Perrigo Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2021

Key Takeaways

  • Strategic transformation: Perrigo completed the $1.6 billion divestiture of its generic Rx business and agreed to acquire HRA Pharma for €1.8 billion, making consumer self-care its sole focus.
  • Irish tax NOA settled: The €1.6 billion Irish tax notice was fully resolved for €297 million using a €355 million arbitration award, removing a major source of volatility.
  • Q3 results pressured by supply chain disruptions and weak cough/cold season: Net sales grew 4% but EPS fell 25% to $0.45, driven by a $43 million drag from logistics issues, higher input costs, and under-absorbed overhead; full-year guidance cut to $2.00–$2.10.
  • Cough/cold demand rebounded strongly: Consumer takeaway rose 61% in the U.S. and 36% in Europe, and Perrigo reports early supply chain improvements to capture this demand.
  • 2023 EPS targets intact: Management expects to recover about $0.49 per share from cough/cold normalization and $0.21 from supply chain headwinds, and HRA is projected to add ~ $1 of EPS by 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Perrigo Q3 2021
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good day, and welcome to the Perrigo Third Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brad Joseph, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Tom, and good morning, everyone, and welcome to Perrigo's Q3 fiscal 2021 earnings conference call. I hope you all had a chance to review the press release we issued this morning. A copy of the earnings release and presentation for today's earnings discussion are available within the Investor .com website. Joining today's call are President and CEO, Murray Kessler and CFO, Ray Silcox. I'd like to remind everyone that during this call, participants will make certain forward looking statements.

Speaker 1

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 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. In addition to the other non GAAP adjustments as described in the appendix, adjusted profit measures, Including adjusted EPS and adjusted operating income, excludes from the prior year period certain costs incurred to support the operations of the RX business, which were recorded in continuing operations.

Speaker 1

See the appendix for additional details and reconciliations of all non GAAP financial 2nd, organic growth excludes acquisitions, divestitures and currency in both comparable periods and third, Murray's discussion will be focused solely on non GAAP results. And with that, I'd like to turn the call over to Murray.

Speaker 2

Thank you, Brett, and good morning, everyone. In Q3, we had major accomplishments, company changing accomplishments, the kind that will secure Perrigo a bright year for years to come. Unfortunately, we also experienced some very significant challenges this quarter related to the I want to remind everyone that during the Q3, we completed our transformation to a consumer self care company by first, closing the generic RX Divestiture transaction for $1,600,000,000 which dramatically lowers volatility and makes self care our sole strategic and second, announcing our agreement to acquire HRA Pharma and its leading portfolio of consumer self care brands for €1,800,000,000 which we estimate will add US400 $1,000,000 in revenue and US150 $1,000,000 in operating income in 20 Perrigo for the last 3 years. This was accomplished by favorably settling the headline €1,600,000,000 Irish tax NOA for a much $3,000,000,000 or more when including interest. We settled for €297,000,000 in total, with cash payable of $266,000,000 net after we received credit for prior payments.

Speaker 2

This issue is now completely resolved and behind us. And even better, we paid for this settlement from a €355,000,000 award we During the quarter through binding arbitration arising from the Omega transaction. The result, Perrigo is Our long term future has never been brighter. Let's shift back to Q3 business performance. Results were below a year ago mainly due to under absorbed overheads and higher input costs.

Speaker 2

For net sales, supply chain was the culprit. This led to an inability for Perrigo to meet very strong consumer demand in the quarter. Absent the supply chain in the form of unabsorbed manufacturing overhead attributed to last winter's historically weak cough cold season also negatively Let me provide a bit more detail. For net sales, as forecasted, the strong consumer takeaway in Q2 2 translated to higher factory orders in Q3. This was highlighted by a 21% year over year growth rate in our coughcold Consolidated net sales increased 4% versus a year ago, despite a supply chain disruption impact of $43,000,000 with a bigger impact in the U.

Speaker 2

S, dollars 38,000,000 causing a 5.5 percentage point drag on CSCA's Q3 net sales Had those orders shipped under normal patterns, CSCA shipment growth would have been very close to the strong consumer take Assumption grew briskly in the categories we compete in for all three of our U. S. Business units. The total OTC category was 18.1% versus a year ago. Total nutrition, which for us is infant formula and electrolytes, was up 29.9% And oral care was up 9.7%.

