Perrigo Company PLC

NYSE:PRGO

Earnings Call Analysis

Perrigo's Recovery and Strategic Focus Amid Market Challenges

Perrigo's Q2 2024 saw a 9.1% decline in organic net sales but significant margin expansion, attributed to the faster-than-expected recovery of infant formula production. The company is optimistic about its full-year EPS outlook of $2.50 to $2.65, despite a revised net sales decline of 1-3%. The reintroduction of Opill and other women’s health products aided growth in their global branded portfolio, with Opill showing promising sales. Project Energize delivered substantial savings, contributing to enhanced operating margins. With production normalizing, Perrigo anticipates substantial profitability and reaffirmed its commitment to strategic initiatives aimed at long-term growth.

Navigating Challenges and Growth

Perrigo, under the leadership of CEO Patrick Lockwood-Taylor, is emerging from a challenging phase, notably in its infant formula segment. The company has faced significant hurdles due to a mix of regulatory scrutiny and declining seasonal demand. In the second quarter of 2024, organic net sales declined by 9.1%, heavily impacted by nearly 7 percentage points attributed to the underperformance of the infant formula category and 4 percentage points linked to lower sales in upper respiratory and pain products. Despite these headwinds, the overall performance in other segments has provided some stability, and optimism for recovery is building.

Financial Performance Highlights

The second quarter earnings per share (EPS) of $0.53 reflects a decline of $0.10 from the previous year. This decrease was primarily due to a one-time discrete tax benefit of $0.09 in the prior year and a year-over-year impact from infant formula, estimated at $0.14. Excluding these factors, operating income actually grew by 16.7%, showcasing significant operational improvements. The gross margin expanded by 190 basis points and the operating margin rose by 160 basis points year-over-year, driven by accretive initiatives such as the Supply Chain Reinvention Program and Project Energize, indicating effective cost-control measures which the company is undertaking.

Guidance and Future Outlook

Looking towards the full fiscal year, Perrigo has updated its guidance to anticipate organic net sales decline in the range of 1% to 3%, with total net sales expected to decrease by 3% to 5%. This revision is primarily due to lower seasonal demand from the cough and cold category as well as adjustments made in the U.S. store brands segment, reflecting a strategic decision to walk away from unprofitable contracts. Importantly, Perrigo is maintaining its guidance for adjusted EPS, projected between $2.50 and $2.65 for the year, buoyed by improved gross margins expected to approach 40%.

Strengthening the Infant Formula Segment

Perrigo has made substantial efforts to bolster its infant formula business, implementing a robust remediation plan across multiple production sites. By May and June of this year, production levels have surged to around 90% of prior year levels, with expectations to fully recover by the end of 2024. This resurgence is pivotal for the company's bottom line, especially as it navigates through the complexities of consumer demand and regulatory challenges.

Strategic Initiatives and Market Position

In addition to stabilization in the infant formula sector, Perrigo is actively pursuing margin improvement across its product lines. Initiatives projected to generate approximately $140 million to $170 million in savings by 2026 signal Perrigo's commitment to efficiency and operational excellence. Furthermore, the company’s entry into the women's health market with products like Opill indicates a strategic pivot towards new growth opportunities, with optimism surrounding its potential for generating market share and contributing positively to revenue.

Long-term Commitment and Leadership

Perrigo's leadership is focused on sustainable growth, committing to invest in talent and infrastructure to enhance market capabilities. The recent divestiture of its Rare Diseases business has bolstered its cash position, with an anticipated cash balance between $500 million and $550 million by the end of 2024. This financial resilience will enable the company to adapt to market fluctuations and invest in growth, reflecting a strategic outlook geared towards enhancing shareholder value.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Perrigo Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, August 2, 2024. I would now like to turn the conference over to Bradley Joseph, Vice President of Global Investor Relations. Please go ahead.

[Bradley Joseph, executive]

Good morning and good afternoon, everyone. Welcome to Perrigo's Second Quarter 2024 Earnings Conference Call. I hope you all had a chance to review our press release issued today. A copy of the release and presentation for today's discussion are available within the Investors section of the perrigo.com website.

