Perrigo Company - Q1 2023

Transcript

Operator (participant)

Good morning, welcome to the Perrigo First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Brad Joseph, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Brad Joseph (VP of Investor Relations and Corporate Communications)

Thank you, Anthony. Good morning, everyone, and welcome to Perrigo's First Quarter 2023 earnings conference call. I hope you all had a chance to review our releases issued this morning. A copy of the earnings release and presentation for today's discussion are available within the investor section of the perrigo.com website. Joining today's call are President and CEO, Murray Kessler, and CFO, Eduardo Bezerra. 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 items 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 divested Rx business, which was accounted for as discontinued operations prior to its sale.

Organic growth excludes acquisitions, divestitures, and currency in both comparable periods. All comments related to constant currency remove the impact of currency translation versus the prior year by applying the exchange rates used in the comparable measurements in the prior year's financial statements. Third, Murray's discussion will focus solely on non-GAAP results, except as otherwise expressly noted. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. Lastly, I wanna share my deep appreciation for Murray during his tenure at Perrigo, and a warm felt congratulations on his retirement. Murray, your mentorship and leadership have been invaluable, and you have set this company on a path for long-term success. On behalf of shareholders, thank you. For the last time, it is my pleasure to turn the call over to Murray.

Murray Kessler (President and CEO)

Thank you, Brad, and thank you everyone for joining us this morning. Many of you likely attended the virtual Investor Day we hosted at the end of February, where we provided details of the next phase of our strategy, what we are calling Optimize and Accelerate. This was my second Investor Day since joining Perrigo, and I believe this was a critically important event for our company. My team shared specifics on how we expect to generate a significant amount of value for shareholders, and the feedback we've received has been overwhelmingly positive. Now, after four years of transforming Perrigo into a consumer self-care company, the management team is focused squarely on operational execution and consistent delivery of results. To that end, we've made meaningful progress on many of the initiatives discussed at Investor Day during the first quarter of 2023.

We're on track with the integration for the HRA and Gateway Good Start brand acquisitions and are already realizing significant benefits from both. We are progressing faster than I expected on supply chain reinvention and have seen some exciting results in the early stages. More on this in just a moment. I'm proud to say that Perrigo's women's health team is starting its presentation to the FDA Advisory Committee today for a potential first-in-class Rx to OTC switch of the Opill oral contraceptive. Underpinning the progress across our strategic initiatives are strong financial results and business fundamentals. To echo comments from my general managers at our quarterly business reviews, after two years of unprecedented volatility, we are seeing our business become more consistent and predictable again.

That predictability manifested itself in the first quarter, where Perrigo achieved double-digit growth on top and bottom line, meaningful growth margin expansion driven by both the base business and acquisitions, and retained or grew market share as the global consumer demand and fundamentals remained strong. We also announced within the last two weeks the successful elimination of the largest remaining tax overhang on the company by resolving the entire April 2019 Athena tax assessment of $843 million. No payment was required, and this assessment is now completely dismissed. We also just settled the interest rate tax assessment with the IRS and have now cleared the decks and dramatically reduced uncertainty in the Perrigo investment thesis. As I just touched on, benefits from recent acquisitions are not only turbocharging our financial results, but are also creating greater leverage across the Perrigo portfolio.

In HRA, we are delivering on our revised higher synergy targets. We remain on track with the HRA distributor conversion into Perrigo's direct sales model, which will deliver significant ongoing cost savings once complete. As I discussed on previous conference calls, there's an approximate $32 million one-time impact to operating income in 2023 associated with returning inventory from distributors. Of this annual estimate, $12 million top line and $0.05 in EPS impacted the first quarter as expected. Importantly, we're realizing greater leverage on our legacy CSEI business as our sales force is now able to combine strong Pan-European brands such as Compeed and ellaOne with Perrigo's existing more regional European brand portfolio. The integration of the Gateway Infant Formula facility and the Good Start brand also are on track.

We are progressing on insourcing transition services currently provided by Nestlé. Despite a voluntary recall in the quarter, we're continuing to leverage increased capacity from this facility to provide much-needed supply of value-based infant formulas. More on infant formula in a few minutes. Within our supply chain reinvention initiative, we are on track to remove complexity from our operations through our winning portfolio strategy, which will result in the optimization or standardization of nearly 1,000 SKUs by the beginning of 2024. We had positive conversations with customers at last week's National Association of Chain Drug Stores, NACDS, conference, and look forward to partnering with them to increase customer service levels through increased operating efficiencies that will free up much-needed capacity in the Perrigo manufacturing system.