Speaker 2

It's worth noting that total store brand OTC The share loss was attributed to buyers of national brands increasing consumption rather than buyers of Store brands switching to national brands. I repeat, the growth did not come from private label buyers switching to national brands, and that's good news. In our CSCI division, market share was stable in Q3. Like the U. S, the categories we compete in showed a very strong rebound in consumer takeaway and they grew briskly.

Speaker 2

Total CSCI consumer takeaway was up nearly 10% over a year ago, but CSCI factory shipments lag consumer takeaway and were basically flat for the quarter. We believe this trades to a light Pre coughcold season buy in by pharmacists across Europe who were worried about getting stuck with too much inventory If the cough cold season doesn't rebound, but that worry appears unfounded as the cough cold season in Europe is in fact off to a very start. Consumer takeaway was up 36% in Q3. We expect this to translate to strong cup club sales Turning to the 3rd quarter earnings, EPS fell short of our internal projection and was $0.15 below a year ago. Supply chain disruption negatively impacted EPS by an Recalls that had a $0.05 negative impact.

Speaker 2

Tight management of expenses offset some of these negatives. Looking towards updated guidance, we expect consumer demand to remain very strong in Q4. However, we also expect higher input trends. We've lowered our EPS guidance range for the year to $2 to $2.10 This new annual estimate includes a total year negative estimate of $0.79 per share for That's what we experienced so far plus the 4th quarter estimate. I place these factors into 3 buckets as follows.

Speaker 2

1st, cough The impact of a historically weak season significantly impacted our 1st quarter net sales and earnings as well as continuing to negative impact on manufacturing efficiencies through under absorbed overhead for the balance of the year. Total impact estimated Throughout the year, including freight and other input costs are estimated to have a total impact for the year of $0.09 And then finally, supply chain disruption, both inbound and outbound logistics that became a major issue beginning in Q3, is estimated to have a full year total impact of $0.21 We believe this large reduction in 2021 net sales and EPS from these three factors The historically weak coughcold season that dramatically impacted Q1 net sales was clearly a one off. Illnesses are up according to IQVIA. Coughcold consumer takeaway was up 61% in the U. S.

Speaker 2

And 36% In Europe, during Q3 and October cold cough sales for Perrigo remained robust. While we aren't yet forecasting a full recovery to the 2019 level, coughcold sales are expected to be up in the Q1 of 2022 versus 2021. As that higher volume runs through our plants, the negative absorption impact will come back to us, albeit that will take 12 months to 18 months to play out. But we have a very confidence in getting this full $0.49 back. 2nd, the $0.21 impact from supply chain disruption Is also expected to be temporary.

Speaker 2

The global supply chain is forecasted to gradually improve by mid next Dear. But in the meantime, we've taken a series of actions to improve the current situation, including outsourcing Highly complex product lines to a 3rd party logistics provider, allowing more room on our trucks for higher profit OTC products, Also adding regional carriers for challenge shipping lanes, hiring additional distribution center personnel, which allows us to change order delivery schedule to account for the many no shows we've experienced and finally, increasing the purchase cycle for ingredients and packaging and the like from 30 to 90 days to make sure we have sufficient lead times for delivery. These actions have resulted in a 25% increase in daily for the month of October as compared to the Q3 average and not all of the actions that have even been fully implemented Some of these changes will remain in place until the larger U. S. Supply chain normalizes.

Speaker 2

Some of these changes we intend to leave in place as a hedge And National Brands are also raising price. And we will continue to maintain a tight focus on Discretionary costs and remain focused on achieving at the least the final $30,000,000 of Project Momentum cost Several other actions have also been put in place to get earnings growing again. We've made several management changes in the U. S. To refocus the team on core OTC market opportunities, of which there are many and of which have already resulted in some Significant customer wins.

Speaker 2

2nd, our successful and growing ecom business, which is up 25 To further accelerate growth and of course, the previously announced acquisition of HRA will have a dramatic positive financial results and the growth trajectory of Perrigo. The transaction remains on track to close mid next year. So to reiterate, despite the best efforts of my Perrigo colleagues and they've been remarkable, the COVID-nineteen pandemic has raised successive challenges, which began in 2020 and continued through 2021. The impact has been real and our response has been real as well. We believe that the negative business impact of the big three drivers in 2021, a historically weak coughcold And we remain on track to close HRA mid next year, which will substantially increase net sales, operating income and margins for years to come.