Joining today's call are President and CEO, Patrick Lockwood-Taylor; and CFO, Eduardo Bezerra. I would like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and safe harbor language regarding these statements in our release issued earlier today.

A few items before we start. First, unless otherwise stated, all financial results discussed and presented are on a continuing operations basis. Continuing operations include the HRA Rare Diseases business, which is classified as held for sale after the first quarter-end and does not include any contributions from the divested Rx business, which was accounted for as discontinued operations prior to its sale. Second, organic growth excludes acquisitions, divestitures, exited product lines and currency in both comparable periods. All comments related to constant currency remove the impact of currency translation versus the prior year by applying the exchange rates used in the comparable measurement in the prior year's financial statements. And third, Patrick's discussion will focus solely on non-GAAP results, except as otherwise noted. See the appendix for additional details and reconciliations of all non-GAAP financial measures presented. And with that, I'm pleased to turn the call over to Patrick.

[Patrick Lockwood-Taylor, executive]

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 out critical capabilities needed to win in self-care, we have also faced challenges, notably in the infant formula regulatory environment in the U.S., 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 for 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 U.S. 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 U.S. 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 commitments 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 from first half results, and they did, impacting organic net sales 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 impact 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, a diversified portfolio, accretive initiatives and relentless execution enabled us to deliver on our bottom line expectations.

Overall, I'm 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 discussion. 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 at U.S. retail customers. These factors led to lower net sales of our cough/cold and allergy products in the second quarter. The result 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 U.S. store brand. Perrigo has a rich history as a market leader in this space. And we are 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 1 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 a 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 3 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 painless sleep aid categories, partially offset by a growth of 1.7 percentage points from the rest of the business. Gross and 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 1, 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 $0.09 per share discrete tax benefit in the prior year and the year-over-year impact from infant formula of $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 and sleep aids category was due to: one, lower seasonal demand in the current year; two, net change in inventory levels at U.S. retail customers where we experienced restocking of inventory in the prior -- and destocking in the second quarter of 2024. These inventory dynamics and the lower seasonal demand I just mentioned accounted for approximately 3 points of the 4 point 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 elllaOne, drove growth in the Women's Health category. Additionally, share gains in [ compete and dongle ] formula led growth in skin care.

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 U.S., and our team is actively monitoring and analyzing consumer awareness trial, conversion and repeat usage through our real-time technology stacks. This analysis allows us to make swift and informed decisions, leveraging instantaneous insights to optimize our strategy. We are learning what sticks with consumers, and we'll 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 U.S. 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 pretax 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 on rebuilding customer service levels and swiftly getting these critical products back on the shelves to serve consumers to need high-quality, affordable infant formula. We are currently making significant progress in quality control, production, packaging and release attainment. On a weekly basis, production volumes through the first 4 months of this year were approximately half of 2023's average weekly levels. During May-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 and 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 to our financial results, but also to 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 U.S. 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 outcome 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 9,000-plus Perrigo colleagues for their commitment to increasing access to consumers around the world. And with that, I will now turn the call to our CFO, Eduardo Bezerra, to cover the financials. Eduardo?

[Eduardo Bezerra, executive]

Thank you, Patrick. Good morning and good afternoon, everyone. Looking at the second quarter financials, starting with the GAAP to non-GAAP summary. Primary adjustments to our second quarter non-GAAP P&L were, first, amortization expenses of $58 million, restructuring charges of $37 million, primarily related to Project Energize and a $34 million impairment charge related to the divested HRA Pharma Rare Disease business. Full details can be found in the non-GAAP reconciliation tables attached to today's press release. From this point forward, all financial results discussed will be on an adjusted basis unless otherwise noted.