We also completed a pilot program using a system called the Redzone, which will be an integral part of our enhanced Perrigo work system. The Redzone is a cost-effective software solution to provide real-time overall equipment effectiveness, OEE. It provides management and monitoring information at the line operating level. We piloted this system on three manufacturing lines across the globe in Q1. All three achieved increased productivity above our expectations at a lower than expected cost. These are truly exciting results. We've begun the process of rolling Redzone out across all our global manufacturing sites. As I mentioned earlier, the FDA advisory committee meeting begins today to discuss the potential switch of Opill. This is an important day for all women and people in the U.S., and it epitomizes our commitment to the women's health space.

The FDA's approval of Opill OTC would increase access to safe and effective birth control while allowing women to take control of their contraceptive needs on their terms. While the FDA will be scrutinizing this application, there are over 35 independent organizations voicing support of Opill. In 2023, women should have ready access to oral contraception. As a reminder, the FDA advisory panel vote is non-binding. We expect the agency to render a decision on approval later this year. Looking at our Q1 financial results. We had a tremendous quarter as constant currency net sales grew 13%. Organic net sales grew 6.4% despite unfavorable impacts of 2.7 and 1.3 percentage points from two voluntary recalls and portfolio optimization initiatives in CSCA, respectively.

Pricing in the quarter was 5.5% and importantly, volume grew 1%. Gross margin improved by 400 basis points, with nearly half driven by the legacy Perrigo business and the other half attributed to higher-margin acquisitions. Year-over-year adjusted diluted EPS grew an impressive 36% or +47% on a constant currency basis. Success in the quarter was broad-based. While global consumer demand remains solid, European consumption is robust and is at a 4-year high, driven in part by a very strong cough cold season. Our Compeed brand continues to see strong demand and share gains, with consumer takeaway up 19% versus a year ago in the quarter. Other areas such as anti-parasites and insect repellents are gaining market share in growing categories and were positive drivers of CSCI growth.

In the U.S., our oral care business is continuing to recover from the logistics and supply chain dynamics experienced last year, sales and consumption trends are very positive. Oral care consumption grew a robust 20% in the quarter, Perrigo recaptured the number two share position in the categories we compete in. In U.S. OTC, we gained share in higher-margin digestive health and NRT categories driven by new products and distribution gains. Of note, U.S. OTC organic growth in the quarter was up 7.3% versus a year ago, U.S. OTC gross margin was 30%, up 450 basis points. Looking at our top line in a bit more detail, we achieved strong growth in both segments and nearly every product category. Many of our investors are U.S.-based, they gravitate toward the U.S. business.

CSEI, which is nearly 40% of revenues, is really hitting its stride. The business grew 24% constant currency in the quarter, 11% organically. The strong EU consumption I just noted was due to high incidences of cough, cold, and flu, strong brands, share gains, the stickiness of our strategic price increases, and the greater leverage from the HRA Pan-European brands. The CSEI business has really come together beautifully. We also once again experienced solid consumer demand in the U.S., especially when you adjust for purposely discontinued low-margin products from our SKU rationalization program and from divestitures. Our OTC business grew 9% in the quarter in total, including a 200 basis point unfavorable impact from SKU rationalization.

It's worth noting shipments to customers were greater than consumption during Q1 in the U.S. as customers replenished inventories that were reduced below normal levels as they exited 2022. That's something we see often in the fourth quarter, and it's not unusual. Other notable category movements in the quarter included women's health, which benefited from the addition of ellaOne and other brands from the acquisition of HRA. Skincare, which benefited from the addition of the Compeed and Mederma brands, and increased manufacturing capacity for our minoxidil hair regrowth products in the U.S., and oral care, which I just discussed. Let's spend a minute on our CSCA nutrition business. Net sales grew 10% in the quarter, driven by strong growth in the contract infant formula business and an additional $36 million in sales from the Good Start acquisition.

As a reminder, this growth is compared against a very strong year-ago period that benefited from the infant formula shortage. The $36 million sales benefited from the Good Start acquisition includes an unfavorable impact of $9 million due to a voluntary recall of certain lots of the Gerber Good Start SoothePro infant formula. Let me go into a little more detail here. In March 2023, FDA released a national strategy and issued a letter to members of the infant formula industry to assist in improving the microbiological safety of powdered infant formula. This letter has a significant impact on our manufacturing and cost to produce infant formula. Of course, Perrigo supports FDA in its mission to ensure food safety and promote nutrition for babies.

