Patrick Lockwood-Taylor
President & Chief Executive Officer at Perrigo
Thank you, Brad. Good morning, good afternoon, everyone. I'll start the call with a few opening comments. First, I'd like to thank all of our 9,000 plus strong Perrigo team, who work relentlessly to deliver world-class self-care products to consumers. I truly appreciate all that you do each and every day.
We ended 2023 with our international business firing on all cylinders, while our US OTC business is performing well as well, amid a normalizing consumer environment as store brands continue to gain market share from national brands. In addition, our accretive initiatives with synergies from the HRA acquisition and our Supply Chain Reinvention Program are adding value and remain on track. We were proud to also achieve a multidecade effort to win FDA regulatory approval for Opill, the first women's contraceptive to be available over-the-counter in the United States. During 2023, these positive benefits offset the impact of evolving regulatory guidelines in our infant formula business. 2024, our team is working to quickly implement a new action plan to augment and strengthen our infant formula business amid these evolving regulatory expectations. We now expect stabilization during the second half of 2024, slightly later than previously planned.
Now looking at the fourth quarter and our 2023 financial highlights. Net sales in fiscal 2023 grew nearly 5%, driven by our international and core US OTC businesses. In addition to benefits from acquisitions, which more than offset headwinds in the legacy infant formula business. Organic net sales for the year increased 2%, including an unfavorable two percentage points from SKU prioritization actions. Gross margin, which has been a major focus for improvement expanded 260 basis points to 38.8%, and operating margin expanded 130 basis points to 12.3% for the full year.
Fourth quarter EPS grew 15%, leading to a full-year EPS of $2.58, an increase of 25% compared to the prior year. And importantly, we delivered very strong cash flow conversion of 115% for the full year. '23 top line growth was broad-based across nearly every category. We realized meaningful growth in skincare, nutrition and women's health, which were partially fueled by the HRA and Gateway acquisitions. Healthy Lifestyle also contributed strong growth, driven by the US smoking cessation products.
Category performance in the fourth quarter, however, was mixed, driven by growth in Healthy Lifestyle and Digestive Health, in addition to low single-digit growth in cough cold products. Cough cold sales in the US grew mid-single digits, driven in part by share gains and restocking of liquid cough cold products, which were constrained in the prior year. These benefits were offset by infant formula, SKU prioritization actions and lower cough cold sales in Europe due to lower incidence levels.
Importantly, store brand dollar share of US OTC increased 70 basis points during the last 13 weeks according to IRI, as consumers continue to embrace value offerings. In quarter four, our 70 to US retailers was higher than consumption, leading to a slightly elevated retail inventory level as we entered 2024.
The margin improvement I just mentioned included benefits from our ongoing accretive initiatives. In '23, the team delivered $30 million in expense synergies from the HRA acquisition, which were offset by one-time costs related to the transition of third-party HRA distributors to the internal Perrigo network. Now that this transition is complete, we will realize the full benefit in '24.
We also advanced our Supply Chain Reinvention Program, delivering $40 million of net savings during the year, while SKU prioritization actions in CSCA delivered 30 basis points of gross margin benefit to total Perrigo. We have now delivered more than one-third of the expected $100 million to $120 million in annualized savings by 2025 from this program, excluding targeted benefits from infant formula.
For 2024, we have identified clear actions to achieve our operational and cash flow priorities, including delivering on the remaining HRA cost synergies, executing on our Supply Chain Reinvention Program, and successfully driving our growth plans. In addition, we must also augment and strengthen our infant formula business, accelerate our journey to One Perrigo by evolving our organization, our portfolio, our processes through the launch of Project Energize, which I will cover in a few minutes. We also need to enhance our brand-building capabilities and successfully launch Opill.
Looking at these in more detail. During 2023, our team have been working to adapt to the evolving US infant formula regulatory landscape, which triggered a major overhaul of long-standing industry standards. In response to these changes, we made considerable investments in our infant formula manufacturing sites, including enhanced cleaning and sanitation protocols, enhancements to our environmental monitoring programs, and added additional quality assurance personnel. These changes resulted in lower manufacturing output and production yields across our network. Then, in late November of last year the FDA issued a Form 483 to our Wisconsin facility, which we acquired in November 2022. This followed the receipt of a warning letter issued to this facility earlier in the year.
Now, it was clear to me, as a new CEO with over 20 years of experience in regulated industries such as healthcare and having led other good manufacturing process plant remediations, that we need to put ourselves on an accelerated plan to augment and strengthen this business by investing and making facility enhancements and revising our quality protocols to ensure quality assured manufacturing in line with these new regulatory expectations. As a result, we bolstered our internal resources and brought in additional outside expertise to help revise, enhance, strengthen, and accelerate comprehensive standards and processes across our infant formula network, which we believe will position us well for the future. I personally chair the steering committee that oversees these efforts.
As part of this plan, our manufacturing facilities have either undergone or are undergoing a site-specific evaluation, which may entail a pausing of production for comprehensive cleaning, infrastructure improvement, and further enhancement to quality protocols and manufacturing processes. Our Wisconsin facility has recently completed a plant-wide reset and is now back in production. Our other two infant formula facilities are under evaluation or set to begin a reset in the coming weeks. Cash costs to achieve this critical remediation plan are estimated at $35 million to $45 million.
Due to unabsorbed overhead and depressed sales volumes resulting from these resets, infant formula operating income in 2024 is now expected to be below 2023 levels, where previously we expected a recovery. Context normalized full-year operating income generated from our infant formula business should be about $140 million or more. 2023, it was approximately half of this. To dig a bit deeper, we expect quarter one 2024 infant formula operating income to be approximately $50 million lower than prior year, building back to flat versus the prior year in the second quarter.