This, Patrick already discussed second quarter consolidated top line results. I will fast forward to operating results. Operating income of $139 million grew 1.5% versus a year ago as benefits from accretive initiatives, including our Supply Chain Reinvention and Project Energize programs more than offset the impact from lower net sales and actions in infant formula. Excluding the year-over-year impact from infant formula, operating income grew plus almost 17%. EPS was $0.53, down $0.10 from a year ago due primarily to a $0.09 per share discrete tax benefit in the prior year and a year-over-year impact from infant formula of $0.14, which was mostly offset by strong performance across the rest of our business.

Year-to-date organic net sales declined 8.1%, including a known minus 5.3 percentage points impact from infant formula and minus 4.4 percentage points impact from the upper respiratory and pain and sleep aid categories that Patrick just mentioned. These impacts more than offset plus 1.6 percentage points of growth across the rest of the business. Year-to-date, adjusted operating income was down almost 10%. Excluding the year-over-year impact from infant formula, operating income grew almost 17%. Year-to-date, earnings per share declined $0.25, or 23%, including the impact from infant formula of $0.43 and the prior year discrete tax benefit of $0.09.

Looking at organic top line performance by segment, starting with CSCI. Organic growth in the quarter was plus 1%. Lower seasonal demand and supply constraints in the upper respiratory and pain and sleep aid categories resulted in a 3.5 percentage point headwind versus the prior year. This was more than offset by strong growth of 4.5 percentage points across the rest of the segment, led by market share gains in key brands such as [ Compete ], ellaOne and [ Paranix ], in addition to high single-digit growth in our U.K. store brand business.

In CSCA, organic net sales declined 15% due to minus 10.8 percentage points from infant formula and minus 4.4 percentage points from the upper respiratory and pain and sleep aids category. Organic net sales included a reduction of 1.8 percentage points from the final tranche of SKU prioritization actions to increase margins. Growth across the rest of this segment was flat. And importantly, our OTC brands grew more than 40%, driven by Opill, [ Nasonex and Derma ]. Margin expansion has been a tough focus for our team. As you can see on this slide, this focus has translated to meaningful margin improvement over the past couple of years, and we remain on track to achieve our operating margin target of 14% to 16% by the end of [ 2024 ]. In Q2, gross and operating margin expanded 190 and 160 basis points, respectively. These were driven primarily by accretive benefits from our Supply Chain Reinvention Program, including the SKU prioritization action we just discussed and Project Energize.

Also worth highlighting is the sequential progress of margins. Both gross and operating margins expanded more than 400 basis points quarter-over-quarter. As I just mentioned, second quarter earnings per share of $0.50 declined $0.10 versus prior year. This change included discrete tax benefits in the prior year quarter and the impact from infant formula.

Moving to cash. Our cash on the balance sheet at the end of the second quarter was $543 million, not including upfront proceeds of $205 million received from the divestiture of the Rare Disease business completed on July 10, 2024. Year-to-date operating cash flow was $8 million, as cash generated from the business was mostly offset by, first, $40 million of restructuring costs primarily related to Project Energize and second, from the shareholder lawsuit we settled last quarter. As a reminder, we expect a full recovery of these $97 million from insurance still during 2024.

During this quarter, we invested $29 million in capital expenditures and returned $38 million to shareholders through dividends. We continue to anticipate operating cash flow conversion for the full year of 90% to 100% as a percentage of adjusted net income. In total, our estimated ending cash balance for 2024 remains between $500 million to $550 million, including the expected recovery of the $97 million shareholder settlement. And as committed, we continue to expect a net leverage ratio of approximately 3.8x to 4x at year-end.

Turning to our 2024 outlook. We're increasingly optimistic about our infant formula business. Our global branded portfolio continues to perform well, and we expect a normal sell-in for the upcoming '24-'25 cough and cold season. However, we updated our 2024 net sales growth outlook versus the prior year. While this does not impact our EPS outlook, we now expect organic net sales to decline in the range of 1% to 3% and all-in net sales to decline in the range of 3% to 5%. These updated net sales ranges imply a 4 percentage point change in the midpoint to our previous net sales outlook. This is due to 2 primary factors. First, 2.5 percentage points from our second quarter results stemming from lower global seasonal demand and U.S. retailer destocking. And second, 1.5 percentage points from U.S. store brand due primarily to the business we walked away from, which Patrick discussed. As a reminder, we expect this 1.5 percentage point net sales headwind to our 2024 outlook from U.S. store brand to be offset with new business wins, leading to no impact to top line growth in 2025.