In response to FDA's new strategy and evolving regulatory expectations, we are, one, making significant investments to further modernize our infant formula infrastructure. Two, modifying and evaluating further adjustments to our manufacturing processes and procedures, including refinements to sanitation procedures, quality hold times, and more. As I said, these actions will negatively impact supply and significantly raise the cost of producing infant formula. The substantial cost of these new regulatory requirements will be offset with a price increase. Even after the price increase, we anticipate that Perrigo store brand products will deliver consumers an approximate 40% savings per ounce as compared to the national brands. Let me pull this all together. I can't say enough how much Perrigo has transformed over the past few years and how excited I am about our future.

Our fundamentals are strong and getting stronger as we continue to win market share. Our strategic acquisitions are having a big accretive impact. Our gross margin is expanding. We continue to optimize our operations and accelerate our strategic investments to drive outsized growth over the next 3 years. With that, I'll turn the call over to our CFO to discuss financials in more detail. I'll come back in the end to wrap up before Q&A. Eduardo?

Eduardo Bezerra (CFO)

Thank you, Murray. Good morning, everyone. For this morning's call, I will provide some color on our Q1 financial results, walk through the drivers of our gross margin expansion, highlight our cash flow and balance sheet metrics, and then wrap up with our 2023 guidance. Starting with our GAAP to non-GAAP summary, the company reported a GAAP loss of $1 million for the first quarter or a loss of $0.01 per diluted share. Adjusted net income was $61 million, and adjusted diluted earnings per share was $0.45 per share versus $0.33 per share in the prior year quarter.

A few adjustments to the quarter pre-tax non-GAAP P&L totaling $71 million were: amortization expenses of $66 million, acquisition and integration-related expenses of $4 million, mainly related to the HRA and Gateway facility, and restructuring charges of $3 million, primarily related to our supply chain reinvention program. Full details can be found in the non-GAAP reconciliation table attached to this morning's press release. From this point forward, all dollar numbers, basis points, and margin percentages will be on an adjusted basis unless stated otherwise. Since Murray already provided details for our top-line results, I will begin my comments at consolidated gross profit, which grew $84 million, or 23.3% in the quarter, with our gross profit margins expanding 400 basis points versus the previous year quarter.

Growth was driven by acquisitions, strategic pricing actions, and favorable volume mix, which were partially offset by inflation, two voluntary recalls, the impact from the HRA distribution transition, and the unfavorable impact of currency translation. Operating income increased $33 million or 38%, driven by favorable gross profit flow-through, which was partially offset by higher operating expenses due to the inclusion of HRA and the Gateway facility net of divested businesses. Interest and other expenses increased $15 million due to last year's debt refinancing associated with the HRA acquisition, which both closed in Q2. We also saw a benefit in our income tax rate of 300 basis points versus previous year due to changes in jurisdictional mix of earnings.

Looking at the bottom line, these factors translated into an adjusted EPS of $0.45 in the first quarter, an impressive 36% increase compared to last year or 47% improvement on a constant currency basis. Looking at slide 16, first quarter gross margin improvement of 400 basis points was driven by both business segments. This was achieved through an equal split between the legacy Perrigo business and the HRA and Gateway acquisitions. Within CSCA, gross margin in our OTC business grew an impressive 450 basis points, driven by favorable mix on existing products, benefits from new products and acquisitions, and strategic pricing actions that offset inflation.

As Murray mentioned earlier, our U.S. Oral Care business is rebounding from the supply chain and logistics dynamics experienced last year, and accomplished a 360 basis points increase in gross margin, driven by strategic pricing actions, improved service levels, and favorable customer mix. These factors led to a 310 basis points expansion in CSCA's gross profit margin, including an unfavorable impact of 150 basis points from two voluntary recalls in the quarter. The FTI gross margin expansion of 470 basis points versus prior year was driven by contributions from the HRA acquisition and strategic price increases, which more than offset the impact of inflation in the quarter. The gross margin expansion included an unfavorable 90 basis points impact from the HRA distribution transitions.

Bringing this together for total Perrigo, gross margin expanded 400 basis points versus last year, including a combined 130 basis points headwind from the two voluntary recalls and the impact of the HRA distribution transition. We also achieved operating margin expansion across both segments in the quarter. Perrigo operating margin expanded 200 basis points compared to the prior year as gross profit flow through due to the factors I just discussed, were partially offset by higher operating expenses, mainly related to the acquisitions of HRA and the Gateway facility and advertising promotion investments in our core brands. Moving on to the cash flow. Cash on hand was $553 million at the end of the first quarter, down from $601 million at the end of the fourth quarter last year.

