Patrick Lockwood-Taylor
President & Chief Executive Officer at Perrigo
Thank you, Brad. Good morning, good afternoon, everyone.
So, to begin today's call, I'd like to briefly reflect on my first 12 months as CEO, and the significant strides our team has made to advance our One Perrigo vision. As we are building our critical capabilities needed to win in self-care. We have also faced challenges. Notably in the infant formula regulatory environment in the US, as we work together to ensure the supply of this critical product for caregivers and babies. I've been especially proud to work alongside my team as we have addressed these issues head-on and with a spirit of resiliency. We're emerging as a stronger company as a result of these efforts.
I spent considerable time assessing our organization portfolio and the competitive landscape. This body of work has only reinforced my original thesis that Perrigo has a strong foundation with a robust asset base. I believe we are poised with greater scale across multiple fronts and have the capacity to drive value accretive growth through consumer-led innovation. This work has also identified the highest potential growth opportunities within our company today and will inform our strategic go forward portfolio, which we look forward to discussing early next year.
We have also executed key cost savings and efficiency initiatives with excellence. Some of these savings will be reinvested to fund both near and long term priorities, including brand building capabilities in the US and provide greater scale for our identified growth opportunities. Additionally, we have made significant progress in strengthening infant formula and are working through long term sustainable growth plans for our US store brand business.
Finally, when I started at Perrigo, I was excited to encounter an organization comprised of dedicated and talented individuals who are committed to excellence and achieving top tier performance. Over the past 12 months, we have further built on this foundation, welcoming additional world class talent to the company in such areas as quality, brand building, and other leadership, which has strengthened our consumer focus and overall capabilities.
In summary, we have completed a great deal of strategic work, all while driving execution across our business. I'm energized by the passion and commitment of my colleagues and remain enthusiastic about the opportunities Perrigo has to create value. Year-to-date, we have delivered on our commitment while managing certain challenges.
We discussed at the start of the year that efforts to enhance our quality assured infant formula network would have a meaningful impact on first half results, and they did, impacting organic next cells by 5.3 percentage points, and earnings per share by $0.43 versus the prior year. After committing intense energy and resources to strengthening infant formula, this business is now poised to deliver ahead of our original expectations for the year. More on this in a few moments.
We also said that we expect to deliver '24 gross margin of approximately 40%, excluding the infant formula impact. And in the first half of the year, we did just that. This performance reflects the positive impacts of product mix, driven by growth in our branded portfolio and our supply chain and project energize efficiency programs.
Finally, we delivered on our first half EPS and continue to expect sizable earnings uplift in the second half. While there were headwinds to our top line, our diversified portfolio, accretive initiatives, and relentless execution, enabled us to deliver on our bottom line expectations. Overall, I am pleased with our first half performance, and particularly in how we have addressed challenges in infant formula.
At the same time, however, there are business dynamics that have changed during the quarter, and these merit discussions. First, we are confident in the recovery of our infant formula business and expect profitability to recover faster than originally expected for the year.
Second, Perrigo's global diversified business insulates us from major seasonal impacts. During the second quarter, cough, cold and allergy volume consumption in geographies where we compete declined mid to high single digits, stemming from much lower seasonal incidences and net changes in inventory levels with US retail customers. These factors led to lower net sales of our cough, cold and allergy products in the second quarter. The results of these dynamics is an unfavorable impact to our '24 net sales outlook of approximately 2.5 percentage points. Our diversified business model, however, helps us to absorb these sales impacts further down our P&L.
Third, turning to our US store brand, Perrigo has a rich history as a market leader in this space, and we're confident in the value we bring to customers and consumers. At the same time, we continue to focus on improving margins to deliver value to shareholders. This can lead to certain instances where we make the strategic and economic decision to walk away from business. And in the second quarter, we did just that.
During negotiations with one customer, we tactically walked away from a portion of our business that was becoming too dilutive to our margins. This loss distribution is resulting in 1.5 percentage point headwind to our '24 net sales outlook. However as the current net value of contracts awarded and lost in '24 is positive, we expect this net sales headwind to be fully offset in 2025. The culmination of these three business updates is anticipated to enhance our full year gross margin now expected to approach 40%. Previously, we had expected full year gross margin of approximately 40%, but excluding the impact from infant formula.
Summing this up, our lower net sales outlook for '24 is expected to be offset by improved gross margin expansion due to faster than expected recovery of infant formula profitability and improved mix in the rest of the business, as well as lower variable expenses this year. This gives us the confidence to reaffirm our full year EPS outlook.
Now let's dig into our second quarter results. Organic net sales declined 9.1%, which included an expected impact of minus almost 7 percentage points from infant formula and an impact of 4 percentage points from lower sales in the Upper Respiratory and Pain & Sleep Aid categories, partially offset by a growth of 1.7 percentage points from the rest of the business.