Pulling this together, and as just noted, the P&L impact from the updated net sales outlook is expected to be offset by improved gross margin expansion and lower variable expenses this year. This gives us confidence to reaffirm our full year 2024 adjusted earnings per share outlook of $2.50 to $2.65. Interest expense, effective tax rate and operating cash flow conversion remain unchanged, and we now expect lower cash spend related to infant formula remediation. Our second half earnings per share is expected to be more than double our first half.

Let me provide some color here. There are 3 key drivers of this expected growth. First is the recovery of the infant formula business, starting with the absence of significant remediation costs, including extended client shutdowns that took place in this first half of the year. Next, the phasing of sales has always been weighted heavily to the back half, which you'll see drives a meaningful contribution for the balance of the year. Second, timing of Project Energize savings, of which we have already made significant from investments and have achieved the $53 million in gross savings year-to-date is expected to result in lower operating expenses in the second half. And finally, the contribution from the rest of the business, which is expected to increase slightly compared to the first half, driven by the seasonal cough and cold selling.

In conclusion, I would like to extend my gratitude to the entire Perrigo team for their continued dedication. We remain confident in our ability to adapt, evolve and deliver long-term value for our stakeholders. Thank you for your time and continued trust in Perrigo. And now I will turn the call back to Brad. Brad?

[Bradley Joseph, executive]

Thank you, Eduardo. Operator, can we please open the call for questions?

[Operator]

Thank you. [Operator Instructions] And your first question comes from the line of Chris Schott with JPMorgan.

[Christopher Schott, analyst]

Congrats on the progress here in nutritionals. I had a couple of questions on this lost customer. So maybe just can you elaborate a little bit more what happened here? It sounds like this wasn't a very profitable business you walked away from. But -- are there any particular segments within CSCA that we should be watching here? And maybe the second part of the question there was, I just want to make sure I caught the comment regarding the impact on 2025. It sounds like wins elsewhere will offset the business you lost, but just maybe talk a little bit about the margin profile of that new business versus what you lost. So just a little bit more color on that front, and I just have 1 follow-up after that.

[Patrick Lockwood-Taylor, executive]

Chris, this is Patrick. I hope you're well. Thank you for the question. This was a margin-dilutive business. We looked at it very carefully. It was 1 customer. It was several molecules of subcategories. And we're reporting it because really it was a one-off. It was impactful in terms of revenue, but positive in terms of margin expansion. And then you're right to pick up on the other points. Our net gain, we have a net gain in contract 1 this year in our store brand business. And we'll start to see that revenue flowing in late quarter 4, but more predominantly in '25. So net, it is -- we're not seeing any change in revenue outlook as a result of the loss of that more unprofitable customer. And you're correct again to say that the businesses won versus that business lost is more margin accretive, yes.

[Christopher Schott, analyst]

Okay. Very helpful. And then just my last question was just on the nutritional business. It seems like you're making good progress here. But just at this stage, how confident are you that you're fully through this process and that there won't be any meaningful setbacks in terms of the recovery in nutritionals? I mean, at this point, are you confident to say that the remediation that was put forth was successful and that this business is kind of in a good place going forward?

[Patrick Lockwood-Taylor, executive]

Yes. I've been very close to the remediation work. As you know, I chair the steering committee. The remediation work has been executed extremely well across the 3 sites. All the key performance indicators show that we are fully quality compliant. I've not seen any backslide in terms of those KPIs as we've been through the remediation effort, and we're on the other side of that. So really now, it is into normal manufacturing operations, but in a much more quality compliant way.

