Categories Earnings Call Transcripts, Health Care

Perrigo Company PLC (PRGO) Q1 2022 Earnings Call Transcript

PRGO Earnings Call - Final Transcript

Perrigo Coompany PLC  (NYSE: PRGO) Q1 2022 earnings call dated May. 11, 2022

Corporate Participants:

Bradley Joseph — Vice President, Global Investor Relations & Corporate Communications

Murray S. Kessler — President & Chief Executive Officer

Raymond Silcock — Executive Vice President and Chief Financial Officer


Chris Schott — J.P. Morgan. — Analyst

Elliot Wilbur — Raymond James — Analyst



Good day, and welcome to the Perrigo First Quarter 2022 Financial Results Conference Call. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Bradley Joseph, VP of Investor Relations. Please go ahead.

Bradley Joseph — Vice President, Global Investor Relations & Corporate Communications

Thank you. Good morning, and welcome to Perrigo’s first quarter 2022 earnings conference call.

I hope you all had a chance to review the earnings press release we issued this morning. A copy of the earnings release and presentation for today’s discussion are available within the Investors section of the website.

Joining today’s call are President and CEO, Murray Kessler, and CFO, Ray Silcock.

I would 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 otherwise 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. In addition to other non-GAAP adjustments, as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from the prior year period, certain costs incurred to support the operations of the Rx business, which were reported in continuing operations. See the appendix for additional details and reconciliations of all non-GAAP financial measures presented.

Second, organic growth excludes acquisitions, divestitures and currency in both comparable periods.

And third, Murray’s discussion will focus solely on non-GAAP results.

And with that, I’m pleased to turn the call over to Murray.

Murray S. Kessler — President & Chief Executive Officer

Thank you, Brad, and good morning, everyone. With our three-year transformation to a consumer self-care company now complete, Perrigo is moving into a new phase, which we are calling optimizing and accelerating.

The Perrigo team is hyper-focused on optimizing and accelerating our self-care platform through: One, supply chain reinvention to improve efficiency, productivity and customer service; two, successful integration of our scale HRA Pharma acquisition; and three, gross margin recovery via pricing and portfolio consolidation.

I will also note that this will be accomplished as we also continually strengthen our organization and culture and contribute to the world we live in by making our products and facilities more sustainable. With that in mind, I’d like to share a few words on the organizational announcement we issued this morning.

First, I’d like to thank Todd Kingma, our General Counsel for the last 19 years, who just announced his retirement, and Ray Silcock, who I’ve worked with on and off for the last 30 years and who previously announced his retirement, for their incredible contributions to the Company and our self-care transformation. While they will be missed, I’m very excited to share who will be filling their roles. First, Kyle Hanson has been hired from Wolverine Worldwide and will serve as our EVP, General Counsel and Corporate Secretary. And second, Eduardo Bezerra, most recently from Fresh Del Monte Produce, has been hired as EVP and Chief Financial Officer. They represent the next generation of Perrigo leaders who will help drive the newly transformed Perrigo organization. They both have the passion and seasoned relevant experience that embodies the Perrigo Advantage. And I’m confident that their diverse perspectives and deep experience will make valuable and immediate contribution to Perrigo’s success.

Turning to HRA. I’m also pleased to say that we closed the HRA acquisition nearly two months ahead of schedule and are extremely excited to welcome their team into the Perrigo family. The final purchase price was approximately $1.9 billion, nearly $200 million lower than originally anticipated, tracing to the recent strength of the U.S. dollar, a good outcome for shareholders. More importantly, the Company we bought is performing beautifully.

HRA results for 2021 were stellar. This is a business that is growing rapidly, finishing up 26% in 2021 versus a year ago and achieved a robust gross margin north of 70%. HRA’s strong growth continued in the first quarter of 2022, with net sales up versus a year ago, on top of double-digit growth versus the prior year. EBITDA was up an impressive 77% versus a year ago in the first quarter.

Strong top line growth, strong margins and a number of budgeted expense decreases, including onetime investments included in 2021 operating income that are not expected to repeat in 2022, supports our estimates of HRA achieving approximately EUR90 million in operating profit in 2022. Since we closed the acquisition early and HRA earnings are historically much stronger in the second half due mainly to the seasonality of Compeed, Perrigo is expecting operating income accretion of around EUR55 million to EUR65 million in 2022.

Beyond 2022, HRA business growth is expected to continue through geographic expansion and new product adjacencies that along with cost synergies from the deal that are now estimated at EUR40 million versus our original EUR30 million estimate leads us to reiterate our expectations for HRA to add about EUR150 million in operating income in 2023, and that excludes any potential short-term impacts associated with capturing the synergies.

