Perrigo Company PLC

NYSE:PRGO

Earnings Call Transcript 2023-Q1

[Operator]

Good morning and welcome to the Perrigo First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode.

[Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded.

I would now like to turn the conference over to Brad Joseph, Vice President of Investor Relations and Corporate Communications. Please go ahead.

[Brad Joseph, Vice President, Investor Relations]

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 release we issued this morning. A copy of the earnings release and presentation for today’s discussion are available within the Investors section of 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.

Second, 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.

And 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.

And lastly, I want to share my deep appreciation for Murray during his tenure at Perrigo and a warm felt congratulations on his retirement. Murray, your mentorship and leadership has been invaluable and you have set this company on a path for long-term success. On behalf of shareholders, thank you. Now for the last time, it is my pleasure to turn the call over to Murray.

And with that, I'd like to turn the call over to Murray.

[Murray Kessler, President, Chief Executive Officer]

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 focussed squarely on operational execution and consistent delivery of results. To that end we 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.

And I’m proud to say that Perrigo’s women’s health team is starting it’s presentations at the FDA advisory committee today for a potential first-in-class Rx-to-OTC switch of the Opill oral contraceptive. Underpinnng the progress across our strategic initiatives, our strong financial results and business fundamentals. To echo comments from my general managers that are reportedly 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 and margin expansion driven by both the base business and acquisitions and retained to grow market share as a global consumer demand and fundamentals remain 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 sell the interest rate tax assessment with the IRS. I have now cleared the desk 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 on-going cost savings once complete. As I discussed on previous conference calls, there is 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 CSCI 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 GoodStart brand also are on track. We are progressing on insourcing transition services currently provided by Nestle, and 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 the system on three manufacturing lines across the globe in Q1.

All three achieved increased productivity above our expectations and at a lower-than-expected cost. These are truly exciting results, and 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 the year 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 plus 47% on a constant currency basis.

Success in the quarter was broad-based. While global consumer demand remained solid, European consumption is robust and is at a four-year high, driven in part by a very strong 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 businesses continuing to recover from the logistics and supply chain dynamics experienced last year, and sales and consumption trends are very positive.

Oral care consumption grew a robust 20% in the quarter, and Perrigo recaptured the number two share position in the categories we compete in. And 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, and U.S. OTC gross margin was 30%, up 415 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, so they gravitate toward the U.S. business, but CSCI, 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, from the HRA, Pan-European brands. The CSCI 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 and 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 L01 and other brands from the acquisition of HRA, skin care, which benefited from the addition of the Compeed and Mederma brands, an 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 GoodStart 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 GoodStart Acquisition includes an unfavorable impact of $9 million due to a voluntary recall of certain lots of the Gerber GoodStart 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 and, 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. But 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, and we continue to optimize our operations and accelerate our strategic investments to drive outsized growth over the next three years.

With that, I'll turn the call over to our CFO to discuss financials in more detail, and I'll come back in the end to wrap up before Q&A. Eduardo?

[Eduardo Bezerra]

Thank you, Murray, and 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 billion, 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 that 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 business.

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 DPS 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 logistic 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 FCI gross margin expansion of 470 basis points versus prior year was driven by contributions from the HRA acquisition and strategic pricing 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 transition. Bringing these 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 and promotion investments in our core brands.

Now 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 taken 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 acquisitions 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 adjust the 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 2020.

Totally 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 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 impacting 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 to $0.18 only the time. And 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 are investors in 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 overhang on the company. Nearly $1 billion with only a minor cash impact to the company. This overhang through 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 our 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 5 years.

Now back to you, Murray, for your closing remarks.

[Murray Kessler, President, Chief Executive Officer]

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 5 years ago to lead the transformation of the company from a health care 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 accidently legal overhang to the strategic path put in place to create value for the future.

I am proud of what my team and the Board 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 $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 and 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 produce leverage and the company has a clear strategic path for sustained long-term growth.

Now it's the right time for someone else to take the reins to 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 values -- tremendous value for investors.