We haven't been impacted by recent financial institutions instability in the U.S. and Europe, and we have proactively taking actions to diversify our cash flow management amongst low-risk financial institutions. We will continue to monitor these developments closely. Operating cash flow for the quarter was $19 million, a conversion of 32% in line with our phasing for the year, which we expect to be similar to last year. As a reminder, we typically experience the heaviest cash outflows in the first quarter, driven primarily by annual employee incentives. In the quarter, operating cash flow included outflows of $10 million from acquisition-related and restructuring expenses. We also invested $23 million in capital expenditures and returned $36 million to our shareholders through dividends in the first quarter.

Looking ahead, we're still projecting 100% operating cash flow conversion to adjusted net income for the full year. Also, our net leverage over the trailing 12 months was 5.3 times adjusted EBITDA, down from 5.5 times at the end of 2022. Due to the continued strong momentum in our business through Q1, we are reaffirming our 2023 guidance, which includes, as Murray discussed, higher costs coming in our CSCA infant formula business with pricing actions to offset these costs. Additionally, timing has shifted slightly in the distribution transitions from HRA to Perrigo, and we now expect the unfavorable impact from HRA sales returns in Q2 and Q3 to be similar to the $0.05 impact, EPS impact in Q1 and minimal in Q4.

This is good news as it means our transition from distributor to direct sales is going faster than originally planned and does not change the total estimated earnings per share impact of $0.16-$0.18, only the time. We continue to provide updates, and we will continue to provide updates each quarter on the progress we are making with these transitions. Summing this up, we now expect our second half EPS weighting to be slightly higher than discussed at our February investor day. As a reminder, we anniversaried the Latin America and ScarAway divestitures at the end of Q1, and we will anniversary the HRA acquisition during the second quarter. Since joining the company last year, I have been repeatedly impressed by our team's ability to adapt and overcome in the face of numerous challenges.

From record inflation to logistics and supply chain issues, our team continues to navigate in a dynamic environment. This quarter is no different. On top of a solid financial performance, we also eliminated almost all of the remaining tax overhangs on the company. Nearly $1 billion with only a minor cash impact to the company. These overhangs drew my attention when I first joined Perrigo, and I'm now extremely pleased to say that these are behind us. I look forward to carrying this momentum forward through the rest of the year as we continue to make progress towards delivering on our strategic initiatives, strengthening our business, and delivering substantial growth in a dynamic environment. Before I turn the call over, on behalf of the entire operating committee, I would just like to say that it has been a pleasure working with you, Murray.

The transformation that you have led during your tenure here has truly set Perrigo on a path for success, and we could not be more excited to drive our strategy forward. We wish you all the best in your retirement, and thank you for your tremendous efforts over the past five years. Now back to you, Murray, for your closing remarks.

Murray Kessler (President and CEO)

Thank you, Eduardo. That's really kind. A few comments on my retirement announcement before we move on to Q&A. As you know, I joined Perrigo almost five years ago to lead the transformation of the company from a healthcare company to a consumer self-care company. Leading that transformation has been one of the most exciting assignments of my career. From 14 M&A transactions to reconfigure the company's portfolio, the near complete elimination of the company's $4 billion tax and legal overhang, to the strategic path put in place to create value for the future. I am proud of what my team, with the board's support, has accomplished. The fact that this all happened in the face of a global pandemic, global supply chain disruption, the Russian invasion of Ukraine, and the highest input cost inflation in decades, makes the transformation that much sweeter.

All the pieces are now in place. Perrigo is growing its top line robustly. We've added over a billion, $1.5 billion in revenues to our consumer businesses since the beginning of the transformation. Perrigo is growing and expanding its margins and is set up to continue to do that going forward. It's growing its bottom line. In the first quarter, I think we were right at the top or nearly at the top of our consumer peer group. It has a strong plan in place to reduce leverage. The company has a clear strategic path for sustained long-term growth. Now is the right time for someone else to take the reins at Perrigo and relentlessly drive the execution of our strategic plan for years to come.

I truly believe that we collectively have set up Perrigo for a bright future and to create tremendous value for investors. Remember, despite strong results, Perrigo continues to trade at almost a 50% discount versus its peer group. That's why even though I'll be retiring and I will sell a portion of my Perrigo holdings to diversify, I intend to remain a large individual shareholder of Perrigo and will continue to be very tied to the success of the company. I've set a target retirement date of the end of July, and I'm working with the board on identifying a successor and ensuring a smooth transition. Lastly, most importantly, I'd like to thank the Perrigo employees who have supported me through the transformation. You are truly amazing, and it's been an honor to lead you. With that, operator, we'll now take questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Susan Anderson with Canaccord Genuity. You may now go ahead.