As our facilities ramp up production and work to replenish inventories, we anticipate this business stabilizing and returning to growth in the second half of the year. Adapting to regulatory change and maintaining compliance is core to Perrigo's business and culture. Our infant formula products provide superior value to consumers and customers and play an important role during the first years of life. I'm confident that with this augmented and accelerated efforts, we will stabilize and strengthen this business, which is the right thing to do for our consumers, our customers and our investors.
Now turning to Project Energize. As we embark on the next stage of our self-care journey and evolve to One Perrigo, we are focused on creating a sustainable value-accretive growth strategy through a blended branded business, which I'll expand on in a few moments. To support this strategy, we have accelerated the launch of a three-year global investment and efficiency program, which we have called Project Energize, to drive the next evolution of capabilities and increase organizational agility. Efficiencies generated by Project Energize will enable us to drive global capabilities, including brand building and consumer-led innovation, unify our platforms and technologies, and support global business service models. Energize will also increase our organizational agility and maintain a competitive cost structure by centralizing and scaling our operating model in CSCI and streamlining commercial operations in CSCA.
Benefits from Project Energize will also help us mitigate the near-term impact from actions we are taking to augment and strengthen the infant formula business. We expect approximately 60% of the efficiencies from Energize to be achieved through non-headcount-related actions, as we streamline and focus the organization. These efficiencies will be driven by several initiatives, including optimizing global advertising and promotional spend, eliminating planned investments that are not aligned to our One Perrigo Vision and procurement savings. The remaining 40% of the targeted efficiencies will be generated by centralizing CSCI and streamlining CSCA, resulting in a net role reduction of approximately 6%, thereby generating meaningful operating savings. This reduction includes the elimination of current and open roles, as well as the creation of new roles as we invest in brand-building and innovation capabilities.
Energize is expected to deliver annual pre-tax savings of $140 million to $170 million by the end of 2026, of which, approximately $40 million to $60 million will be reinvested to build the necessary capabilities and processes I discussed earlier. The estimated cash cost to achieve Energize is $140 million to $160 million, including $20 million to $40 million in investments to enhance our capabilities in digital tools and systems. These costs and investments are anticipated to be incurred by the end of 2026. While the decision to reduce the number of roles at Perrigo was not an easy one, it will enable organizational dexterity across our segments by enhancing decision-making and simplifying commercial operations.
Now turning to Opill. As we progress our work to enhance brand-building capabilities, we're excited about the upcoming launch of Opill. This is by far the most revolutionary and holistic product launch in the history of Perrigo, and will be a benchmark for future branded launches. The Opill program encompasses a 360-degree approach to establish OTC, oral contraception awareness. Omni-channel activation plans are in place to drive awareness in-store, online and at pharmacy, building a reassurance bridge to guide consumers through their decision journey. We expect Opill to be available to consumers in-store and online within a few weeks. In addition, we view Opill as a key pillar to our growing women's healthcare business. Perrigo intends to be a global leader in women's health, and believe we have the core portfolio and personnel to implement this strategy.
Translating these tangible operational priorities into our 2024 EPS outlook. First, we have several favorable trends, including momentum in our international and US OTC businesses, benefits from Project Energize, contributions from our Supply Chain Reinvention Program, and synergies from the HRA acquisition. These drivers are expected to be partially offset by the absence of tax benefits in the prior year and the operating income impact from expected exited businesses and products. Putting this together, we expect 2024 EPS to grow in the mid-teens as a percent versus 2023, excluding infant formula.
Taking infant formula into account, 2024 EPS is expected to be relatively flat to 2023. For context, earnings from our infant formula business are expected to be impacted by approximately $0.65 from our expectations at our last earnings call in November. While we are taking a conservative approach to our infant formula expectations in 2024, we have a clear action plan to recapture those lost earnings as we head into 2025.
Now, I would like to share the progress we are making on our blueprint for One Perrigo, including our new vision and purpose which will serve as our north star. We have made significant progress on our long-term enablers of our strategic principles, specifically, work to identify our winning portfolio is swiftly moving ahead. We currently compete in nine categories across multiple continents in more than 20 countries. To win in self-care, I believe we require a more focused approach to market, one of that is simplified and scalable.
We are also centralizing our capital allocation decisions. This approach will be standardized for all of the investments from capital expenditures, to advertising and innovation to shareholder returns. Governance will be owned by a newly established capital allocation office which will report to me. And with the upcoming launch of Opill, we are taking a sizable step in our brand building capabilities. Launches such as this will help build our blended branded model, which we introduced at our last earnings call.
I want to spend a moment on a good UK example of a blended branded business. Our business model is a portfolio of consumer-preferred, branded, better-value, and store-brand solutions. This model is well established in many consumer categories, but has yet to be broadly adapted to the OTC arm. Perrigo is uniquely positioned to bring this model to market. And importantly, we already have a proven framework within our portfolio today. Our UK business provides unique value to customers as it is vertically inclusive, allowing Perrigo to partner and drive strategies aligned to specific retailer objectives. It also provides value to consumers as it is price-inclusive and allow Perrigo to provide high-quality self-care products across all consumer price points and, of course, to Perrigo, as the top-line growth and margin structure are both highly accretive to our overall business. And of course, to our shareholders, as this will drive long-term sustainable value accretive growth. This model will be powered by the breadth and scale of our world-class manufacturing and quality-assured supply chain and the innovation capabilities that we have across those categories where we choose to play.
So, the key takeaways. While we have achieved EPS outlook in 2023, we need to improve the quality of our business performance by augmenting, accelerating and strengthening infant formula, achieving Project Energize targets, and launching Opill with excellence. In addition to these priorities, we'll continue to consumerize, simplify and scale our business, all while focusing on cash and returns.
With that, I will now turn the call over to Eduardo, our CFO to cover the financials. Eduardo?