Remember, despite strong results, Perrigo continues to trade at almost a 50% discount versus its peer group. And 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 tight to the success of the company.

I've set the 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 and 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.

And with that, operator, we'll now take questions.

[Operator]

[Operator Instructions] Our first question will come from Susan Anderson with Canaccord Genuity. You may now go ahead.

[Susan Anderson, Canaccord Genuity]

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

[Murray Kessler, President, Chief Executive Officer]

Thank you Susan and good morning.

[Susan Anderson, Canaccord Genuity]

Yes. So 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? And then also, if you could maybe just give a little bit more color on the rest of the drivers there between pricing, mix, maybe currency, etcetera.

[Murray Kessler, President, Chief Executive Officer]

Okay. why don't I take Eduardo the first part. Yes, which I just want to sort of talk relative to the gross margin and the [indiscernible] across the businesses and then you can break up the individual drivers. So yes, the gross margin from last year to this year was on CSCA, 310 gross margin points. So I think if you look at it, the important parts are -- excuse me, it was up more than I had 310. OTC was up 450, so it went from 25% last year to a 30% gross margin.

Oral Care went from 25.3% to 28.9%, up 360, but Nutrition had a significant decline and it has 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. So every part of our business expanded significantly from a growth margin standpoint, and it's progressing just as we expected, but you had hits and Eduardo can quantify these on purposefully with the HRA not recall of moving from distributor to our own sales force and then you had 2 recalls that hit $17 million or roughly $0.10 of the business was so strong. It covered it.

But I want to be very clear our margin programs are working beautifully. They're not pricing driven or some in recovery, but they are all the kind of things that you want that will continue to expand and grow over time, especially as we have our highest margin businesses are growing the fastest in the company. Now Eduardo will get to your specifics on the drivers. Go ahead.

[Eduardo Bezerra]

Yes. So talking specifically there, Susan. So between the GoodStart impact as compared to last year, we had about 50 basis points there. And also on the inventory transition on HRA about 40 basis points. And we also had around 40 basis points related to the OTC recall that we announced there.

And so on the flip side, pricing had a positive impact of about 300 basis points and volume and mix about 160 basis points positively. And those combined more than offset the impact we had on inflation and input cost that was about 230 basis points.

[Susan Anderson, Canaccord Genuity]

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

[Murray Kessler, President, Chief Executive Officer]

Yes. Those were a lot of questions. So let me turn over if I don't get to every piece of it, just ask it again. But 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 and fully understands the impact of manufacturing and output for the industry especially during a period of time when there are shortages.

But I want to be very clear that the Perrigo quality control system did not break down during the first quarter. If it had been 3 weeks earlier, prior to this letter coming out, there would have been no recall. So the quality control measures that were in place of how much product to throw away, etcetera, if you get 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 input, and that's what you're talking about now. So we -- full plant sanitizations and shutdowns, there'll be more of them, it will have a negative input on product, but all of that including the sales will be offset by the pricing, okay?

So what you lose in a little bit of volume, you're going to gain an additional pricing in cost, and then we still see it as making our original plan on the infant formula business, it will just be a little bit more back loaded.

Pricing here, we don't -- we're not pricing relative to the competition. We're pricing to offset this higher cost and lower productivity. And -- but 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. So on a cost per ounce basis, we'll actually be at a 40% discount after the pricing.

Customers hate price increases. I just spent 5 days of NACDS, our biggest conference. They all understood this. That -- they understood that there was a change that we have to be able to produce and make a margin, and they understood that we weren't expanding margins on this. We were just literally addressing this regulatory change. So I think it will be very well supported. Nobody likes pricing when you're a value competitor. But in this case, it's absolutely necessary and we'll sell that through. I'm not worried about that. So yes, I think I've answered all your questions.

[Susan Anderson, Canaccord Genuity]

Yes. That's great. Thanks. And then just really quick on your inventory levels and then also at retail. I guess are there certain categories you had more of? And how has your ability then to get back in stock quickly?