Turning to Slide 11. First quarter results for Perrigo were generally in line with our expectations, despite another wave of cost headwinds resulting from the war in Ukraine. Net sales increased 6% versus a year ago, with organic net sales up a very strong 10%. We attribute this strength to a global rebound in cough/cold and U.S. nutrition infant formula sales. Price also had a positive impact.

Gross profit margin was down 140 basis points sequentially versus Q4 due to onetime items we don’t expect to repeat. Note additional cost pressure was offset by price increases and higher volume in the quarter resulting in our EPS finishing at $0.33 per diluted share in line with our expectations. Currency neutral EPS for the quarter was $0.37 including a $0.02 per share negative impact from the war in Ukraine. While Perrigo’s top line continued to accelerate sequentially, what is more important is that our net sales in Q1 ’22 are substantially higher than they were back in 2019 before the ups and downs of COVID. On a three-year basis, our first quarter net sales compound annual growth rate is plus 5.6%, and our organic growth rate on a compounded basis is 2.9%. There can be no doubt that the transformation has returned Perrigo to revenue growth.

Looking at our categories in more detail. Strong total net sales growth was driven by strong performance across both CSCA and CSCI, with cough/cold and contract pack sales leading the way. Infant formula was also a big driver in the U.S.A. Strong shipments are aligned with robust global consumer demand for self-care products. After two years of disconnects between shipments and consumption, the system appears to be back in balance.

I think it’s worth spending a minute on infant formula. This business has turned around nicely. Top line growth in our nutrition business was up 38% in the quarter, driven by infant formula. Importantly, Perrigo gained more than 5 share points compared to a year ago. These gains came from the launch of new hypoallergenic formula offerings, continued growth in our organic products and the roll-off of COVID-enhanced benefit programs for formula.

Our business also benefited slightly at quarter end from the recall of a competitor’s infant formula. While this didn’t benefit us in the quarter much, we are now seeing higher demand. And Perrigo is doing everything it can to run as much infant formula as possible to help build the shortages created by the recall.

Also during the quarter, I’m proud to say the Perrigo team received U.S. Food and Drug Administration approval for over-the-counter Nasonex, the Company’s first-ever branded Rx-to-OTC switch. The NDA was a first-cycle approval, and we expect the brand to be on shelves at leading retailers in the U.S. this fall, a big win for the Perrigo regulatory team.

Turning back to gross margin for the quarter. We are laser-focused on recapturing the margin loss due to supply chain disruptions and cost and freight inflation, and we still see a clear path to gross margin expansion in the second half of the year, consistent with the phasing discussed on our last earnings call. Manufacturing productivity, elimination of onetime costs, price increases and 90% of expected benefits from price this year are still to come. The sale of the Latin American businesses and now the addition of 70% gross margin HRA products should allow us to recover 400 to 500 basis points of gross margin by year-end.

Now on to guidance. We are increasing our organic net sales growth guidance to 8% to 9% compared to prior year, up from 7% to 8%, driven by expected strong performance for the rest of the year, partially offset by a 0.5 percentage point from expected loss business in Ukraine and Russia. We are also increasing our all-in net sales guidance to growth of 8.5% to 9.5%, up from 3.5% to 4.5% versus the prior year. The primary driver is the addition of HRA, which is expected to contribute approximately 5.5 percentage points of growth for this year. This will be partially offset by the impact of unfavorable foreign exchange.

We are also increasing our full year adjusted diluted EPS guidance to $2.30 to $2.40 per share. This range includes approximately $0.35 accretion from HRA and a $0.20 headwind stemming from Russia/Ukraine-related macro volatility, which led to unfavorable foreign exchange and higher-than-anticipated refinancing costs.

Putting the year together, we are now expecting outsized growth on both the top and bottom line with near double-digit top line growth and approximately 14% diluted EPS growth.

In closing, our focus going forward is to optimize and accelerate the business through supply chain reinvention, through successful integration of HRA and through gross margin enhancement and by continually improving our organization and culture. We are focused on controlling what we can and what remains a very dynamic environment. We have inflation-related pricing actions in place to cover rising costs and expect them to fully take hold in the second half of this year. We are also uniquely positioned in the U.S. consumer self-care market to benefit from an inflationary cycle as evidenced by store brand share gains during the last recession.

And with that, I will turn the call over to Ray one last time to discuss the financials in more detail. Ray?