Speaker 2

We therefore still believe we can get to our at least Close to our original 2023 EPS targets we shared with you back in May 2019 and again during the The transformation plan having come to fruition in this most recent quarter. The volatile generic Rx division has been divested. The HRA acquisition is on track and is expected to add approximately $1 of EPS in 2023 and the Irish know and the uncertainty it created over the last 3 years is gone. Perrigo is now a focused consumer self with industry peers. And while COVID-nineteen has created many unforeseen challenges in 2020 2021, big challenges, We work through them as they occur and we will not let them deter us from making our vision a reality nor hitting the ultimate growth plans we originally With that, I turn the call over to Ray Silcock, our Chief Financial Officer, to discuss the financials in more detail.

Speaker 2

Ray?

Speaker 3

Thank you, Murray, and good morning, everyone. Firstly, with respect to the major strategic initiatives completed this quarter and outlined in this morning's press release, I'd like to reiterate Murray's comments that these achievements do indeed lay the foundation for our bright future. But as Murray also said, the operating environment in Q3 was challenging and had a significant adverse impact on our quarterly results. So I would like to thank the team at Perrigo for all their hard work navigating through them. With that, let us take a look at our 3rd quarter results in greater 1st, let's review our GAAP to non GAAP adjustments.

Speaker 3

On a consolidated basis, the company reported a GAAP loss from operations of $54,000,000 for the Q3 of 2021, a loss of $0.40 per diluted share. On an adjusted basis, consolidated net income was $61,000,000 and adjusted diluted EPS from continuing operations was $0.45 per share, a 25% decline compared to prior year. Adjusted EPS decline versus last year is primarily due to 1, lower operating efficiencies, primarily Overhead under absorption as a result of lower manufacturing from the weak 2020, 2021 coughcold season. 2, higher freight and materials costs due to global supply chain disruptions and this quarter totaled $311,000,000 primarily these were from our excluding the positive benefit $3,000,000 of amortization expense as we always do and $25,000,000 in acquisition and unusual litigation expenses.

Speaker 2

Full details of these and other

Speaker 3

adjustments can be found in the non GAAP The principal non GAAP tax adjustments for the quarter were the $309,000,000 Irish Noah settlement and $108,000,000 in tax arising from intra entity transfers of intellectual property due to the Rx divestiture. These led to an adjusted effective tax rate for the quarter of 21.3%, Down from Q3 last year's adjusted effective tax rate of 24.6%. The reduction in our adjusted Effective tax rate was primarily due to the release of state uncertain tax position reserves, partially offset from $9,000,000 of favorable currency $5,000,000 from acquisitions. On an organic basis, excluding the effects of currency and acquisitions, net sales grew by 2.6%. Consolidated gross profit in the quarter was $35,000,000 lower than last year, primarily as a result lower operating efficiencies and higher material and freight expenses as well as the $9,000,000 cost of 2 product recalls, all offset by $6,000,000 in favorable currency and acquisitions.

Speaker 3

Consolidated gross margin in the quarter was 34.4%, 480 basis points lower than prior year, driven by the same factors. Consolidated operating income Q3 was $112,000,000 $29,000,000 down from last year. Operating expense reductions, including Project Momentum Savings helped partially offset the unfavorable gross profit blow through. Measured as a percent of net sales, consolidated gross profit in Q3 was 34.4%, down from 39.2% for the same period last Global supply chain disruptions, which caused higher material and freight costs, were 1 in the first and second quarters were another 150 basis points. In addition, we experienced those 2 product recalls, which costs 80 basis points.

Speaker 3

These headwinds together with unfavorable mix in our base business driven by contract Sales to the recently divested Rx business and lower sales in CSCI's weight loss category resulted in a year over year Gross margin decline of 400 basis points in the quarter. Lower operating expenses of 80 basis partially alleviated these effects. We expect the gross profit headwinds to gradually reverse over the course of the next year or so As the cough cold season returns to its historical levels and overhead absorption levels in our plants normalize And supply chain disruptions ease. Now let's turn to the 3rd quarter segment results starting with Consumer Self Care Americas. Net sales for the quarter increased 4.6% driven by e commerce, third party sales to the divested Rx business and better coughcold sales.

