Patrick Taylor
President and Chief Executive Officer at Perrigo
Thank you, Brad, and good morning, everyone. We delivered another quarter of solid financial results, highlighted by gross margin and operating margin expansion. Net sales grew 2.2% compared to the prior year. Organic net sales declined 1.2%, including an unfavorable impact of 2.8 percentage points from discontinued lower-margin SKUs and HRA distributor transitions, both designed to expand margins.
Year-over-year gross margin expanded 300 basis points, including a 70 basis point benefit from our supply chain reinvention program to 39.5%. Operating margin expanded 130 basis points to 13.4%. For the fifth consecutive quarter, Perrigo has delivered double-digit growth in gross profit, operating income and earnings per share. This performance puts us in the top quartile of our peers.
Digging a little deeper into quarter three, net sales of our global cough, cold and pain products increased 7% compared to the prior year, excluding portfolio optimization efforts, driven by seasonal sell-in, which was particularly strong in Europe.
Within CSCI, organic net sales grew 6.2% as we held market share in growing markets and categories. In addition to cough, cold and pain, growth was broad-based, including skin care offerings and high single-digit growth in our UK store brand business.
In CSCA, organic net sales declined 5.1% as favorable pricing, the acquisition of Gateway and new products was more than offset by legacy infant formula, 3.6 percentage points from the discontinuation of low-margin SKUs, normalizing consumer consumption and a comparison to the strong and an early cough and cold season last year.
Importantly, store brand OTC dollar volume and value share grew during the last 13 weeks, as consumers seek high-quality products at a good value.
Turning to infant formula, the background for over two decades, Perrigo has successfully and consistently produced high quality, safe and effective infant formula, as the leading player in store brand.
We have proven we can deliver the most advanced and innovative infant formula, on par with the national brands while delivering value for consumers. No one else does this, but it's tougher now than ever before. We're extremely proud to play an important role in this central category.
In response to the updated FDA guidelines issued in March and subsequent warning letters to multiple facilities in the industry, we have shortened production campaigns to perform more frequent, major cleaning of our facilities, leading to more downtime between campaigns.
In addition, we implemented enhanced product testing and quality procedures, leading to longer inventory holes before product is released to customers. Due to these factors, we have been unable to replenish safety stock, leading to low customer in-stocks, intermittent SKU availability and lost sales.
With these changes now implemented and production improving each week, we are focused on rebuilding safety stock for our highest volume SKUs. I anticipate our operations to normalize by the middle of next year.
This improved production, continued strong demand for store brand formula and the annualization of price actions implemented in 2023, positions us well to recapture most, if not all, of the $0.35 EPS impact against our original 2023 expectations.
Turning now to Opill, which will be the most unique product launch in the history of Perrigo forming an entirely new US OTC category. This launch requires an innovative approach to accelerate brand awareness and consumer conversion.
We will build one-to-one consumer relationships, leveraging CRM data that will self-learn and get smarter throughout a consumer's journey, to maximize the Opill brand experience and its conversion.
To accomplish this, we are partnering with leading technology organizations to build a marketing technology stack that we're driving great engagement through all touch points of consumer conversion for awareness to purchase.
As we ramp our pre-launch activity, timing Voltaren selling to retail customers is now expected in quarter one 2024 to ensure customer inventory levels meet the buildup of consumer demand. To maximize long-term potential in this category, we will look to extend investment beyond the Opill brand with a franchise of women's health products.
Now I'd like to reflect on my first four months as CEO. I have immersed myself in all facets of our global organization and met with many key stakeholders, including many of you, our shareholders.
Coming out of these conversations, I remain confident in our strategy, and I'm increasingly excited about the opportunity ahead. Our business is highly unique, marked by significant scale, multiple points of consumer access and value and is attractively diversified.
Let me briefly explain each of these. With an addressable market of $400 billion, the global self-care segment has cemented itself as an independent industry within consumer products. Our scale is unmatched evidenced by the fact that every second of every day, 2,200 doses of our products are consumed around the world. And we're the only company that can produce most major products across entire categories.
We are a leading provider of value and access through a distinct model across brand, value brand and store brand. Not only do our offerings drive savings for consumers through value pricing, but also by bypassing doctor visits for their health needs and providing very significant savings for healthcare systems as well.