Susan Anderson (Managing Direct and Senior Analyst)

Hi. Good morning. Thanks for taking my question, and Larry, congratulations on your retirement. You've done a great job setting the company up for future success.

Murray Kessler (President and CEO)

Oh, thank you, Susan, and good morning.

Susan Anderson (Managing Direct and Senior Analyst)

Yeah. Maybe just I wanted to drill down a little bit first on the gross margin, the 400 basis points. I think you said 130 Bips from the recalls with the HRA distributor. I guess how much of that was the infant formula? Also, if you could maybe just give a little bit more color on the rest of the drivers there between pricing, mix, maybe currency, et cetera.

Murray Kessler (President and CEO)

Okay. why don't I take on, Eduardo, the first part?

Eduardo Bezerra (CFO)

Yeah.

Murray Kessler (President and CEO)

Which I just wanna sort of talk relative to the gross margin and across the businesses, and then you can, break up the individual drivers.

Yeah, the gross margin from last year to this year was up on CSCA 310 gross margin points. I think if you look at it, the important parts are. Excuse me, it was up more than that, 310. OTC was up 450, it went from 25.5 last year to a 30% gross margin. Oral care went from 25.3 to 28.9, up 360. Nutrition had a significant decline, and it had even a bigger decline from the fourth quarter to the first quarter, and that was related to the recall. I mean, you had a big hit on that. CSCI actually had a 480 basis point increase.

Every part of our business expanded significantly from a growth margin standpoint. It's progressing just as we expected. You had hits, and Eduardo can quantify these on, you know, purposefully with the HRA, not recall. Of moving from distributor to our own sales force. You had two recalls that hit $17 million or roughly 10% of the business was so strong it covered it. I wanna be very clear, our margin programs are working beautifully. They're not, you know, pricing driven. There's some in recovery. They're all the kind of things that you want that'll continue to expand and grow over time, especially as we have our highest margin businesses are growing the fastest in the company. Eduardo will get to your specifics on the drivers.

Go ahead, Eduardo.

Eduardo Bezerra (CFO)

Yeah. Talking specifically there, Susan, between the Good Start, you know, impact, you know, as compared to last year, we had about 50 basis points there. Also on the inventory transition on HRA, about 40 basis points. We also had around 40 basis points related to the OTC recall that we announced there. On the flip side, you know, pricing had a positive impact of about 300 basis points and volume and mix about 160 basis points positively. Those combined more than offset the impact we had on inflation and input costs that was about 230 basis points.

Susan Anderson (Managing Direct and Senior Analyst)

Okay, great. That was really helpful. Thanks for all those details. On the infant formula business, I guess, do you expect there to be a sales impact, it sounds like the rest of the year too, with the changes from the FDA? Also, how much will this pressure be on sales and margin, and how long will it take you to get back in stock? Just in terms of raising prices, do you guys have an idea of what that will be and the timing? I guess, you know, pricing does increase across the category. I would assume this is actually helpful to your private label business, correct?

Murray Kessler (President and CEO)

Yeah. It those were a lot of questions. Let me make sure I cover them. If I don't get to every piece of it, just ask it again.

Susan Anderson (Managing Direct and Senior Analyst)

Sure.

Murray Kessler (President and CEO)

Let's just go back here a little bit. I think it's really important to say that this letter was sort of a shock to the system. It's very well-intended. I'm not sure whoever wrote it fully understands the, you know, the impact of manufacturing and output for the industry, especially during a period of time when there are shortages. I wanna be very clear that the Perrigo quality control system did not break down during the first quarter. If it had been three weeks earlier, prior to this letter coming out, there would have been no recall. The quality control measures that were in place of how much product to throw away, et cetera, if you get anything, any variation, that had been in place for decades, there would not have been a recall.

Okay? The FDA, given what happened last year and pressure from Congress and others, have tried to raise safety up to another level. Very admirable, but it has an impact, and that's what you're talking about now. We, full plant sanitizations and shutdowns, there'll be more of them. It'll have a negative input on product. All of that, including the sales, will be offset by the pricing. Okay? What you lose in a little bit of volume, you're gonna gain in additional pricing and costs, and then we still see it as making our original plan on the infant formula business. It'll just be a little bit more backloaded. Pricing here, you know, we're not pricing relative to the competition. We're pricing to offset this higher cost, and lack and lower productivity.

