8-K: Perrigo Reports Mixed Q1 Results: Infant Formula Issues Impact Earnings, While International Business Shows Strength

Perrigo's first quarter results were impacted by challenges in the infant formula business, though the company reaffirmed its full-year outlook and saw strong growth in its international segment.

Summary

• Perrigo reported a net sales decrease of 8.4% to $1.1 billion in the first quarter of 2024 compared to the same period last year.
• Organic net sales declined by 7.0%, primarily due to a 4.3 percentage point impact from lower infant formula sales and a 3.6 percentage point impact from SKU prioritization actions.
• The Consumer Self-Care International (CSCI) segment saw a 4.7% increase in net sales, with organic growth of 7.0%, while Consumer Self-Care Americas (CSCA) net sales decreased by 15.7%.
• Reported gross margin was 33.1%, a 190 basis point decline, while adjusted gross margin was 36.5%, a 90 basis point decline, including a 280 basis point negative impact from infant formula.
• Adjusted diluted earnings per share (EPS) was $0.29, a 35.6% decrease compared to $0.45 in the prior year, primarily due to a -$0.30 impact from infant formula.
• The company reaffirmed its fiscal year 2024 outlook, projecting organic net sales growth of 1.0% to 3.0% and adjusted diluted EPS in the range of $2.50 to $2.65.
• Project Energize, a three-year program, is expected to deliver $140 million to $170 million in annualized pre-tax savings by 2026, with $40 million to $60 million reinvested.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant decline in earnings and sales, particularly in the Americas segment and the infant formula business. While there are some positives, such as the international growth and cost-saving initiatives, the overall tone is cautious due to the challenges faced by the company.

Positives

• The Consumer Self-Care International (CSCI) segment showed strong growth with a 4.7% increase in net sales and 7.0% organic growth.
• Perrigo successfully launched Opill, the first over-the-counter birth control pill in the U.S.
• Project Energize is expected to generate significant cost savings and improve long-term business performance.
• The company reaffirmed its full-year outlook for organic net sales growth and adjusted diluted EPS.
• The company returned $38 million to shareholders through dividends during the quarter.

Negatives

• Overall net sales decreased by 8.4% compared to the prior year quarter.
• Organic net sales declined by 7.0%, primarily due to issues in the infant formula business and SKU prioritization.
• The Consumer Self-Care Americas (CSCA) segment experienced a significant 15.7% decrease in net sales.
• Adjusted diluted EPS decreased by 35.6% year-over-year, largely due to the impact of infant formula.
• Reported gross margin declined by 190 basis points, and adjusted gross margin declined by 90 basis points.
• The company experienced a reported operating loss of $(55) million, a decrease of $104 million compared to the prior year period.

Risks

• The infant formula business is experiencing significant challenges, impacting both sales and margins.
• The company is undergoing a restructuring program (Project Energize) which involves significant costs and potential disruptions.
• The company is facing inventory de-stocking at U.S. retail customers, impacting sales in the CSCA segment.
• There are ongoing supply chain issues and cost of goods sold inflation in Europe.
• The company is exposed to fluctuations in currency exchange rates and interest rates.
• The company faces risks related to the consummation and success of the proposed sale of the HRA Rare Diseases portfolio.

Future Outlook

The company reaffirmed its fiscal year 2024 outlook, projecting organic net sales growth of 1.0% to 3.0% and adjusted diluted EPS in the range of $2.50 to $2.65. They also expect operating cash flow conversion of approximately 90% 100%.

Management Comments

• President and CEO, Patrick Lockwood-Taylor, stated that the company continued to progress its blueprint to build One Perrigo by implementing Project Energize.
• Lockwood-Taylor also noted the successful launch of Opill and the strong topline growth in CSCI.
• He mentioned that quality improvement actions in infant formula are progressing well, with manufacturing volumes expected to ramp in the second half of the year.
• Lockwood-Taylor expressed gratitude to Svend Andersen for his contributions and welcomed Roberto Khoury to the leadership team.

Industry Context

Perrigo's results reflect broader trends in the consumer healthcare industry, including challenges in supply chains and the impact of inventory de-stocking at retailers. The company's focus on cost-saving initiatives and new product launches aligns with industry efforts to drive growth and efficiency. The launch of Opill is a significant move in the over-the-counter women's health market.

Comparison to Industry Standards

• Perrigo's performance in the first quarter is mixed when compared to industry peers. Companies like Haleon (HLN) and Kenvue (KVUE) also operate in the consumer health space, but their specific results and challenges may differ.
• Haleon, for example, has focused on its global brands and innovation, while Kenvue, spun off from Johnson & Johnson, is establishing its own operational structure. Perrigo's challenges with infant formula are unique to its business, while other companies may face different supply chain or market-specific issues.
• The 7% organic sales decline is worse than the industry average, but the 7% organic growth in CSCI is a positive sign. The 35.6% decline in adjusted EPS is a significant underperformance compared to industry averages.
• The launch of Opill is a positive development, but its impact on overall results is still to be seen. The success of Project Energize will be crucial for Perrigo to improve its financial performance and compete effectively with industry leaders.

Management Changes

Stakeholder Impact

• Shareholders will be impacted by the decrease in earnings and the mixed financial results.
• Employees may be affected by the restructuring program (Project Energize), which includes a net reduction of approximately 6% of total Perrigo roles.
• Customers may experience changes in product availability due to SKU prioritization and supply chain issues.
• Suppliers may be impacted by changes in the company's supply chain and restructuring efforts.
• Creditors will be monitoring the company's debt levels and financial performance.

Next Steps

• The company will continue to implement Project Energize to drive cost savings and improve operational efficiency.
• Perrigo will focus on ramping up manufacturing volumes in the infant formula business in the second half of the year.
• The company will continue to monitor the impact of inventory de-stocking at U.S. retail customers.
• Perrigo will work to ensure a smooth executive transition in the CSCI business.
• The company will continue to execute its blended-branded business model.

Key Dates

Keywords

Perrigo, Consumer Self-Care, Infant Formula, Project Energize, Opill, Net Sales, EPS, Gross Margin, Restructuring, Organic Growth