[Murray Kessler, President, Chief Executive Officer]

Depends on the category. We're making progress, but I've heard of -- and I heard at NACDS, 2 I 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're -- we shipped a little bit more than we that was consumed during the first quarter, but we're still a week -- 1.5 weeks on average of low in inventories out at the retail level. And that's before we begin to build our own safety stock.

So 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 gold. And that's because, again, last year, we had an elevated cost call 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 4 or 5 months. Based on the way the illness trackers are going and trending we should be back in business with safety stock for the full cough and cold season next year.

The other business, as I said, is nutrition and a nutrition basis, there's going to be some working through this new regulatory guidance. It is with additional full plant sanitization and longer quality holds in order to comply. It will take some time before we can get inventories back.

So that's been a challenge for the last 18 months it's probably been now extended. I can't put a time on it, but I don't see an end in sight yet. So when we are fully back in a safety stock position on Nutrition. But the good news is we did buy the other facilities. So we have a lot more product to work with. And we are making those investments. We're not backing off those investments. And within another year, we should have an additional 7 million pounds of capacity.

So -- and 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 in cough/cold, I think we're back in the most recent weeks back into the '90s again. too. So everything is going in the right direction.

[Susan Anderson, Canaccord Genuity]

Okay. Great. And if I could just ask 1 more on the week's AdCom on Opill. Curious, just any thoughts you could give around that on how they're going to think about this? And then also, if it is approved, your thoughts around just the market opportunity in the U.S., is this going to basically add to the market? Or will it take some of that share? And then any color you could give on the time line to launch and impact to the P&L? Thanks.

[Murray Kessler, President, Chief Executive Officer]

Well, I think I read it 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 our -- any of the guidance we've given over the next few years because it's you're talking birth control, and this is a big change having -- so it's only upside, and I think we've been giving a year one estimate of roughly $100 million in revenues.

And by the time the FDA got into a position, I think that next 2 or 3 months or for them to make a decision once they review the data and what the advisory panel has to say about it. You're talking in the very end of the year, beginning of next year. I don't think we have a set date yet. It depends how the FDA when they come to their decisions and any implications of those.

But like philosophically, though, this is a product that has been on the market since the 1960s. There is [indiscernible] of safety data on this. And when taken in a whole, we believe the FDA should approve this application period. There's a lot of pushback in there, which is their job and that's what they're supposed to do. And we have many -- 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. But again, it's not in our numbers this year, next year. It's all upside. But this is a big idea for the company, and we're really excited about women's health.

[Susan Anderson, Canaccord Genuity]

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

[Operator]

Our next question will come from Chris Schott with JPMorgan. You may now go ahead.

[Ethan Brown, JPMorgan]

This is Ethan Brown on for Chris Schott. Thanks for taking my question. 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 infant formula shortages, the disruption this quarter and then with the FDA update as well?

[Murray Kessler, President, Chief Executive Officer]

Okay. Well, let's start with -- remember, last year, the way our business flow, we were stripped our safety stock last March and April. A little bit of February, but March and April were huge spikes. And then after that, once we had no safety sauce, and we actually had challenges as the year progressed, on our base business, keeping up and running what was -- we have on our Vermont facility, older equipment, it really pushed that, and we struggled in the back half of the year.

So I think it just is going to be a bit lumpy, but I think this will be a growth year. And it's not like we're going to be giving back a ton when we went into buying Nestle, we had estimates of tens of millions of pounds of unmet demand, even with the Nestle 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. So I don't have the forecast in front of me right now, Brad, can give you those numbers later.

But we are not backing off plan. But from a flow standpoint, the pricing a little bit 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 there are not some big growth rates from, we'll call it, May, June, July onward until the end of the year in infant formula, which is driving our nutrition numbers.

[Ethan Brown, JPMorgan]

Thank you. That's great. And 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, Chief Executive Officer]

Well, it's a 2-part answer, right? It is -- the second is, first is that it took us almost to midyear. We were a touch -- when you look at 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. But 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 midyear.

So you're going to 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, to price for cost, we can get that done. So I'm not going to answer your question right now. You pay me as CEO to -- 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, but we'll continue to look at which opportunities make the most sense to deliver on the guidance. I truly believe that Perrigo sitting at 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.

