Patrick Lockwood-Taylor
President & Chief Executive Officer at Perrigo
Thank you, Brad. Good morning, good afternoon, everyone, and thank you for joining today's call. I would like to begin with an update on the advancements we have made towards building "One Perrigo" and the progress we have made towards our fiscal year expectations. Stepping back, One Perrigo is an operating platform designed to deliver a unified global operating rhythm built on speed, agility, reliability and data-driven decisions. Main building blocks include: one optimized organizational structure; one operating model, a way of working; one unified enterprise technology network; one focused and scalable portfolio. Bringing all these pieces together will allow us to significantly advance our vision to provide the best self care for everyone.
During the third quarter, we have taken significant steps to strengthen our One Perrigo culture and brand building capabilities. By expanding our executive leadership team with the appointment of a new Chief Brand and Digital Officer, Dr. David Ball, in addition to appointing a permanent General Counsel, Charles Atkinson. Both David and Charles bring an immense amount of industry-specific experience and will be instrumental to Perrigo achieving value-accretive, sustainable growth over the long term. I wish them both a warm welcome.
Turning to our accretive initiatives. Team has executed Project Energize extremely well, achieving $95 million in gross savings year-to-date, partially offset by reinvestments of $16 million. As a reminder, we expect Project Energize to deliver $140 million to $170 million in gross pre-tax annualized savings, while reinvesting $40 million to $60 million of these savings all by the end of 2026. Early reinvestments have been focused on adding or repurposing key talent across the organization. In addition to the appointment of both David and Charles, we reinvested in other areas, which is global quality, IT, category management and disruptive growth. These new leaders have added more than 200 years of combined consumer experience to the company.
Our supply chain reinvention program is delivering gross savings of $32 million year-to-date, corresponding cash outflow of $18 million. This program in total has achieved $72 million in gross savings and corresponding cash outflow of $42 million, equating to an extremely solid ROI. The supply chain program has delivered gross margin expansion, unlock capacity in constrained areas to pursue new business, lowered our standard production costs and increased U.S. OTC service levels which most recently achieved 92% across all U.S. customers, up from 80% in the prior year quarter. Efficiencies gained from this program that partially offset lower production volumes primarily in U.S. OTC and nutrition.
We have also made demonstrable progress to augment and strengthen our infant formula business. When net sales grew plus 3% versus the prior year quarter, plus 58% sequentially, more infant formula in a few moments. Next, we delivered third quarter gross margin of 41%, an increase of 160 basis points compared to the prior year and plus 40 basis points sequentially. The strong third quarter expansion is driving year-to-date gross margin expansion of about plus 90 basis points.
Now to our earnings phasing, which remains heavily weighted towards the second half of the year due to the timing of recovery of infant formula and benefits from Project Energize. For the third quarter, we delivered EPS of $0.81, an increase of plus 27% year-over-year and plus 53% sequentially. And we are reaffirming our 2024 adjusted EPS range of $2.50 to $2.65. In summary, we've made significant progress in 2024. We're delivering on our accretive initiatives, the infant formula business is recovering, and we have taken actions to simplify and consumerize our business. There's a lot more work to do.
Now let's turn to our third quarter earnings highlights. Third quarter net sales decreased 3.2% year-over-year while organic net sales declined 2.4%, which I will speak to on the next slide. Gross and operating margins expanded meaningfully versus prior year, plus 160 basis points and plus 340 basis points, respectively. These factors led to an operating income growth of plus 21.3% and EPS growth of 26.6% to $0.81 as just shared.
Now to organic net sales, which declined 2.4%, including an impact of minus 2.8 percentage points from lost distribution of lower-margin products in U.S. store brand in line with our second quarter earnings call discussion. Organic net sales from the rest of the business improved 0.4 percentage points driven by Women's Health and Healthy Lifestyle categories. Nutrition category had a minus 0.2 percentage points impact on organic sales as lower sales of low-margin oral electrolyte solutions more than offset growth in infant formula. Organic sales of our global OTC brands grew plus 2.1% versus the prior year, stemming from strong performance of Compeed, Nasonex, Bronchostop and Bronchenolo. Overall, our brands continue to perform well.
Now to infant formula.
Job number one, in infant formula was to recover and complete our self remediation actions so that all our sites produce reliable, quality assured infant formula. We have done this and are now achieving high attainment of quality, production and packaging.
