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    PERRIGO Co (PRGO)

    PRGO Q2 2024: Cuts Guidance 4pp, Margin Boost via Customer Exit

    Reported on Aug 2, 2024 (Before Market Open)
    Pre-Earnings Price$28.18Last close (Aug 1, 2024)
    Post-Earnings Price$27.33Open (Aug 2, 2024)
    Price Change
    $-0.85(-3.02%)

    What went well

    • Margin Enhancement: The company exited a margin-dilutive customer—a strategic move that not only removed a revenue drag but also contributed to overall margin expansion, setting the stage for more profitable growth.
    • Infant Formula Recovery: There is strong demand for infant formula with production ramping up quickly toward prior year levels, suggesting that the current supply constraints will resolve and fuel improved organic growth in the future.
    • Store Brand Upside: Despite short-term revenue headwinds from a lost customer, new, margin accretive store brand contracts are expected to offset these impacts, supporting a robust recovery and potentially higher margins in the coming periods.

    What went wrong

    • Margin Pressure from Lost Store Brand Contract: The company walked away from a margin‐dilutive store brand contract, contributing a 1.5 percentage point headwind to its 2024 net sales outlook, which could signal a risk if similar decisions continue impacting revenue.
    • Weaker Seasonal Demand and Inventory Adjustments: Lower global seasonal demand and U.S. retailer destocking led to a 2.5 percentage point reduction in full-year guidance, underscoring near-term revenue weakness.
    • Infant Formula Supply Challenges: While production is ramping up, performance only reached 90% of prior year levels in May–June with full recovery and safety stock buildup slated for early 2025, exposing the business to potential short-term supply risks.

    Q&A Summary

    1. Guidance Reduction
      Q: Main drivers for reduced full-year guidance?
      A: Management explained that the 4 percentage point reduction comes from 2.5 percentage points lower global seasonal demand and 1.5 percentage points from reduced U.S. store brand distribution, reflecting planned SKU rationalization actions.

    2. 2025 Outlook
      Q: Are 2025 expectations intact?
      A: They expect a significant recovery in infant formula and margin-accretive new contracts, setting the stage for improved overall earnings with benefits manifesting in 2025.

    3. Lost Customer
      Q: Impact of losing one customer?
      A: Exiting that margin-dilutive relationship was a strategic move, yielding a short-term revenue hit but improving overall margins and paving the way for stronger, more profitable business in late 2024 and 2025.

    4. Nutritionals Recovery
      Q: Is the nutritionals recovery on track?
      A: Leadership confirmed that quality remediation has been executed well, with operations returning to normal and no significant setbacks observed in nutritionals.

    5. Infant Formula Stock
      Q: Plans for building infant formula safety stock?
      A: With production ramping up to near prior-year levels, management expects to build safety stock in the first half of 2025, addressing high demand without sacrificing shelf space.

    6. Opill Sales
      Q: Difference between Opill sell-in and sell-out?
      A: Opill shows very good sell-in and distribution, with about 30–40% of sales from e-commerce, while enhanced retail activation is expected to further drive sell-through.

    7. Phenylephrine Inventory
      Q: Reduce phenylephrine inventories ahead of FDA decision?
      A: No tactical reduction is planned because demand remains robust and the category is less profitable, so management is continuing to supply as needed.

    8. Cough Inventory
      Q: Are current retailer inventory drops temporary?
      A: The drop is viewed as a one-off adjustment post-COVID, with expectations that retailer inventory levels will normalize later this year.

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