It just so happens that after the pricing that is necessary to do that will be about 25... On our price value business, store brand business will be about 25% cheaper on an absolute unit. We give away a couple more ounces. On a cost per ounce basis, we'll actually be at a 40% discount after the pricing. Customers hate price increases. I just spent, you know, 5 days at the NACDS, our biggest conference. They all understood this, you know. They understood that there was a change and that we have to be able to produce and make a margin. They understood that we weren't expanding margins on this. We were just literally addressing this regulatory change. I think it'll be very well-supported.

Nobody likes pricing, when you're a value competitor. In this case, it's absolutely necessary and, we, you know, we'll sell that through. I'm not, I'm not worried about that. Yeah, I think I've answered all your questions.

Susan Anderson (Managing Direct and Senior Analyst)

Yeah, that's great. Thanks. Just really quick on your inventory levels and then also at retail, I guess are there certain categories you wish you had more of, and how has your ability been to get back in stock quickly?

Murray Kessler (President and CEO)

Depends on the category. We're making progress, but, you know, I've heard of, and I heard at NACDS, too, I've heard of a lot of categories out there where they're fully back in inventory or even inventories could be a little high. That's not the case for us yet. We shipped a little bit more, you know, than we, than was consumed during the first quarter, but we're still a week and a half on average of low in inventories out at the retail level. That's before we begin to build our own safety stock. Listen, it's really right now for the company, our productivity is doing beautifully in the manufacturing facilities. We are running at record levels.

We have two issues in terms of getting our inventories back off cold, and that's because, again, last year we had a elevated cough cold season right through the summer, which is supposed to be our down season where we build inventories. We're running again at record levels, especially on liquids and pediatric liquids was an area of concern over the past four or five months. Based on the way the illness trackers are going and trending, we should be back in business with safety stocks in for the fall, cough and cold season next year. The other business, as I said, is nutrition. On the, you know, a nutrition basis, there's gonna be some working through this new regulatory guidance.

It is with additional full plant sanitizations and longer quality holds in order to comply, it'll take some time before we can get inventories back. What's been a challenge for the last 18 months has probably been, you know, now extended. I can't put a time on it, but I don't see an end in sight yet to when we are fully back in a safety stock position on nutrition. The good news is we did buy the other facility, so we have a lot more product to work with, and we are making those investments. We're not backing off those investments. Within another year, we should have an additional 7 million pounds of capacity. You know, it...

On the rest of the business, we're back up to service levels, and service levels are not a concern in Europe. We're in the 90s in the U.S. Other than nutrition and cough, cold, I think we're back in the most recent weeks, back into the 90s again, too. It, you know, everything's going in the right direction.

Susan Anderson (Managing Direct and Senior Analyst)

Okay, great. If I could just ask one more on this week's ad comm on Opill. Curious, just any thoughts you could give around that on, you know, how they're gonna think about this. Also, if it is approved, your thoughts around just the market opportunity in the U.S. Is this gonna basically add to the market or will it take some of that share? Any color you could give on the timeline to launch and impact to the P&L? Thanks.

Murray Kessler (President and CEO)

Well, I think I read in your note, but it is not, and I think everybody knows it at Investor Day, it's not in our current modeling. It's not in any of the guidance we've given over the next few years because it's, you know, you're talking birth control, and this is a big change. Having, so it's only upside, and I think we've been given a year one estimate of roughly $100 million in revenues. By the time, you know, the FDA got into a position, you know, I think that, you know, next two or three months or for them to make a decision once they review all the data and what the advisory panel has to say about it. You're talking the very end of the year or beginning of next year.

I don't think we have a set de-date yet. It depends how the FDA when they come to their decisions and any implications of those. You know, like, philosophically, though, this is a product that has been on the market since the 1960s. There is reams and reams and reams of safety data on this. When taken in a whole, we believe the FDA should approve this application, period. There, you know, there's lots of pushback in there, which is their job, and that's what they're supposed to do. We have many extroverts will be testifying, and we'll see how it comes out. Ultimately, we believe this will get approved, and hopefully it gets approved this time through. Again, it's not in our numbers this year, next year. It's all upside.

This is a big idea for the company, and we're real excited about women's health.

Susan Anderson (Managing Direct and Senior Analyst)

Great. Thanks so much. Good luck the rest of the year.

Murray Kessler (President and CEO)

Thanks. Thank you.

Operator (participant)

Our next question will come from Chris Schott with J.P. Morgan. You may now go ahead.

