
2.2 %
(2.1) %
0.1 %
(1.4) %
(1.2) %
Reported net sales of $1.1 billion increased $24 million, or 2.2%, driven primarily by 1) +2.5 percentage points from the acquisition of the Gateway infant formula facility and the U.S. and Canadian Good Start infant formula brand ("Gateway"), and 2) +2.1 percentage points from foreign currency translation. This growth was partially offset by a decrease in organic net sales of 1.2% including a -2.8 percentage points impact from SKU prioritization actions and the HRA distributor transitions.
Organic net sales were driven primarily by strategic pricing actions of +4.7 percentage points and new products sales. This growth was more than offset by 1) -2.3 percentage points from purposeful SKU prioritization actions, 2) lower net sales in legacy U.S. Nutrition due primarily to lower manufacturing productivity stemming from the U.S. Food and Drug Administration’s ("FDA") evolving industry guidelines on infant formula manufacturing, and 3) -0.5 percentage points related to HRA distributor transitions as part of the integration plan to capture synergies.
Reported gross margin was 36.6%, a 360 basis points increase versus the prior year quarter. Adjusted gross margin expanded 300 basis points to 39.5% driven by strategic pricing actions, benefits from purposeful SKU prioritization actions and higher margin new products. These positive initiatives were partially offset by higher cost of goods sold inflation in CSCI and lower manufacturing productivity in U.S. Nutrition. These same factors drove gross profit growth versus the prior year quarter.
Reported operating income was $62 million compared to $33 million in the prior year period. Adjusted operating income grew $17 million, or 13.0%, to $150 million driven by gross profit flow-through described above, in addition to favorable currency translation and lower distribution expenses. These benefits were partially offset by higher operating expenses, driven primarily by the addition of Gateway.
Reported net income was $15 million, or $0.11 per diluted share, compared to a reported net loss of $52 million, or ($0.39) per diluted share, in the prior year. Excluding certain charges as outlined in Table I, third quarter 2023 adjusted net income was $87 million, or $0.64 per diluted share, compared to $76 million, or $0.56 per diluted share, in the prior year. Third quarter adjusted EPS included an unfavorable impact of $0.03 due to the HRA distributor transitions.
Third Quarter 2023 Business Segment Results from Continuing Operations
Consumer Self-Care Americas Segment
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Third Quarter 2023 Net Sales Change Compared to Prior Year(3)
Reported
Net Sales
Growth
Foreign
Exchange
Impact
Constant
Currency Net
Sales
Net Divestitures,
Acquisitions, &
Product Line Exits
Organic
Net Sales Growth
CSCA
(2.6) %
— %
(2.6) %
(2.6) %
(5.1) %
CSCA reported net sales of $704 million decreased 2.6%, including +3.8 percentage points from the addition of Gateway. Organic net sales decreased 5.1% as strategic pricing actions and new product sales were more than offset by 1) -3.6 percentage points due to purposeful SKU prioritization actions to enhance margins as part of the Company’s Supply Chain Reinvention Program, 2) lower net sales in legacy U.S. Nutrition due primarily to lower manufacturing productivity, and 3) lower net sales of branded OTC products. Primary category drivers are provided below.
Nutrition
Net sales of $131 million increased 5.1% due primarily to the Gateway acquisition. This benefit was partially offset by lower net sales in legacy infant formula due to lower manufacturing productivity stemming from the FDA’s evolving industry guidelines on infant formula manufacturing and exited product lines.
Upper Respiratory
Net sales of $130 million decreased 1.5% due primarily to the launch and channel fill of Nasonex in the prior year quarter and exited product lines, partially offset by higher net sales of cough cold products, led by store brand Guaifenesin-based offerings, and the new product launch of store brand Cough Relief Liquid Honey.
Digestive Health
Net sales of $117 million decreased 2.1% due primarily to lower net sales of store brand Proton Pump Inhibitors, partially offset by higher net sales of store brand laxatives, including Polyethylene Glycol 3350 Orange.
Pain & Sleep-Aids
Net sales of $94 million decreased 9.5% due primarily to purposeful SKU prioritization actions in adult analgesic offerings to focus capacity on higher margin products, partially offset by sales of new products, including store brand Dual Action Acetaminophen 250mg and Ibuprofen 125mg Tablets, and higher demand for children’s analgesics products.
Healthy Lifestyle
Net sales of $79 million increased 7.6% due primarily to higher volumes and market share gains in smoking cessation products.
Oral Care
Net sales of $77 million decreased 8.5% due primarily to purposeful SKU prioritization actions and timing of promotions compared to the prior year quarter, partially offset by higher net sales of store brand teeth whitening products and power toothbrush handles.
Skin Care
Net sales of $48 million decreased 2.7% due primarily to exited product lines, partially offset by strong performance of Mederma.
Women’s Health
Net sales of $10 million decreased 17.7% due primarily to purposeful SKU prioritization actions in feminine hygiene.