Speaker 3

Excluding favorable currency of $2,000,000 organic net sales grew 4.2% in the quarter. Gross profit in the quarter was $193,000,000 $29,000,000 below last driven by unfavorable plant overhead absorption, higher material and freight expenses and basis points. Operating income for the quarter was $106,000,000 $28,000,000 lower than prior year, driven by unfavorable gross profit flow through, partially offset by operating expense reductions, mainly R and administrative costs. Moving on to Consumer Self Care International. Net sales grew 2.8 percent driven by favorable currency and acquisitions, performance in the U.

Speaker 3

K. Store brand business, greater demand 0.6%. CSCI gross profit was $166,000,000 3 percent down from last year, a 2 80 basis point decline in gross margin, unfavorable mix from lower sales in the weight management category together with the cost of the recall, were only partially offset by favorable currency and acquisition. Operating income was $46,000,000 $6,000,000 lower than prior year primarily due to the impact of the product Moving now to the balance sheet and operating cash flow. Cash on the balance sheet as of October 2 was $2,100,000,000 and included $1,600,000,000 from the RX divestiture, plus $418,000,000 from the Belgian Arbitration award.

Speaker 3

Operating cash flow in the quarter was $350,000,000 including the Belgian arbitration As a reminder, the cash outlay for the Irish tax settlement and the legal fees for the Belgian arbitration award were made after the environment in which we operate, which is reflected in our updated full year adjusted EPS guidance in the range of $2 to $2.10 We remain confident in our plans to deliver long term profitable growth as Operator, can you open the line for questions, please?

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. And the first question comes from Elliot Wilbur with Raymond James.

Speaker 2

Good morning, Alex. Thanks.

Speaker 4

Good morning. Murray, despite all the cited factors over the last Couple of quarters that explain various aspects of the company's performance. No one can figure out what's going on with gross margins. I've followed this company for a long time and frankly, I feel a little bit lost right now. I don't know where the bottom is and we keep coming in well short the company's expectations.

Speaker 4

So clearly, it seems to be something beyond just merely supply chain issues and Logistics issues, because obviously over the course of the pandemic, numbers have been Volatile, yet margins have been certainly relatively close to historical standards and certainly well above where we are today. It would be very helpful if the company could somehow provide a bridge between margin performance, Gross margin performance, CSCA, in the current quarter relative to historical levels, so we can have sort of some understanding Of what's happening kind of outside of these one time

Speaker 2

issues? Sure. But it's primarily I mean, these are massive One time issues and most of them come back. But listen, I get it, right? I mean, but inflation freight materials, 180 margin points this quarter under absorption, 150 basis points this quarter, that's 3 30 by themselves.

Speaker 2

We sold the RX division. We get credit for the sales. That's not a real margin deterioration. Like we just have to report what was Contract sales that we had to profit before, you lose 100 basis points on that. I mean, that really comes off, but it's no change to the profitability And we've picked up 100 basis points on the operating margin line from cost savings, Primarily in tight management of operating expenses.

Speaker 2

But I mean the big issue is you have 3, 400 points that came on roaring on strong From having no cost cold season and from massive supply chain disruption And massive increases in freight. I mean, we have you got a big business like oral care that buys a lot of its product from China and a container with $6,000 is now $26,000 I mean, hopefully and everyone believes that will come back But those are when you translate that out over a longer period of time, those are big numbers. The good news is We're out and been able to put in pricing. So I think when you recover the cough cold, which we're clearly doing For a little while until prices start to come down again, input costs offset by pricing. We've gotten more pricing Approved and into the marketplace, I don't know when the last time that's happened for the company, but our customers But it's not like a national branded business when you take the price increase on Friday and it goes up Monday.

Speaker 2

We have Contracts and that gets filtered in, but we have 75% of the business being a price increase over The next period of time. So it was clearly a hit to gross margins. I get it. I just think these short term hits undermine The great work that had been being done on product mix, on discontinuing unprofitable products, on KU rationalization. I mean, we're focused on margins, but I get it from where you're seeing you don't see it

Speaker 4

No, I don't see it. It's difficult to see. And I think it would be helpful for the company to shed some additional light and But again, I mean, even if I gave you the benefit of 300 basis points in terms of some of these one time issues, I mean, you're still looking at Gross margins in the CSCA business, which are 30.8%, and that's still 150 basis points to 100 basis points below what people believe was sort of The bottom here. So I think this issue needs some additional clarity going forward. I do want to ask about the Absorption issue and the impact in the quarter, I mean it just seems like with cough, cold clearly bouncing back at least In the quarter to 2019 levels and presuming that you're continuing to see relatively high order rates, I'm a little surprised, I guess, that absorption seemed to have the impact at least in the quarter that you've Excited and I'm not sure necessarily why that would occur if it's just product being produced in the warehouse, but not Put on trucks, I would assume a lot of that unabsorbed overhead is in fact actually allocated to product costs and is not impacting On the Zord overhead, and we're also not seeing that necessarily in terms of inventories increasing.