So we'll use any lever we have to, to try to consistently perform and deliver the promises we made for the year. And then I think everybody is going to benefit from that, including me and my lovely retirement.

[Ethan Brown, JPMorgan]

And then maybe 1 last 1 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, Chief Executive Officer]

Yes. Eduardo perhaps 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 want to price if I don't have to. That's our competitive advantage. We want to have 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.

So you see clearly, most national brands, etcetera, have priced more aggressively than us. But on the other hand, we used to be in a situation where we were having making price concessions.

Now 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. Meaning consumers are down traded.

[Operator]

[Operator Instructions] Our next question will come from Daniel Biolsi with Hedgeye. You may now go ahead.

[Daniel Biolsi, Hedgeye]

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

[Murray Kessler, President, Chief Executive Officer]

Correct. That automatically happens, yes.

[Daniel Biolsi, Hedgeye]

Okay. And then 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, Chief Executive Officer]

No, they're lost sales. Right now, we were at trying to Brad, do you have a number list. I just saw this. We had 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. So I don't want to be too specific, but it could have been $25 million or $30 million additional in and on 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. Now people buy it for the cough/cold season. So they had to buy something.

So 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. And 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 the 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 because what that does in combination with Redzone is it increases capacity because it wasn't -- we can continue to grow and build market share, but we're mindful of our return on invested capital. And we don't want to be just adding equipment and lowering prices than getting no return for that.

So this is sort of an elegant solution to be able to where we see a path to 25% to 50% more capacity in our cough/cold business through this supply chain reinventing and standardization and simplification of less line changeovers and better operational effective in the welder throw away and all those good things that are part of this program. And -- and I'm excited to say in those 3 test lines we did in the first quarter, we got that increase in operational effect on this.

So that's what we're pushing for. So -- do we get it back? We can get it back next cough/cold season when we play it out. It shows the potential is there, but it's not like it got pushed forward.

[Daniel Biolsi, Hedgeye]

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

[Murray Kessler, President, Chief Executive Officer]

No, no, it's better than expected. But we're going for the low-hanging fruit first. And if you've listened to Eduardo speak on this, the low-hanging fruit is the part that is not consumer-facing. So 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 , etcetera. But 80% of the complexity we have now, believe it or not, is not consumer-facing.

So it is one customer whose label is an eighth of an inch figure than another 1 but you have to -- and 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 a slightly different bottle size, where it really matters as corrugated. You've got the outer corrugated, the thickness of it, the dimensions of it might be a quarter inch and 8 inch, 0.5 inch inside. It could be packed shrink wrap together, 6 wrap together, 9 shrink wrap together, 12 shrink wrap together, where the national brands only get 2 variations.

And over time, Perrigo being a specialist, a complexity and customization built all this complexity into its system working with customers, but sort of no one realized how much complexity it added.

So again, I gave this example at Investor Day, but because of that complexity, we can't use automatic case factors. And it's the year 2023, that's not -- and everybody agrees they can get to like a standardized outer carton and at least that I've been in front of us and same thing with label size is and all of that, and they're like wow, we didn't even know we were different on those kinds of things.

So that first 1,000 SKUs is easier. It will be years -- we'll be doing this for the next 2 or 3 years, where then we go back and say, Listen, everybody ought to be in 225 count set of [indiscernible], not some of you 200, some of you 250, we can still shrink that together and do bigger sizes, but we need to standardize as much as possible. And 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 of calculator and do math. They want to look at and see the products know it's comparable to the national brand that it will work as well, be just to say and cost less.

[Daniel Biolsi, Hedgeye]

Thank you.

[Operator]

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 Kuster, President and CEO, for any closing remarks.

[Murray Kessler, President, Chief Executive Officer]

Yes. 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 good buys, but I've worked hard for you, and I can tell you that everybody at Perrigo will continue to work hard for you and make your trust in us pay off then over the medium, short, long term, all of it. So thank you again for your interest in Perrigo.

[Operator]

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