Raymond Silcock — Executive Vice President and Chief Financial Officer

Thank you, Murray. Good morning, everyone. And yes, this is my last Perrigo earnings call, as I’m going to be retiring from the Company. It has been a privilege to work with the talented Perrigo team over the past three-plus years, and I’m excited about the path ahead for the Company.

Currently, I’m working diligently to ensure a timely and smooth transition to Eduardo who, with his deep experience, will be a great new CFO for Perrigo.

Now, let’s review our first quarter financials. On a consolidated basis, the Company reported a GAAP loss from continuing operations of $1 million for the first quarter of 2022, a loss of $0.01 per diluted share. On an adjusted basis, consolidated net income from continuing operations was $45 million and adjusted diluted EPS from continuing operations was $0.33 per share versus $0.50 per share in Q1 last year. The decline in adjusted EPS as compared to prior year was primarily due to onetime headwinds in CSCA. These included higher customer service claims related to unfulfilled customer orders and lower profitability on contract-manufactured product for the now divested Rx business. We also have had higher planned advertising and promotion expenses in CSCI in support of our strong top line growth there. And as Murray noted, the inflation impacts in cost of goods sold and transportation costs were offset by increased sales volumes and higher prices.

Also unfavorable foreign currency movements hurt adjusted EPS by $0.04, and we experienced an additional $0.02 EPS impact, half from lost business in Ukraine and Russia and half from product donations we made in Ukraine, in line with Perrigo’s corporate charitable philosophy.

Moving on to non-GAAP adjustments. In the first quarter, pretax non-GAAP adjustments totaled $71 million. Major components included amortization of $49 million, HRA acquisition and integration fees of $11.4 million, plus $3.5 million from HRA purchase price hedge costs and impairment charges, writing off a $5 million fixed asset. Full details of these and other adjustments can be found in the non-GAAP reconciliation table attached to this morning’s press release.

The non-GAAP tax adjustments are primarily due to a $13.6 million tax expense related to a pretax non-GAAP adjustment and the removal of the following reported items: One, a $17.2 million tax benefit on dispositions of entities, offset by two, $6 million tax expense with nonrecurring legal entity restructuring. These led to an adjusted effective tax rate for the quarter of 22.5%, slightly up from the first quarter 2021 adjusted effective tax rate of 22.2%.

From this point forward in this presentation, all dollar numbers, basis points and margin percentages will be on an adjusted continuing operations basis, unless stated otherwise.

Since Murray already covered net sales for the quarter, let’s move on to gross profit. Consolidated gross profit in Q1 was 8.3% lower than prior year, primarily due to the onetime headwinds I just mentioned, including unfavorable foreign currency movements.

Gross margin declined 540 basis points versus the prior year, due primarily to these onetime headwinds, which account for nearly half of the decline, unfavorable product mix from higher proportion of sales coming from store brand compared to branded and the timing of pricing actions relative to inflation as well as unfavorable foreign currency.

Consolidated operating income for the quarter was $87 million, $32 million below Q1 last year, primarily from unfavorable gross profit flow-through, but also from higher distribution costs and increased advertising and promotional expense, which helped us deliver our strong top line growth.

Turning now to the first quarter segment results. Let’s start with Consumer Self-Care Americas. CSCA gross profit in the quarter was $178 million, $24 million below last year. Higher sales volumes and positive pricing in the quarter were more than offset by inflation in cost of goods sold and transportation. In addition, in Q1, other cost headwinds, including lower profitability of contract sales to the now divested Rx business, customer service claims and some other headwinds had a total adverse impact of approximately $24 million. In combination, these factors led to a year-over-year gross margin decline of 640 basis points in Q1.

Operating income for Q1 was $87 million to $23 million down from Q1 last year, primarily unfavorable gross profit flow-through and increased distribution expenses, partially offset by lower R&D and admin costs. These factors led to a 500 basis point year-over-year decline in adjusted operating margin.

Moving on to Consumer Self-Care International. CSCI gross profit was $182 million, down $9 million or 4.8% from the same quarter last year, largely due to unfavorable currency movements. Gross margin for the quarter decreased 180 basis points, primarily the impact of product mix as we had higher growth in both store brand and contract-manufactured products as compared to our higher margin branded offerings. In addition, we felt the adverse effect of having carried in high-cost inventory made in Q4 last year, but expensed in Q1.