Speaker 4

I understand there's a lot of moving parts That could impact the inventory line, but inventories were actually down in the quarter. So I'm trying to reconcile a couple of

Speaker 2

You're selling the inventory that you made, expecting a down, but not a non existent coughcold season. So when those you're paying for the unabsorbed inventory now for what happened last January February, Right. So it gets put on to that inventory as it gets put up. And then as you work it down, you're working down inventory with a Higher cost to it. And then it's like a 6 month lag in our costing system that that works through and it will Continue on through the Q4 a little bit into next year and then it will slowly start to reverse itself and all of a sudden you'll get

Speaker 4

Okay, understood. Thank you. And I guess just sort of Last question is, given some of the changing dynamics in the OTC Base and taking pricing and the like. Could you just talk about sort of where the company's relative market share position Is kind of across the private label segment where you're gaining share, where maybe share has slipped a little bit, Whether or not you think that the price increases will in fact have a negative effect on Share, but you can more than make it up for in margin. Just trying to understand what some of the moving parts there are In terms of competition from other private label players, as small as they may be versus just changing share dynamic versus national brands?

Speaker 4

Thanks.

Speaker 2

Yes. That's a great question by the way, Elliot, because at first glance, people are going to look at the national brand or the store brand level. And I gave you the panel data that shows that's just from them advertising more and getting consumers to buy more. So and That has no effect on our business right now. Within store brand, we had some big challenges that we got hit And that resulted in some share loss this year.

Speaker 2

Now our businesses on across the board We're still up and growing across those, but they could have gained more. And I don't accept ever losing share. It's not when it's actually sourced and coming from you, I would tell you that I made some changes in management and some other structural areas, and we have won a lot of business in the last 30 days. So did we lose some short term share within Storebrand to the extent that we can read it, right, Storebrand gets provided And we told you a few months ago, we were able to start to break it out ourselves. It's not something that had historically reported by IRI.

Speaker 2

We are now starting to get that data. And as soon as I'm comfortable with it, probably in the next investor conference we will do, we'll really break that A meaningful competition in nicotine replacement. I will also tell you that those are the areas where we've had the most wins Ship them in because we wouldn't be having half the discussions we're having right now, have we just been able to ship the orders that we had.

Operator

The next question comes from Chris Schott with JPMorgan. Please go ahead.

Speaker 5

Great. Thanks so I know you addressed a little bit of this in the prepared remarks, but I'm still just trying to get my hands around kind of bridging from the $2 $2.10 this year to those 2023 goals. So I guess the heart of it is beyond cold cough demand normalizing, What else really has to happen to get to that 2023 target to give you confidence to still be sticking with that, just given the results we're seeing here? I just want to make sure I'm clear. It feels like this is mostly cold cough normalizing, but just help me walk through the other kind of key assumptions, I guess, that go into That bridge over the next few years and then a couple of follow ups from there.

Speaker 2

Okay. Well, listen, I've got work to do to finish it, Chris, but let's Oversimplify it. If you're $2 to $2.10 and you get back $0.49 $0.50 on coughcold, which we believe, which is the combination of the volume impact and The absorption of the manufacturing efficiency, now you're at $2.50 to $2.60 and you were at $1 For HRA, you're at $350,000,000 to $360,000,000 and the numbers were $365,000,000 to $395,000,000 that we were Originally talking about, so at the bottom and end of that range, you're off $0.10 or $0.15 and you say, okay, excluding cost cold, the rest of the world, the rest of These other costs with pricing, etcetera, cost savings, you're only $0.15 $0.20 short, right? So, I mean, big components, 205 out of $1,305,000,000 that get back to $50,000,000 on cough cold, $3,500,000 $3,60, And you got to get $0.15 $0.20 out of the rest of the business over 2 years.

Speaker 5

Okay, perfect. And then just I don't know if you can quantify, I think you mentioned you're taking price on a good percent of the portfolio. I know that's something you historically haven't been to do as much. Just any flavor on just how much price are you able to get on the portfolio just to help offset some of these supply chain pressures that you're seeing?