Ethan Brown (Equity Research Analyst)

Hi, this is Ethan Brown on for Chris Schott. Thanks for taking my questions. I guess first off, you already talked about this a bit, but on the nutritional segment, just how do you think about sales growth for the rest of the year as we move past the instant formula shortages, the disruption this quarter and then with the FDA update as well?

Murray Kessler (President and CEO)

Okay. Well, let's start with, remember last year, the way our business flowed, we, you know, stripped our safety stocks last March and April. Little bit of February, but March and April were huge spikes. Then after that, well, once we had no safety stocks, and we actually had challenges as the year progressed, on our base business, keeping up and running what was, you know, we have on our Vermont facility, older equipment, you know, it really pushed that and we struggled in the back half of the year. I think it just is gonna be a bit lumpy, but I think this will be a growth year. And, you know, it's not like we're gonna be giving back a ton.

When we went into buying Nestlé, we had estimates of, you know, tens of millions of pounds of unmet demand. Even with the Nestlé facility in here, it's not a demand question, it's a question of how much can we make and how much can we make under the new regulatory guidance and the dollar. I don't have the forecast in front of me right now. Brad can give you those numbers later. We're not backing off plan. From a flow standpoint, the pricing will hit sort of the middle of the year. The back half will get bumped up because of it.

It was depressed in the back half of last year, so you're gonna have some big growth rates, you know, from, we'll call it May, June, July, you know, onward till the end of the year in infant formula, which is driving our nutrition numbers.

Ethan Brown (Equity Research Analyst)

Thank you. That's great. Then on pricing outside of the nutritional segment, do 1Q results reflect most of the planned pricing actions, or can we think about some further price opportunities as we move through the year?

Murray Kessler (President and CEO)

Well, you know, it's a two-part answer, right? It is. The second is, first is that it took us almost till mid-year. When you look at our, you know, the traditional CPG companies on national brands in the U.S., and I'm only talking the U.S. here, our international business is similar to any branded company. In the U.S., you have to negotiate with customers on store brands, and we lagged in the beginning because most of our price increases didn't go into the mid-year. You're gonna still get a pretty strong benefit, I would suspect, in the second quarter of this year on most of ours, and then you'll start to lap some of those.

The great news is we have learned through this whole crisis, when we need to price for cost, we can get that done. I'm not gonna answer your question right now. You pay me as CEO to, you know, I have a toolbox and sometimes I go to pricing and sometimes I go to cost, and sometimes I go to new products and innovation, and sometimes I go to M&A, and sometimes I go to supply chain reinvention, and sometimes I go to capital structure. We'll continue to look at which opportunities make the most sense to deliver on the guidance.

I truly believe that Perrigo sitting at, you know, where it is in terms of its metrics at a 50% discount on valuation is all about credibility right now and delivering on the numbers. We'll use any lever we have to try to consistently perform and deliver the promises we made for the year. Then I think, you know, everybody's gonna benefit from that, including me and my lovely retirement. So.

Ethan Brown (Equity Research Analyst)

Then maybe one last one for me. Can you just talk about the trends you're seeing on the private label versus national brands, given the current macroeconomic environment and anything notable to keep in mind there? Thank you.

Murray Kessler (President and CEO)

Yeah. Eduardo or Brad, feel free to jump in here, but what I see is our volumes growing and their volumes declining. You don't see the dollar swing of down trading as much because they're more aggressive on pricing. I don't wanna price if I don't have to. Our competitive advantage. We want to have a you know, a good discount versus the national brand and with good gross margins, and then grow market share over the long haul as partnership with our customers. You see, you know, clearly most national brands, et cetera, have priced more aggressively than us. On the other hand, we used to be in a situation where we were giving price concessions.

We've gotten first to stabilization and now our ability to price for growth when necessary. As a result of all of that, we are gaining market share in volume.

Daniel Biolsi (Managing Director)

Meaning consumers are downtrading.

Murray Kessler (President and CEO)

Thanks, Ethan.

Operator (participant)

Again, if you have a question, please press star then one. Our next question will come from Daniel Biolsi with Hedgeye. You may now go ahead.

Daniel Biolsi (Managing Director)

Thank you. Murray, on your well-earned retirement, I take it you're also retiring from the board?

Murray Kessler (President and CEO)

Correct. That automatically happens, yeah.

Daniel Biolsi (Managing Director)

Okay. I was wondering if you could quantify the product shortage impact on the CSCA upper respiratory segment, like what that was and if it was lost sales or you consider it just delayed?