Adjusted operating income of $53 million was $7 million below same quarter prior year, including a $7 million adverse currency effect. Excluding currency, gross profit was 4.3% higher than in the same period last year, driven by higher sales volume in the quarter, which came about despite the loss of business as a result of the Russian war in Ukraine. At the operating income line, favorable gross profit flow-through, excluding currency, was offset by higher advertising and promotion spend in support of CSCI’s strong top line growth. These factors led to a 130 basis point year-over-year decline in adjusted operating margin, excluding currency effects.

Moving on now to the balance sheet. Cash on the balance sheet amounted to $2 billion at the end of the first quarter, up from $1.9 billion as at year-end 2021. After the quarter ended, we closed on a $2.6 billion refinancing comprising a $1.6 billion term loan and an undrawn $1 billion revolver. The term loan was used to refinance an existing term loan maturing in August as well as to refinance two 2023 bonds and to provide approximately $500 million in incremental borrowings over and above what was already available on our balance sheet to fund the $1.9 billion acquisition of HRA, together with cash on hand. Operating cash flow for the quarter was $79 million, a strong 176% cash conversion on adjusted net income. As Murray discussed, we continue to operate in a dynamic environment, but remain poised for outsized growth given the contributions from the HRA acquisition and continued strong demand for our consumer products, which is reflected in our updated EPS guidance at $2.30 to $2.40 a share.

Operator, can you open the line for questions, please?

Questions and Answers:


[Operator Instructions]. The first question today comes from Chris Schott with J.P. Morgan. Please go ahead.

Chris Schott — J.P. Morgan. — Analyst

Hi, guys.

Murray S. Kessler — President & Chief Executive Officer

Good morning, Chris.

Chris Schott — J.P. Morgan. — Analyst

Good morning. Just a couple of ones for me here. I guess, first on the gross margin front and there’s maybe a couple of different pieces to this. I know you touched on this in the remarks, but I’m still just trying to get my hands around the step-down in CSCA gross margins. When I look at kind of second half ’21 to 1Q ’22, I think they came down about 250 basis points sequentially. And can you just provide a little bit more color of, I guess, how much of this was onetime? What were the onetimers exactly? And then, I guess, how much of this is just like kind of stickier supply chain inflation type stuff that you’re going to have to work through as the year goes along?

Murray S. Kessler — President & Chief Executive Officer

It’s 100% one-timers.

Chris Schott — J.P. Morgan. — Analyst


Murray S. Kessler — President & Chief Executive Officer

And we got hit with about $4 million of one-timers. Part of it is cleanup. There was a number of things. One, in the system as cough/cold business came roaring back, we had a bunch of customer claims, which we’re working through and reversing right now. So, it may not only be one time, we may actually recover a fair amount of it, but there was about $7 million of claims that are automatically kicked out when you — when we agree on — to fill a certain level of orders, and we don’t take deductions. And there are boundaries that guided, but it automatically happens in their computer systems and ours, and we have to manually go back and challenge those, which we’re doing. So, we went from — I’m going to give you just an example. If the forecast was for 100 — I mean it’s obviously different than that for cough/cold, all of a sudden, about the first week of January, it shot up to 10 times that. We were able to fill 2 or 3 times that, but not the remaining 7 times. And there was then automatically kicked into the system, these claims. And it was, like I said, it was worth about $7 million. That number will come down millions, if not, completely go away versus the past. So, that’s one piece of it. Another piece of it, unfortunately, as a part of one-timers, even though we were short of cough/cold inventory this year from a year or almost two years ago, inventory that you made for the ’21 season back in 2020, right, for the inventories for that, and with no cough/cold season, we had a little bit of clean off of write-offs that needed to take place for that. We — when Ukraine/Russia came along, we made a number of product donations and charitable donations that were one-offs that we believed was the right thing to do. Those are just — and there was — I think Ray can help me, but I believe it was a $5 million or $6 million royalty rate catch-up on one of our suppliers that the accrual is just needed to be adjusted. None of that [Speech Overlap] that’s a couple of hundred points. Basically, I am telling you that the gross margin on CSCA, absent those one-timers, was exactly what it was in the fourth quarter, and I’m actually feeling very optimistic about gross margin this year to our plans. I know you guys had us in at a higher level, but we actually hit our plan despite a couple of hundred gross margin points of one-timers. If we hit our internal — despite currency working against us, despite a new wave of cost increases that we offset with pricing and most of our remedial actions, like 90% of them, are still to come, like pricing and things like that, which we can talk about.