Job number two, in infant formula is focused on bringing back service levels across all retailers and contract customers. In addition, to building safety stock to lessen any potential shock to this business. Our highest volume store brand SKUs are now back on shelf, and we are currently achieving approximately 85% in stock across our largest customers. Looking ahead, we expect all customers, including contract to be in stock with our highest volume SKUs by year-end.
Now that the largest store brand customers have inventory, job number three for infant formula sales activation. This entails driving demand creation to promote switching to store brand formula through online ads, promotions and other activities. This work has recently begun resulting in store brand volume share of Non-WIC Powder increasing 160 basis points compared to the prior period as of the latest consumption data. The recent and short-lived consumption spike during the first week of October, likely due to pantry loading from the poor strike and Hurricane Milton also contributed to the store brand share gains.
Our contract customers recently began reintroducing SKUs, and we are leaning in to support and optimize their business, including the launch of several new products. However, early volume share gains for these customers have been slower than the store brand share gains. While a lot of focus this year is being placed on infant formula, we are also driving consumer-preferred innovation. Perrigo is strategically positioned to leverage emerging trends and partner with retailers to drive growth in categories where we play.
One trend worth highlighting is the increasing usage of GLP-1 medications, particularly for weight loss. This market is expected to grow from approximately 6 million users today to approximately 30 million users by 2030. GLP-1 users often experience multiple side effects, which can be managed with OTC products, creating an opportunity for Perrigo and our retail partners. For example, a GLP1 user may need multiple products to treat nausea, diarrhea, headache, constipation and gas. By focusing on specific claims related to GLP-1 side effects, we can provide retailers with a one-stop hub of convenient and accessible OTC offerings that cater to consumers seeking relief.
Retail activation of this innovative program is expected to begin later this quarter. This program is just one example of leveraging Perrigo's scale and agility to quickly provide unique solutions for an emerging OTC trend. Stepping back, I've spent considerable time over the past 16 months assessing our organization, our portfolio and the competitive landscape to ascertain where we play and how we want to win. This work has identified several attractive growth opportunities that have potential to be impactful in the long term. It has also uncovered additional initiatives necessary to rewire Perrigo has set us on a path to achieve sustainable value accretive growth.
These initiatives are: one, stabilizing key areas of our business; two, streamlining our operations; and three, strengthening our foundation for the long term; four, as we will refer to these initiatives, the 3S model. We will provide more detail on these initiatives during our Investor Day early next year, but here is a brief overview.
First, we recognize the importance of stabilizing key areas of our business, namely infant formula, U.S. store brand and core brand share growth in our international markets. Most of these stabilization efforts are well underway and delivering good results, including high attainment levels for quality production and packaging in infant formula, increasing service levels, better joint business planning with customers and driving demand creation, which is a critical differentiator for our U.S. store brand business. Three, continued execution and achievement of our accretive initiatives.
Second, we will position ourselves for long-term sustainable growth by further streamlining the operating model, systems and manufacturing operations to a more simplified global model with one way of working. This will entail one focused and scaled global portfolio prioritizing growth opportunities at the category level and implementing a blended brand strategy tailored to local markets.
Finally, we will strengthen and operationalize the company by prioritizing free cash flow while continuing to delever the balance sheet, concentrating innovation investments of bigger growth initiatives with the highest ROI and leveraging our successful innovation chassis across more brands, including store brands. Again, I'm looking forward to sharing details on our path forward at the investor event early next year.
In summary, we're on track to deliver against our 2024 EPS commitments and expectations. We have made significant progress stabilizing core businesses. We have invested in world-class CPG capability and leadership, and we're executing excellence against our accretive initiatives. I believe we are much better positioned for more reliable earnings per share and revenue growth, and we're also advancing our work to consumerize, simplify and scale One Perrigo.
Investment in brand building capabilities are yielding early positive results, evidenced by solid OTC brand performance in the quarter. And we are significantly advancing our strategic work to fully realize long-term sustainable value-accretive growth. The 9,000 Perrigo team continues to provide significant value to consumers, customers and society as a whole by delivering our important and necessary self-care solutions. The dedication to our purpose is truly remarkable. They embody the One Perrigo ethos, and together, we are committed to making life better through trusted health and wellness solutions accessible tool.
With that, I will turn our call to our CFO, Eduardo Bezerra, to cover the financials. Eduardo?