Murray Kessler (President and CEO)

No, they're lost sales. Right now we were at. Boy. Brad, if you have a number. Let's. I just saw this. We had a forecast of, I think about $25 million for the first quarter. We shipped about 25% more than that, but we had orders that we could have doubled that again. I don't wanna be too specific, but it could have been $25 million or $30 million additional in cough, cold. I'm being really back of the envelope here, but the point is we had elevated levels and as much as we could have made, we could have shipped. People buy it for the cough, cold season, so they had to buy something.

Again, our cough cold numbers were up and our production in the factories was up significantly. They did a brilliant job, but there was still more demand than even that. That's why I'm so excited. We haven't really talked about it this morning, but that's why I'm so excited about this supply chain reinvention and what I talked about on the call of the simplification of over 1,000 and standardization of over 1,000 SKUs. What that does in combination with Redzone is it increases capacity because it wasn't, you know. We can continue to grow and build market share, but we're mindful of our return on invested capital, and we don't wanna, you know, to be just adding equipment and, you know, and lowering prices and getting no return for that.

This is, you know, sort of an elegant solution to be able to where we see a path to, you know, 25%-50% more capacity in our cold cough business through these, this supply chain reinvention and standardization and simplification and less line changeovers and better operational effectiveness and lower throwaway and all those good things that are part of this program. I'm excited to say in those 3 test lines we did in the first quarter, we got that increase in operational effectiveness. That's what we're pushing for. Did we get it back? We can get it back next cough, cold season when we played it out. It shows the potential is there, but it's not like it got pushed for a quarter.

Daniel Biolsi (Managing Director)

Right. Thank you, Murray. Then just following up on that, what have your initial conversations been with your customers about, you know, reducing some of the SKUs? Has it been, you know, what you'd expected or have there been some pushback?

Murray Kessler (President and CEO)

No, no, it's better than expected. We're going for the low-hanging fruit first. If you've listened to Eduardo speak on this, the low-hanging fruit is the part that is not consumer-facing. In the complexity between customers, it will be a more difficult decision when you're talking about what consumers actually see in terms of the number of pills in the bottle or the size of the bottle, et cetera. 80% of the complexity we have now, believe it or not, is not consumer-facing. It is one customer whose label is an eighth of an inch bigger than another one. You have to, you know. It's not even perceivable to the eye, but we have to stop the line and do a major changeover for the new label size.

Or it could be, you know, a slightly different bottle size where it really matters is corrugated. You've got the outer corrugated, the thickness of it, the, the dimensions of it might be a quarter inch, an eighth an inch, a half an inch. Inside it could be packed in 3 shrink wrap together, 6 shrink packed together, 9 shrink wrapped together, 12 shrink wrapped together, where the national brands only give 2 variations. Over time, Perrigo, being a specialist in complexity and customization, builds all this complexity into its system working with customers, but sort of no one realized how much complexity it added. Again, I gave this example at Investor Day, but because of that complexity, we can't use automatic case packers. It's the year 2023. That's nuts.

Everybody agrees they can get to a standardized outer carton and at least that I've been in front of, and same thing with label sizes and all that, and they're like, Wow, you know, we didn't even know we were different on those kinds of things. That first 1,000 SKUs is easier. It'll be years. We'll be doing this for the next two or three years, where we go back and say, "Listen, everybody ought to be in 225 count a set of Metamucil, not some of you 200, some of you 250." We can still shrink wrap together into bigger sizes, but we need to standardize as much as possible.

Because we are a branded company, whether it's store brand or national brand, at the heart of when we get to the consumer-facing is a massive consumer study that we did that will guide us in what consumers want when they go to the shelf, which is frankly, not to have to get out a calculator and do math. They wanna look at, and see the products, know it's comparable to the national brand, that it'll work as well, be just as safe and cost less.

Susan Anderson (Managing Direct and Senior Analyst)

Thank you.

Operator (participant)

That's all we have time for and marks the conclusion of our question and answer session. I would like to turn the conference back over to Murray Kessler, President, CEO, for any closing remarks.

Murray Kessler (President and CEO)

Yeah, just, once again, thank you for your interest in Perrigo. Thank you for support and investing in the business and believing in me, whether it was here at Perrigo or Lorillard or UST. It's been a heck of a run and I hope to see as many of you as I can before I actually say my final goodbyes. I've worked hard for you, and I can tell you that everybody at Perrigo will continue to work hard for you and, you know, make your trust in us, pay off in over the, you know, the medium, short, long term, all of it. Thank you again for your interest in Perrigo.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.