Chris Schott — J.P. Morgan. — Analyst

So it sounds like based on that answer, I know that you laid out the second half margins for us, a nice step-up. Just when I think about just sequentially for 2Q, should we be thinking about kind of 2Q, let’s just stick on the Americas business and pre HRA, kind of more in line with what we were seeing for the second-half of ’21 or is this kind of like 25.5 — 25 level wherever we are currently, kind of like a good proxy for 2Q? I just want to make sure I’m kind of getting the — this is such a focus on that number, just the gating as we go through the next few quarters?

Murray S. Kessler — President & Chief Executive Officer

Yeah. I mean, HRA is going to factor in. But, go back — what was the period you were trying? Are you — sequentially, it’s going to increase.

Chris Schott — J.P. Morgan. — Analyst

That’s what I’m trying to get my hands on. Yeah. So, I look at basically, I think we were like 27.5%, second half of ’21. Is that like a reasonable level to think about like 2Q before HRA?

Murray S. Kessler — President & Chief Executive Officer

I think it will be around — Well, you’re talking — I’m looking at consolidated. Just give me a second to get there [Speech Overlap] from the CSCA. Yeah. I think I’m sort of thinking about it the right way. I mean, if you’re doing it pretty — yeah, well, actually, I’ve got to go — give me one more second. Yeah, I think that’s right.

Chris Schott — J.P. Morgan. — Analyst

Okay. Perfect.

Murray S. Kessler — President & Chief Executive Officer

[Speech Overlap] Corporation. I’m kind of sticking my neck out here, but I think we’re going to recover almost all of the gross margin loss this year. I’m looking at 400 to 500 gross margin points of recovery by the fourth quarter.

Chris Schott — J.P. Morgan. — Analyst

Okay. Perfect. The other topic I just wanted to talk a little bit about HRA, it looks like you had a pretty — a very strong 1Q. And I know I think you were planning on talking a bit more about this later this year about the HRA growth targets. But, if I just go back to, I guess, the 2021 results and kind of bridging out to where you’re thinking about for ’23, I think it assumes something like a mid-20s percent annual growth rate. Can you just, again, just remind us of the growth drivers that are enabling that type of step-up in HRA growth for the next few years? That’s — I know it’s a question that came out quite a bit post the proxy, and we just love just a bit of a reminder of just kind of how we think about the drivers of HRA these next kind of two years or so?

Murray S. Kessler — President & Chief Executive Officer

Yeah. I’m at a funny location giving this earnings call to you, Chris. I’m actually in Europe. I’d be going back and forth. I’m at HRA integration meetings. I was at HRA headquarters two days ago, going through each general manager that leads all the hubs around the world actually, Europe export, U.S., where there is an incredible high level of confidence and them saying, this is the best start that the Company has ever had, that the people are traveling again, etc. So, the first thing you have this year is the numbers that we published out in the 8-K, those were COVID numbers. Compeed is — was hurt dramatically by COVID, like our cough/cold business. No one was out traveling, hiking, needing plasters, I mean, they were not wearing high heels going to work. Those are all the drivers. So, you have this ramp-up besides the normal growth of them, adding countries, converting on ellaOne. They are continuing to switch different countries around the world from Rx to OTC. In future years, you have the entire line. They have their Hana line, which is the everyday pill. That is a birth control pill. That is if you’ve been reading the articles around the controversy of Roe v. Wade, there’s also been articles in politico about one of the best positioned companies being HRA, who has a solution with an everyday over-the-counter pill that we hope to have in by 2023 will be a growth driver and applications are going into additional countries around the world for that. They are broadening the usage of the brand. We’ve already extended — tremendously successful from just — from wounds and heals to adding right now fever blisters, and there is just a whole wave of ways to build that brand to build out the product portfolio. Expanding into the United States is a big priority and driver of growth. I mean, I was just blown away by both the confidence in that team, the capability, the sophistication of the marketing, and their — they strongly believe in those numbers. What’s that all add up to? I think you’re talking about on about double-digit top line growth continuing without any revenue synergies, and you’re talking about going to $150 million in operating income next year or 2023, — excuse me. So, Brad talked to you about operating income. I’ve gone back and forth even in the deal model, we were talking EBITDA, and the European version of EBITDA, but we’re converting it back into our operating income numbers. So, I mean, right now, it feels like the sky is the limit. And again, we raised the synergy number from EUR30 million to EUR40 million. So, this is going to come — this will be the best acquisition I’ve ever done in my career.

Chris Schott — J.P. Morgan. — Analyst

Excellent. Appreciate the color. I’ll jump back in queue. Thanks.


The next question comes from Elliot Wilbur with Raymond James. Please go ahead.

Elliot Wilbur — Raymond James — Analyst

Thanks, good morning. Just maybe — hey, Murray, how are you?