Growth in operating margins expanded meaningfully year-over-year, plus 190 basis points and 160 basis points respectively. Sequentially, the expansion was even more pronounced as both gross and operating margins expanded more than 400 basis points compared to quarter one, 2024.
Operating income in the quarter was up 1.5%, or 16.7%, excluding the year-over-year impact from infant formula. Second quarter EPS was $0.53 which whilst down $0.10 from a year ago, this is due primarily to a share discrete tax benefit in the prior year and the year-over-year impact from infant formula, or $0.14, which was mostly offset by performance across the rest of the business.
Looking at the component of organic net sales now in further detail. As just discussed, the nutrition category was the largest headwind, stemming from actions we are taking to strengthen our quality assured infant formula network. The net sales impact of minus 4 percentage points from the Upper Respiratory and Pain & Sleep Aids category was due to one, lower seasonal demand in the current year. Two, net change in inventory levels at US retail customers where we experienced restocking of inventory in the prior quarter and destocking the second quarter of 2024. These inventory dynamics and the lowest seasonal demand I just mentioned accounted for approximately 3 points of the 4 points decline. And lastly, SKU prioritization actions to enhance margin accounted for the remaining 1 point. As a side note, this now completes the Americas SKU prioritization actions under our supply chain reinvention program.
These impacts more than offset the positive 1.7 percentage points of growth across the rest of the business, driven primarily by our global branded portfolio. This branded growth included the recent launch of Opill which, along with ellaOne, drove growth in the women's health category. Additionally share gains in Compeed and Jungle Formula led growth in skincare.
Looking at our '24 operational priorities, I'm pleased to say we remain well on track. We've made significant progress augmenting and strengthening our infant formula business and are increasingly confident in our second half recovery as production volumes return. Opill sales continue to grow in the US, and our team is actively monitoring and analyzing consumer awareness, trial, conversion and repeat usage through our real time technology stacks.
This analyses allows us to make swift and informed decisions, leveraging instantaneous insights to optimize our strategy. We are learning what sticks with consumers and will continue working with customers to enhance consumer interest for the product. We are confident that Opill will be an important reproductive health product for women in the US for many years to come.
We also continue to benefit from our accretive initiatives. First, we're on track to deliver a total of $25 million in incremental HRA synergies this year. Second, our supply chain reinvention program achieved gross savings of. $23 million and a gross margin expansion of 40 basis points from the SKU prioritization actions year-to-date.
And finally, Project Energize achieved $53 million of gross savings in the first half of the year, and we remain well on target to deliver $140 million to $170 million in pre tax annualized gross savings by 2026.
Now to infant formula. All sites are up and running, producing reliable, quality assured infant formula. Our focus now lies in rebuilding customer service levels and swiftly getting these critical products back on the shelves to serve consumers who need high quality, affordable infant formula. We're currently making significant progress in quality control, production, packaging and release attainment.
On a weekly basis, production volumes through the first four months of this year were approximately half of 2023's average weekly levels. During May and June as we ramped up production following the remediation efforts with our new protocols in place, we immediately achieved production volumes of 90% of the prior year levels. And our latest data available for July reveals that production is on a path to return fully to prior year levels. Furthermore, manufacturing efficiencies are recovering faster than expected, stemming from reductions in production stoppages and product scrapping, giving us confidence in the recovery of our second half profitability. I want to relay my thanks to the entire team on achieving this outstanding progress and their dedication to getting this business back on track.
Progress made against our self-imposed remediation plans have been impactful both through our financial results, but also through the health of our business. But this business is not without other known challenges, as you may recall, the genesis behind Perrigo acquiring its Wisconsin facility from Nestle in 2022 was to bolster our network and eventually replace an aging facility through this cost effective acquisition. Now that we are producing reliable, quality assured infant formula across the network, we will now start the work on optimizing our production footprint over time.
So, in summary, our business is strong. We remain on track to deliver our critical accretive initiatives, and margins are anticipated to continue to expand. We've made significant progress in infant formula and are very focused now on driving performance in US store brand. We are successfully consumerizing, simplifying and scaling One Perrigo.
Our investments in brand building capabilities are starting to pay off, and we have tremendous growth opportunities ahead of us. The strategic work on how to win continues, and we expect the outcomes from this important initiative will pay dividends in '25, '26 and beyond. Critically, our team remains focused on delivering on our commitments and delivering the balance sheet. Perrigo plays a vital role in a sizable and growing self care market by delivering value to consumers and society. I want to thank, of course, my 9000 plus Perrigo colleagues for their commitment to increasing access for consumers around the world.
And with that, I will now turn the call to our CFO, Eduardo Bezerra to cover the financials. Eduardo.