Speaker 2

Well, I mean, historically, we've been I've been out there saying in the U. S. That there had been 2% to 3% erosion. We've been able to improve that to 2% and then last quarter that had flattened out in this Quarter for the first time, it was positive. So we had obviously swung it by a couple of percentage points because it really wasn't mix.

Speaker 2

And That was only with a third or so. I don't know, Brad, if we are have a And then you have a you have to say, well, what's going to stick relative to consumers buying it, right? So what's the volume The price elasticity impact on the vine. Here, it's different. We have no impact on the retail price.

Speaker 2

That's a retailer decision. And there's massive Gaps and the national brands are taking in many cases prices and the retailers will make their decisions on price gap. We'll suggest things, but this is a question of our cost to them. And then we there's negotiations and then we'll see what percentage, but so far it's gone very well, albeit there's a lag percent, 3%, somewhere in that range. Okay.

Speaker 5

But sequentially, it kind of continue to get a little bit better than what we're seeing even now.

Speaker 2

Yes, yes. We're out there with a fair amount. I Inez, it's got to offset those higher input costs and freight costs and because that's I can't continue to have that be negative for that Little formula that I just worked for you, right? Pricing plus cost savings has to offset future negatives because we're only 6 months through it, right? So I got to offset Any first half impact with that to hold the $2 to $2.10 and then add the dollar and then

Speaker 5

And then the final question, which I just want to make sure I'm fully understanding it, is you're talking about $0.49 from I'm just trying to understand how much of this was, I guess, already known in 2Q when you guided to the lower end of the range versus kind of what's New here. So you said at high level, it seems like kind of demand is back. So I'm just trying to understand and I totally get that there's some offsets of Lower utilization, etcetera, from what happened earlier in the year. But I'm just trying to understand why the impact seems to be kind of growing versus your expectations In 2Q given the volumes we're seeing. So maybe just walk me through a little bit of what is going on this quarter versus what you had line of sight on, I guess, as of the August guide?

Speaker 2

We had line of sight on the unabsorbed book. The unabsorbed was already baked in. And When I sat there on the HRA announcement, I thought we had the quarter. We were roaring in orders. I mean, The shortfall that we had in the Q2, which was we had talked about inventory and Mathematically, it had to came back.

Speaker 2

It came back. We had every day, the orders were record orders above that we were seeing in demand during some of the spikes of COVID. And by August, I thought I had the quarter. And then all of a sudden, logistics is coming in and you're not shipping it, you're not shipping it, Digging into it and if we normally are shipping 55 trucks a day, all of a sudden, we're Between customers not showing up to pick up or customers not coming for their pickups For drivers who were scheduled not coming, 10, 12 trucks every single day, not showing up and we exit the quarter with on ship balance in the company's history. I mean, you had $45,000,000 that's in another Yes.

Speaker 2

Gash, another $45,000,000 or $0.10 $0.12 on top of that. And there are some big spike in freight costs That hit us as well. So what didn't we have line of sight is the supply chain disruption, the inability to get some of the inbound product to fill Customer orders and dramatically higher freight costs, but the absorbed and unabsorption was baked into the forecast in August.

Speaker 5

Okay, Great. I appreciate all the color. Thank you.

Operator

The next question comes from David Steinberg with Jefferies. Please go ahead.

Speaker 6

Hey, David. Thanks. Good morning, David. Hey, Murray. Thanks and good morning.

Speaker 6

Couple of questions, just continuing on with gross margins. I know you said that You're repricing, I think, 75% or 80% of the portfolio, but it will take some time because there are contracts in place. So, in thinking about the bridge to 2023, could you give us some sense of what you're thinking about gross margins in 20 '22, I assume that will include a lot of the price increases you mentioned. Would those gross margins be perhaps closer to this year on the weak side Or what you're more of what you're thinking for 2023? My second question relates to tax.