Murray S. Kessler — President & Chief Executive Officer


Elliot Wilbur — Raymond James — Analyst

Thanks. Just maybe a high-level question on macro trends in the U.S. store brand market seeing relatively strong growth metrics, but wondering what you may be seeing in terms of potential consumer trade down in the quarter over the last year? Just how things have trended from a market share perspective in the categories, in which you compete in? And then, more specifically on the Nutrition business, strong performance in the quarter. Obviously, a lot of factors behind that, but just wondering if we could sort of maybe tease out the incremental lift from some of the organic initiatives that you talked about over the past couple of quarters versus the benefit from overall supply issues resulting from some developments at one of your competitors?

Murray S. Kessler — President & Chief Executive Officer

Yeah. Well, let me do the second one first because that’s really finished. And it — it only — the recall only happened in like last week of March. So it had a — we had a bigger week that one week, whether that was a few million dollars or so — it wasn’t massive. It is big in the second quarter, though. It just is. We are — I could run double what we have. We are running flat out as much as we can. Will that be sticky? We hope parts of it are sticky, given the test. But the — and we don’t know how long that situation is going to be in place. It could be a while. It could be a long while. And we’re looking at ways to potentially increase capacity at the request of the FDA. We’re doing whatever we can. I will tell you part of it that will be sticky is in the face of the cost increases and shortages, our customers were more than understanding that we needed to adjust the price of this product. No price gouging or any of that, but it had been hard to do in the past few years, and we were able to do that. So, that’s a positive. So, yeah, I mean, first quarter, barely anything. Second quarter, it will be meaningful.

Turning to the first question, we haven’t really seen much trade down. It continue — I believe that it’s going to be — and I listed it on one of the slides, there’s an upside for Perrigo. But, the national brands have spent a lot of money in AMP [Phonetic] to restart their businesses, to restart their advertising. They clearly had some new products out there ready to go, and they’ve grown, frankly, a little bit faster than the store brands in the — exiting the year and the first quarter. The good news is we dug in pretty hard to that and had our partner from a data source and information resources do all the panel data and switching, and none of it came from store brand. It was just increases in consumption among their existing consumer bases. But, not a big trade down. So, the big numbers that you’ve seen in consumption for us has all been just category growth and all boats rising, not a lot of switching. I will tell you they’re taking more pricing than we are. We work hard as we can with our partners to — they were — they’ve been beautiful. They understand what the situation is now. We have — boy, I think we had $125 million of pricing in our consolidated P&L for this year. And for us, that’s a lot. And by the way, I think about 10% or a little more than 10% of that was in the first quarter. So, there’s well over $100 million still to come on agreed upon price increases. But, that’s still only about 3% — 2% to 3%. I think it was 2% in the first quarter, where if you’re looking at other consumer benchmark companies, the big guys, they were talking about volume up 10%, 11%, 5% from pricing, 5% from volume, we were up 8% from volume and 2% from pricing. And I think that sets us up for even more future growth as the price gaps widen a little bit. So, we’re working hard, but I think we’ve got all of the inflation, including a second wave because of the war implications on energy prices, other commodities, and all of that is triggering a rise for us of another $45 million of input costs. The input costs we carried in, plus that $45 million of all being covered by about $125 million of pricing, so — and some good strong volumes. But, I think we finished this year double digit certainly on a constant currency basis, top line near 20% on a constant currency neutral basis for the bottom line, margins growing, again, beautiful brands coming in with HRA. I think it’s going to feel a whole lot different in the back half of the year, but I do think this was our low this quarter.

Elliot Wilbur — Raymond James — Analyst

Okay. Just following up on that. I think in the text, with respect to CSCA, it’s mentioned that roughly $34 million of cost headwinds hit the operating profit line absorption issues and freight costs, and the like, which all seem to be more transitory. Just wanted to confirm, in fact, if you believe that pricing actions and procurement actions themselves would be sufficient to offset that drag in the second half of the year?

Murray S. Kessler — President & Chief Executive Officer

Yeah. I think it will be enough to offset the drag for the total year, but there was a lag. We’re not like a national brand where I can go in, take a price increase on Friday and it’s up on Monday. We have to negotiate those when the stores are being reset. Many of those price increases are just going into effect now. Many of them went into effect late in the quarter or in the beginning of the second quarter. But some were in place. But call it, if we had roughly $0.15 of material and freight inflation in the first quarter, we probably offset 80% of that, something like that — in with pricing alone, and then the rest got offset by volume. As we go forward, you’re going to offset all of it or even possibly a touch more. And listen, the big unknown for us, no one said it, but we had a big currency impact on the business.