[Eduardo Bezerra, executive]

And Chris, just to add a little bit color there. So the team now is 100% focused on recovering the share on our store brand business as well as growing the other pieces of the business that were impacted. So that's 100% now with the situation more under control from the production and release the payment side. It's the team, 100% now focused on the market side to regain the business and working closely with our customers to get products back on shelf.

[Christopher Schott, analyst]

Perfect. And then just as a follow-up on that one. In terms of the share regain, and any pushback at all from customers? Or so far, is that product you're producing -- kind of finding a home, I guess, in terms of customers?

[Patrick Lockwood-Taylor, executive]

Yes. I mean, this continues to be a capacity-constrained industry, generally. And we're not having any problem repipelining our business.

[Operator]

Your next question comes from the line of Korinne Wolfmeyer with Piper Sandler.

[Korinne Wolfmeyer, analyst]

First, I'd like to touch on the guidance reduction. If I understand correctly, it looks like to be solely coming from that that SKU rationalization and then the upper respiratory. So can you confirm those are the main things driving that guidance reduction? And then on the SKU rationalization, can you comment on how quick of a decision that was? Because it obviously wasn't factored into expectations last quarter. And then what gives you confidence that we might not see another -- you might not have to have another guidance reduction for further SKU rationalization this year?

[Eduardo Bezerra, executive]

Yes. So let me -- Eduardo here. Let me clarify. So the change in guidance that we talked at that midpoint is about 4 percentage points. 2.5 are related to the -- mainly the impact that we saw in the second quarter, and that's mainly related to the lower global seasonal demand for cough and cold and allergy and some impact related to the U.S. retailer destocking. While 1.5 comes from lower distribution in the U.S. store brand. So when we talk about the SKU rationalization, that was already considered as part of our plan. So the 4 percentage points reduction on our full year guidance are related to those 2 impacts, 2.5% and 1.5%, okay?

[Korinne Wolfmeyer, analyst]

Got it. That's helpful. And then can you touch on expectations into 2025? I know you're not guiding that far out, but you have previously laid out some commentary on how to think about 2025. With the top line impacts we're seeing, but offset in the P&L, is there any reason that 2025 expectations, would it still be intact with the number you delivered today?

[Eduardo Bezerra, executive]

Yes. So again, it's still early in the process, and we're seeing a lot of industry dynamics, mainly on consumer demand being significantly impacted. But at this stage, you remember, as we have positioned before, we expect, of course, the significant impact we had in the first half of infant formula to not repeat. So we expect a significant portion of that being recovered. And so -- and at the same time, remember, we mentioned that we would recover that, but also we needed to build some finished goods safety stock. So I would say a significant portion of the impact that we mentioned that took place in the first half of 2024 should be recovered in 2025, which also implies that the product will benefit from the price increases that we had in 2023. That's number one.

It's going to be very important to understand how consumption and also the upcoming cough and cold selling season takes place, right? Because we saw a very significant impact to the whole industry in the first half. So that's going to be a very important item that we're going to be taking a look. And also, remember that we mentioned before, we continue to expect Opill to be dilutive for the next -- for the first -- since the launch until the next 18 months. So those are the 3 key factors that we're looking right now, but it's fair to assess right now that we mentioned in the previous quarter that would be $3 plus, and that's what we're looking right now.

[Korinne Wolfmeyer, analyst]

Great. And then if I could squeeze in 1 more on Opill. Can you provide a little bit of color around the sell-in versus sell-out differential that you're -- you're seeing? We're able to get some [ scare ] data, and it doesn't fully align with your previous comments on the sales you've been recognizing. And I understand there's also a heavy DTC component that's not factored in the data we get. But any color you can provide on what you're seeing versus sell-in and sell-out?