Vitamins, Minerals, and Supplements ("VMS") and Other
Net sales of $18 million decreased 24.4% due primarily to purposeful SKU prioritization actions.
Reported gross margin was 31.8%, a 550 basis points increase versus the prior year quarter. Adjusted gross margin expanded 430 basis points to 32.5% driven by 1) strategic pricing actions, 2) productivity savings in U.S. OTC and U.S. Oral Care, 3) benefits from SKU prioritization actions and exited product lines, and 4) the addition of the higher margin Gateway acquisition. These benefits were partially offset by lower manufacturing productivity in U.S. Nutrition.
Reported operating income was $91 million compared to $75 million in the prior year quarter. Adjusted operating income increased $4 million, or 3.5%, to $108 million driven by gross profit flow-through resulting from strategic pricing actions, productivity savings in U.S. OTC and U.S. Oral Care, and the addition of Gateway. These benefits were partially offset by higher operating expenses, driven primarily by the addition of operating expenses related to Gateway, lower manufacturing productivity in U.S. Nutrition and Opill pre-launch investments.
Consumer Self-Care International Segment
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Third Quarter 2023 Net Sales Change Compared to Prior Year(3)
Reported
Net Sales Growth
Foreign
Exchange Impact
Constant
Currency Net
Sales
Net Divestitures,
Acquisitions, &
Product Line
Exits
Organic
Net Sales
Growth
CSCI
11.2 %
(6.0) %
5.2 %
1.0 %
6.2 %
CSCI reported net sales increased 11.2% and constant currency net sales increased 5.2%. Reported net sales growth included a favorable impact of +6.0 percentage points related to foreign currency translation and an unfavorable impact of -1.4 percentage points related to HRA distributor transitions. Organic net sales increased 6.2% driven by strategic pricing actions and new products. Primary category drivers are provided below.
Skin Care
Net sales of $87 million increased 6.9%, or an increase of 4.4% excluding the impact of currency, driven primarily by the Sebamed and ACO brands, partially offset by lower net sales in wound care products.
Upper Respiratory
Net sales of $78 million increased 13.0%, or 5.1% excluding the impact of currency, due primarily to higher demand for cough cold products, including Coldrex and Bronchostop. Net sales of U.K. store brand cough cold products were also higher compared to the prior year period.
Pain & Sleep-Aids
Net sales of $61 million increased 32.5%, or an increase of 23.0% excluding the impact of currency, due primarily to quarterly phasing of Solpadeine, higher net sales in store brands and increased demand for Nytol.
Healthy Lifestyle
Net sales of $52 million increased 10.1%, or 4.4% excluding the impact of currency, due primarily to higher net sales of anti-parasite offerings that continue to outpace strong category growth and higher demand for smoking cessation products. This growth was partially offset by lower category consumption in weight loss, impacting XLS Medical.
VMS
Net sales of $46 million decreased 0.6%, or 7.5% excluding the impact of currency, due primarily to lower category consumption, impacting sales of Davitamon and Abtei.
Women’s Health
Net sales of $29 million decreased 0.7%, or 7.0% excluding the impact of currency, due primarily to lower net sales in contraceptive products, which were primarily impacted by distributor transitions.
Oral Care
Net sales of $25 million increased 14.3%, or 6.5% excluding the impact of currency, due primarily to higher net sales of power toothbrush handles, Plackers and improved service levels compared to the prior year.
Digestive Health and Other
Net sales of $43 million increased 14.6%, or 10.8% excluding the impact of currency, due primarily to higher net sales of store brand digestive health products and distribution brands.
Reported gross margin was 44.5%, a decrease of 120 basis points compared to the prior year quarter. Adjusted gross margin decreased 120 basis points to 51.2% as strategic pricing actions and higher margin new products were more than offset by less favorable product mix and higher cost of goods sold inflation.
Reported operating income was $14 million for the quarter compared to $1 million in the prior year. Adjusted operating income increased $18 million, or 28.2%, to $80 million due primarily to the same factors as the adjusted gross margin, in addition to favorable currency translation and lower advertising and promotion investments. These benefits were partially offset by higher administrative expenses.
Fiscal 2023 Outlook
The Company’s fiscal year 2023 updated outlook is provided below:
Reported net sales growth of 4.0% to 6.0% compared to the prior year, versus the previous range of 7.0% to 11.0%,
Organic net sales growth of 1.0% to 3.0% compared to the prior year, versus the previous range of 3.0% to 6.0%,
Interest expense of approximately $180 million,
Full year adjusted tax rate of approximately ~14.0%, versus the previous expectation of ~17.0%,
Adjusted diluted EPS range of between $2.50 to $2.60 versus the previous range of $2.50 to $2.70, and
Operating cash flow conversion (operating cash flow as a percentage of adjusted net income) of approximately 100%.