Elliot Wilbur — Raymond James — Analyst

Okay. And then I wanted to circle back to the gross margin issue, and we’ve obviously touched on this many times over the past 12 to 18 months. But within your prepared comments, this morning, you talked about optimize and accelerate and refer to supply chain reinvention. I mean, that sounds more like a facelift than a BOTOX injection. So, I’m just wondering if you can kind of give us maybe some early insight into terms of what you’re thinking? I mean, is this an actual alteration of the physical footprint here? Is this more about just having better processes and procedures in place and material planning strategies so that we don’t kind of see these huge swings in inventory and just we’ve got just better line of sight into production? Just trying to understand exactly what you’re kind of thinking, at least at this early stage, when you talk about supply chain reinvention?

Murray S. Kessler — President & Chief Executive Officer

Let me also be very clear, when I am talking about that, I am talking about accelerate. I am not talking anything about the 2023 — or the 2022 forecast. I do have some assumption in 2023 as I build it. So, can I — if you don’t mind, may I answer the — I’d like to answer the question for you this year because I want to hit it over the head, that is a very clear path to recovery without that. When you add the absence of the one-timers in the first quarter, sequentially, you’re adding a couple of hundred basis points. When the absorption issues go away that we carried into the year in the second half, you add 120 basis points. When you remove Mexico, that was low gross margin and zero operating margin, $100 million in sales, you add a certain amount. When you add a 70% gross margin HRA business that’s growing rapidly from a mix U.S. 200 gross basis points, even if you don’t get a single benefit of the pricing. So, those are the drivers between — to get you back to 400 to 600 points and a growing portfolio with the top line growing double digits and the EPS growing double digits, which is a pretty exciting place for us to be, and by the way, without $3 billion worth of tax risk. Okay. Now optimizing accelerating. I’m starting to tease you with the ideas that I think can be very exciting for Perrigo going forward. We have done five divestitures, eight acquisitions, completely reconfigured this Company to be consumer self-care. You had the Omega acquisition that was done a number of years ago, and the entire supply chain has never been optimized. So, the answer is all of the above to what you said. And it will be a five-year project. And we got — we took out $100 million, and people have complimented us on being pretty tough on the operating expense line. But the cost line in this Company is dramatically higher. There are four — three to four phases. There’s a short term — let’s call it a short term, a midterm and a longer term. 12 to 18 months, 18 to 36 months, 36 months plus. Anything that would involve consolidating distribution centers and optimizing for the portfolio of products we have going forward, that’s further out. And I will share with you when we get to our Investor Day our ideas there. The immediate ones, though, are getting our service levels back up coming out of COVID and all the disruption of supply chain disruption that has given us a number of those one-timers, that has resulted in SSO [Phonetic] levels that over the course of the year and obsolete inventories from making it and missed shipments of — we get probably $100 million of profit opportunity in that category alone. But, the carat [Phonetic] that I’m starting to tease, that again is not in our numbers, is $100 million to $300 million opportunity. We have a lot of work to do on it, it’s readers [Phonetic] and it is going to be the culmination of three years of putting in costing down to the SKU level, being able to get demand data for our SKU separate from the entire store brand industry to build better demand models. But, a lot of things change when you get your service levels up into the 90s, including your ability to sell more distribution and leave less revenue on the table. So, demand planning is a super example of that. Scheduling is a super example of that. Product portfolio is a great example of that. Elliot, we did an analysis and had some help doing it. But, every time the national brand launches a big SKU, we have 500 variations we take to market because of years of history of Perrigo in the U.S. saying yes to every single variation. The startling part of that is 80% of that is not consumer-facing. And it’s just a customer wanting to get a little different, a little different, a little different, slows down, breaks down our lines. So, the ability for productivity, increased volumes, almost every single one of our lines is at max capacity running 24 hours a day, which is one of our major service issues. And so, that’s a huge opportunity. Eliminating probably, I think I showed this a year ago though, and we’re working on it, but 30% of the line probably represents 90%, 95% of the contribution margin. So, upfront demand planning, forecasting, getting those service levels up, our — and portfolio reconfiguration or short to midterm goals, but there will be behind that opportunities for consolidation of distribution centers and plant shop floor metrics, etc. So, yeah, we’re excited. We have turned ourselves into a consumer self-care company. Now, it’s time to turn ourselves into a great one. And I got to get this darn margin issue, as you point out, behind me. So, everybody can get as excited about the business as I am.