Speaker 6

Can you provide an update on all the ongoing tax I know you settled the Irish tax liability case, but there's also an IRS case, which is linked to that relates

Speaker 2

Yes. I mean, on the gross margin, Ray, I'm going to turn this call over to Ray. But I mean, I don't want to I haven't seen the fully baked out plans because a lot has changed in a month and the teams are working through it. But A lot of the you'll get gross margin benefit as the absorption comes down and the volume runs through the plant Later in the year, but you should get cough cold volume benefit and sales benefit in the first half. But I don't have We have a final plan in front of me yet for 2022, but

Speaker 3

Yes, we don't have our final plan yet, but what Murray said is basically correct. We're going to see the effect of Coughcold season being reinstated in the first half, that was really hit us hard in the Q1, quite frankly, more even than the second. And we'll see that coming back in the first and second quarters. So I don't really have a number to give you, but I think that We see that most of the profitability coming back to us by the end of the year, But it will come back gradually as the supply chain disruptions ease. But also, we have to bear in mind that Our costing system, we have it takes 6 months for variances to work through the system, meaning that Our under absorption in the second in the first half of this year is we're still feeling it now, And we will continue to feel it into the Q1 or so of next year.

Speaker 2

Yes. As it relates to The tax, we're not even I mean, those are a very long way out. The first portion of that IRS tax is It still becomes down to double taxation from the company's perspective. And there is an Agreement between Ireland and U. S.

Speaker 2

Who has the right to attack. So that is a battle right now between Ireland And the U. S, that's in their competent authorities jurisdiction, I forget the name of, it's like the MSA They have arguments and briefs and on both sides and that will occur over Presumably the next year or so, and it will either completely go away or then we begin And we think our arguments are very strong in those regards to whittle those down if they survived a to a much smaller number and I'm going to stand behind the success I had with Ireland on the massive one and my years in the tobacco industry Being able to work through these issues. I know we're challenged on gross margins on the business, but I think I And I've done a pretty good job here of taking out $2,000,000,000 to $3,000,000,000 of risk for the company, along with our Strong legal team and we'll work through these as well. I don't see these nearly of the magnitude that we were dealing with and

Speaker 6

So many years ago, the company grew rapidly based on Rx OTC switches, PPIs, cough, cold, allergy and that kind of ground to a halt. And I know you've called out Next coming up, but also the possibility of some other switches like Cialis, Glise, Tamiflu. And I'm just curious, When you said that you hope to get back to your original 2023 forecast, Are there any meaningful Rx OTC switches built into that? And do you think we're going to see any in the foreseeable future?

Speaker 2

Yes. I just had a portion of this by the group. I mean, in the immediate term, I think we have Building out the diclofenex line, launching of NASONEX, launching of the splice product, help me out if wrong on that, Brad. There's probably 9 others being worked on that will phase in over the next 3 or 4 years, but the 20 23 numbers don't depend on that. And then when we close the HRA deal, you have some massive ones.

Speaker 2

And that's one of the things I'm excited about. They just got the switch on a daily birth control pill In the U. K, which and they are in the process with working on the process with The FDA, which could be and they're well along the path, could be just a massive Opportunity for the company. And then the equivalent of LO-one, which is not that Particular molecule is not approved in the U. S, that'd probably be a bit of a harder fight, but it is one that HRA has won in 35 countries Around the world, so which would represent another one because plan B is probably it's already on That company has something like a north of a 90%.

Speaker 2

They basically have a monopoly on the market and It's one of the biggest SKUs out there in OTC and fast growing and that represents an opportunity. So I think you're going to see switches come back to be A very big and important part of our business going forward, but it's not critical to make the 2020 That 2023 plan, recapturing the cost and the gross margin where this call has rightfully been focused and the pushback is fair, that's where We need to recapture those numbers, get that volume through those plants, get the cost out of the system. I I accept that feedback because that's where I look at the numbers and I see it the same way, but we believe we'll get all that back.

Speaker 6

Thanks.

Operator

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

Speaker 2

I just want to thank everybody for their interest in Perrigo. I fully understand that this was A bit of a punch in the stomach here relative to the cost situation. I don't think it's Perrigo I think it is the macroeconomic trend that the world is facing and it's real. The teams have responded We'll be able to ship more products, and I've already seen that with a nice strong month of October, and we will We believe we'll recapture and get back to those 2023 numbers, and I'm not the type to back off those. We need to do that.

Speaker 2

So but And over $1 of EPS that we have shed what was the riskiest and most volatile business with $400,000,000 arbitration win. So a lot of good things still happen for the quarter for the long term. The Short term issues, my team and I, we will work our way through it, get it done and work our way through this COVID challenges. And with that, I will look forward to giving you updates in future quarters. Thanks.

Speaker 3

Thank you,

Operator

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

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