[Patrick Lockwood-Taylor, executive]

Yes, this is Patrick. So very good sell-in, very good distribution. Obviously, a new consumer, a new category. We're learning and refining the model. I would say 30% to 40% of our sales are on e-commerce. Obviously, that channel lends itself to subscribe and save, and we're seeing that. Key learnings, probably shifting media more to awareness generation, how to operationalize the insurance support that we have with Caremark. We're working through that. That is significant additional volume opportunity for us. We're learning as well sort of back to the future that having retail distribution is not sufficient. Those retailers that are supporting the brand launch with incremental display clear signage are seeing a materially different sell-through rate. We want to get that executed across all retailers. It's very important for the category and the consumer.

And lastly, continuing to develop our social influencing, our HCP network. The role of HCPs and the conversion to this is extremely important, given some of the broad considerations the consumer has in terms of safety, side effects, effectiveness, et cetera. And so we continue to see good awareness build. We continue to see sales growth. We've just gone through a critical milestone in terms of share. So we're learning and improving. This was never going to be optimized day 1, but I'm actually quite pleased with our ability now to read and react and enhance our marketing execution.

[Operator]

And your last question comes from the line of Daniel Biolsi with Hedgeye.

[Daniel Biolsi, analyst]

Thank you. So for the infant formula, my anecdotal evidences, your demand certainly exceeds your supply. Did you lose any shelf space? And when do you plan on being able to build safety stock? Can you do that without losing shelf space?

[Eduardo Bezerra, executive]

Well, so we're looking to how much can we start doing in 2024, but I think that's going to be very difficult given that there's still a lot of demand for store brand products in the marketplace. So we're seeing that more to take place in the first half of 2025.

[Daniel Biolsi, analyst]

Okay. And then 1 other question. Do you have any plans to reduce your inventories of [ phenylephrine ] ahead of a possible FDA decision, like a competitor announced?

[Eduardo Bezerra, executive]

Sorry, could you repeat? The inventories of what?

[Daniel Biolsi, analyst]

Phenylephrine.

[Patrick Lockwood-Taylor, executive]

No. understood what the FDA said. It's not in force or legal requirements, and there still continues to be demand for those products. So we continue to supply it. And no, we've not made a tactical decision to reduce that inventory while we continue to see good demand. And I would say that phenylephrine-based products -- so irrespective of what happens here, the great majority of consumers, of course, will use alternative products. And there tends to be a less profitable category for us anyway. So no plans, and we see it as potentially positive as people move to different formulations.

[Daniel Biolsi, analyst]

Okay. And then for the retailer inventory levels for cough and cold, does that require you to carry more if they're carrying less? Or do you think this is just sort of a onetime little reduction they've had in the last quarter or 2?

[Eduardo Bezerra, executive]

Yes, we're seeing that as more of a onetime, right? So I think what we're seeing is after a COVID situation and now that the industry per se has been adjusting that, so that's getting more into a normalized levels across the whole industry. And so it's going to be interesting, which on the other side means that probably for the cough and cold season, depending on how these start to shape up, there will be a need to replenish stocks in the third and the fourth quarter of the year.

[Operator]

And that is all the questions that we have at this time. I would like to turn it back to our President and CEO, Patrick Lockwood-Taylor, for closing remarks.

[Patrick Lockwood-Taylor, executive]

Yes. Thank you very much. Thank you for joining us today. Thank you for those questions. I know we have a number of calls later with you, which we look forward to. So really, from my vantage point, I think we're on track with our key reliability and our cost-saving initiatives. We are set for revenue recovery in the second half, accelerating particularly in quarter 4. Our earnings per share adjusted for last year's tax benefit and infant formula are a healthy plus 24% versus quarter 2 a year ago. Our U.S. store brand business is a key focus for us, and we are forecasting growth for that, driven by the volume share growth we're seeing in that category and net new contract wins that are realized, as I mentioned, in late '24 and '25.

We are also accelerating the acquisition and development of world-class leadership and talent, which will also be a core driver for us going forward. So our business is stabilizing, and we can now turn more of our organizational capacity to accelerating more profitable growth being realized in '24 and of course, through to '25. So net, it was a stabilizing 6 months for us, but now we're turned squarely back to growth. Thank you very much for joining us.

[Operator]

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.