Elliot Wilbur — Raymond James — Analyst

Yeah, absolutely. Two quick additional ones for you. Given all the external issues that the Company has faced on the logistics side and input cost side that have hampered gross margins in the U.S., I guess, I find it surprising or relatively impressive anyway that the CSCI margins have held up substantially better. We’ve really seen very little margin compression there. How much of that is just supply chain-related with respect to that business versus the ability to just take higher and more immediate pricing actions to offset whatever incremental costs you are seeing? And then as a closer, given that you now own HRA, the Company has been working on a potential OTC switch of daily oral contraceptives in the U.S. market for some time. Now, just wondering if there are any action or regulatory updates that are on the clock for the next 6 to 12 months? Thanks, Murray.

Murray S. Kessler — President & Chief Executive Officer

Okay. So on the second one and the biggest one, the next step is the official filing, right? You go through all the questions in all those circles. And with the FDA in the U.S. on the — we’re with customers, so I’ll tell you the name. It’s called the Opill [Phonetic] and the Opill is — should be filed here within the next few months. So, that would be the next big hurdle and then the clock starts ticking. But again, I’d encourage you to read the Politico article from earlier this week. This is something this country needs. I mean, there are 6 million abortions a year in the United States and 30% of women who — can’t or have difficulty getting access to birth control and this improves accessibility, which is what our company is all about. And by the way, it won’t be the only country that we are applying in and we continue to apply for also for ellaOne in numerous countries. And we also have Nasonex that we got done. So, it’s — there’s a lot of great things coming.

CSCI, you answered your own question. It’s primarily pricing. But I mean, that’s the biggest answer. I think, in general, I would say, I’ll give credit to Svend Andersen, who runs that group and team. They’ve done a lot of the portfolio reconfiguration that I’ve talked about. Five years ago, there were 15,000 SKUs in our international business. Today, there’s about 5,000. Svend would tell me there’s still about 1,000 too many. So, there’s still further opportunity, but that’s helped drive gross margin as well.


This concludes our question-and-answer session. I would like to turn the conference back over to Murray Kessler for any closing remarks.

Murray S. Kessler — President & Chief Executive Officer

Like I said earlier in the call, I am over here in Europe, for the first time in two years — over two years that to sit in front of a room of our sales force. And two days ago, I was in Paris in front of the entire HRA team. And I just can’t share with you how excited I’m now [Phonetic] and how excited the people in our organization are about our future, etc. Bottom line, we said we would start growing this Company double-digits and earnings double- digits this year. And this is the year to do it. We spent a few years, brand — making it smaller and getting that cash and have reinvested it now, and you’ll start to see those numbers show it very soon. It’s unfortunate that we got hit with the supply chain and some of the other freight costs and others, but those weren’t Perrigo issues. You know that. Those were — our gross margin hits are no worse than Conagra’s gross margin hit, Procter & Gamble’s gross margin hit, core assets [Phonetic] gross margin hit. Sure. I mean, everybody, TreeHouse’s gross margin. I mean it just hit the entire consumer industry. And I think if you look, you’ll see that Perrigo’s probably wasn’t as bad because our team’s done an incredible job. And I think we will get it recovered with less pricing, which will then, in an inflationary environment, hopefully benefit the Company in expedited trade down. Because the last time this happened, we gained about 4 share points when there was a meaningful inflation in a recessionary period of time. And I think you’re going to start seeing volume for those national brands slow down and not see volume slow down for us, but that’s just my prediction. Bottom line, we made — we’ve kept every single promise we said we would make — we made three years ago in order to reconfigure this Company. We are at the sort of the point where we believe it starts paying off. And you take currency out of the situation, we’re well above estimates. And that will turn around, too, I mean, in my opinion, but we’ll see over time. But right now, we’ve plugged in a very aggressive euro exchange rate, and that has an impact, but strong organic growth, continuing and growing for three years. Lots of effort on margins. Lots of great brands and switch potentials, etc., going forward. And after that, you’ve got the supply chain reinvention coming behind it. So, I like where I sit right now, and it’s time for us to prove it. We would have been proving it already, but the world — we didn’t expect a war, but we’ll get through that too. And I will leave you with one final note. A member of my Ukrainian sales force is at this sales meeting. And she intends — and I almost fell down. I’m like, “What are you doing here?” And she said, “Well, we need all the information. We got to — we still think we can deliver 70% of the plan. We’re not backing off.” So, the people at Perrigo are fighters. Thank you for your interest in Perrigo.


[Operator Closing Remarks]


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