Lastly, our horizontal category breadth and vertical pricing is a unique advantage. Our offerings extend through nine major OTC product categories with our blended branded portfolio, providing consumers access across the value spectrum, wherever their point of purchase. Our portfolio is also well-diversified for economic environment shift across geographies and across SKUs with no one product representing more than 3% of total revenue. This better insulates us from economic slowdowns and seasonal factors in individual categories.
My interactions with all key stakeholders have clarified the next evolution of strategic thinking of Perrigo. Throughout these learnings, four key pillars have emerged, culminating in the blueprint designed to deliver the One Perrigo model, a model in which our portfolio, operating systems, structure and behaviors will be simplified, standardized and scaled. This will position us to win in self-care through the creation of a sustainable and value-accretive growth engine that will drive Perrigo financial performance for the long-term.
First, we will consumerize and digitize the company. Second, drive category growth in partnership with our customers. Third, leverage our global supply chain. And fourth, optimize into one global operating model. To provide a bit more detail on each of these. First, we will deliver consumer-preferred brands through innovation by consumerizing and digitizing Perrigo.
The consumerization of Perrigo will focus on bringing consumer preferred innovation and brands to market in more value-accretive offerings. This will be enabled through the digitization of Perrigo, powering our marketing strategies with digital insights, AI that will offer real-time actionable insights and end-to-end visibility of the consumer journey. This is a transformation in how we're going to bring products to consumers. Opill is a great example of this, where we have a stack of marketing and digital tools to enhance the consumer journey and accelerate conversion.
Next, we will leverage these consumer preferred offerings and our strong customer partnerships to drive growth in the OTC categories where we participate by delivering differentiated solutions benefiting all members of the value chain. All of this will be powered by our global supply chain, allowing for increased manufacturing of higher-margin products. Our Supply Chain Reinvention program is already delivering significant benefits, including a reduction of 750 of the 1,000 SKUs planned for this year.
Finally, we will evolve to a uniform operating model that will drive consistent focus across our organization on the most value-accretive opportunities. We will simplify, standardize, automate and globalize our structure to optimize our organization. This will provide tremendous opportunity to reinvest in our business and enhance financial performance by driving brand growth capability and accelerating consumer innovation.
Defining key pillars is crucial and the work to operationalize these is happening now. Execution against these pillars will require skillful sequencing to strengthen our long-term foundation, and we will provide updates on these initiatives as our work continues.
To wrap up, we have mobilized around the four key pillars that will create an advance the sustainable and value-accretive growth engine to drive Perrigo for the long-term. We must continue to focus on operational excellence and deliver our trusted self-care products. We have begun the sell-in for the cough, cold season and there is an opportunity for us to further build retail stock, particularly in the US. Also in the Americas, we expect store brand market share gains to continue while building safety stocks and infant formula. In international, we will continue to leverage our brands that are growing and on trend, notably in women's health and skin care.
Now finally, a few brief comments regarding oral phenylephrine-containing products and the Acetaminophen litigation. As most of you know, an FDA advisory committee recently voted their oral phenylephrine products, do not provide efficacy to consumers looking for decongestion relief. Following the vote, the FDA communicated publicly, there are no safety concerns with these products. And if a decision is made to remove or reformulate, the agency will work closely with the industry.
Recently, a retail pharmacy chain removed single-entity phenylephrine products from their shelves. Our sales of this product across all of our customers is de minimis. Sales of phenylephrine-containing products accounts for approximately and only 2% of total Perrigo net sales, a very low margin in only our US business. We do not currently expect retailers to pull combination products ahead of the cough/cold season as this could create a shortage.
Turning to acetaminophen benefit. We have not been named in litigation, and the FDA reiterated its stance that there is no causality between ADHD and taking these products during pregnancy. Additionally, we have not agreed to indemnify any customers or indeed they ask.
In closing, we delivered another solid quarter of results with double-digit growth in gross profit, operating income and EPS, in addition to meaningful margin expansion. We are single-mindedly focused on improving our cost structure, cash flow and profitability. And I'd like to thank all of our Perrigo colleagues for your commitment to our self-care vision.
Now with that, I will turn over to our CFO, Eduardo, to cover the financials in more detail. Eduardo?
