Good morning, and welcome to Perrigo's Second Quarter 2022 Earnings Conference Call. I hope you all had a chance to review the earnings press release we issued this morning. A copy of the earnings 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, Murray Kessler; and recently appointed CFO, Eduardo Bezerra. Welcome Eduardo.

Eduardo Bezerra - Executive Vice President and Chief Financial Officer

I'd 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 press release issued earlier this morning. A few quick items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the divested Rx business, which was accounted for as discontinued operations prior to its sale.

In addition to other non-GAAP adjustments as described in the appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from the prior year period, certain costs incurred to support the operations of the Rx business, which were reported in continuing operations. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. Second, organic growth excludes acquisitions, divestitures and currency in both comparable periods. And third, management's discussion will focus solely on non-GAAP results, except as otherwise expressly noted.

Now I would like to turn the call over to Murray.

Murray S. Kessler - President and Chief Executive Officer

Thank you, Brad, and good morning, everyone. I want to recognize the entire Perrigo team for a truly remarkable quarter. We are executing well against our self-care strategy, which is clearly the right direction for our business. And even though we continue to operate in an extremely difficult macroeconomic environment, the team once again achieved a number of major accomplishments during the second quarter.

Let me be specific. First, we closed on the HRA transaction, which had an immediate impact on the quarter and is setting us up for outsized growth. Two, we closed on $2.6 billion in senior secured credit facilities, locking in favorable rates and further certainty. Three, we received FDA approval of and launched Perrigo's first-ever branded Rx-to-OTC switch, Nasonex 24-hour. Four, we filed with the FDA for the first-ever Rx-to-OTC switch for a daily birth control pill, the Opill. And five, we worked around the clock at our infant formula facilities to deliver 72 million more infant feedings year-to-date than the same period last year as we continue to do everything we can to help build a severe shortage in the U.S. created by a competitor's recall. And we did all of this while delivering year-over-year constant currency top line growth of 20%, gross profit growth of 17% and operating income growth of 8%. We also achieved a 310 basis point sequential improvement in Perrigo's gross margin as promised.

Net-net, I'm pleased to see strong fundamentals on our business and a full pipeline of significant innovation. Looking at the quarter in a bit more detail. We delivered strong top line growth with reported net sales growth of 14% or as I just said, plus 20% growth on a constant currency basis. This was driven by robust organic growth of plus 17%, stemming from continued strength in our product categories, including cough, cold and infant formula and channel expansion, including e-commerce. Worth pointing out, the bulk of our 17% organic growth was volume mix with only four points of that growth coming from price. Sizable volume/mix growth, price increases and the incremental contribution of HRA revenues for two months overcame significant inflationary pressures on cost, the Latin America and ScarAway divestitures and the higher operating expenses in the quarter versus last year, which included $8 million of costs not expected to repeat.

Higher year-over-year interest expense and a slightly higher share count led to constant currency diluted EPS for the quarter of $0.49 or $0.43, including adverse currency translation. Importantly, top line growth year-over-year accelerated for the fifth quarter in a row as consumer demand for the categories we compete in is very strong, and our inflation justified price increases taken to offset severe inflation-related cost increases are taking effect. As I said, HRA, which is included in our results, made an immediately positive impact to the quarter, contributing $65 million in constant currency net sales with only two months of accretion following the April 29, 2022 close. HRA's high gross margin had a 220 basis point positive impact on Perrigo's consolidated results. We expect the long-term benefits from the acquisition of the fast-growing HRA portfolio to be significant, including our estimate of over $40 million in cost synergies.

As we align our strategic growth pillars to incorporate the HRA portfolio, we've created two new product categories we are reporting in our disclosures: women's health and skincare. Both will be important to the future Perrigo growth story. Skincare is now our second largest global category, 15% of global sales. The segment is growing strong and includes major brands like Compeed, ACO, Maderma and Amalia. We view women's health as potentially our largest and most relevant global growth opportunity. And we look forward to sharing more about our plans in this area in the near future. With those new product category definitions as part of our disclosure framework, let's take a closer look at revenue growth for the quarter. As you can see, strong double-digit growth was experienced across both Consumer Self-Care Americas and Consumer Self-Care International. It was also strong across our major product categories.

Let me give you a few notable highlights. One, our upper respiratory revenues grew 44% versus a year ago globally, and our related pain and sleep aid revenues grew 14%. We attribute this to a rebound in cough/cold sales as compared to last year's sales, which were still depressed as a result of COVID-19-related lockdowns. That, in combination with an extended cough/cold season this year and a good start to the global allergy and hay fever seasons, accounts for the strong growth in this product category. Two, a 31% increase in our nutrition business was driven by infant formula, which primarily benefited from the surge in demand in response to the competitor brand recall I just mentioned. Three, a 30% increase in our skin care business relates to the addition of Compeed and Mederma, and continued strong growth on ACO. And four, our women's health business grew 77% due mainly to the addition of the HRA businesses, which also benefited from the increased demand spurred by the public concern before and after the recent judicial decision in the U.S. related to Roe V. Wade.

It's worth noting that our shipment growth rates were somewhat higher in the quarter than the consumer offtake growth rate. I note that this is not due to increased inventory as customers. Rather, if you remember last year's second quarter was slightly depressed due to inventory reductions by our customers. The absence of that reduction this year gave an extra benefit to Q2 sales. In fact, our inventory levels are where they should be with the obvious exception of infant formula. Another positive trend in the second quarter was the share trend between total store brands and national brands. Year-to-date, total store brands have gained more than three share points on a dollar basis. While early, consumers are clearly shifting to store brand as a result of inflation. As we discussed last quarter, our infant formula business continued to gain volume share in the non-WIC category, up more than 10 share points versus prior year.

These gains are due to the launch of our store brand hypoallergenic formula and, of course, the shortage created by the competitor recall. We continue to run our factories around the clock and have optimized our product offering so that we can produce 117% of our normal full capacity. We're doing everything we possibly can to help feed America's babies during this crisis. Importantly, this unusual circumstance has given many families the opportunity to try a private label infant formula for the first time, a good portion of which we believe will be sticky. Latest survey results show that more than one in three pediatricians are recommending Store Brand formula to parents, up from one in five in October of a year ago.

These results illustrate that our physician-directed marketing efforts are making significant progress. And this is an important trend as the parent or caregiver who purchases infant formula typically turns over every 12 months. Our investments over the last few years in our e-commerce business continued to deliver significant growth for Perrigo. E-commerce sales in the first half of the year grew more than 25% versus the strong prior year period, driven both by the Americas retail customers and international direct-to-consumer initiatives. E-commerce sales are now over 12% of Perrigo's global sales. During the quarter, the team launched our first-ever branded Rx-to-OTC switch, Nasonex, now available on retail shelves.

And as a reminder, this was a first cycle approval and illustrates the robust regulatory capabilities at Perrigo. Congratulations to the entire team on this important launch. Another example of our regulatory and Rx-to-OTC switch capabilities at Perrigo is the recent filing of our application to the FDA for the potential first-ever over-the-counter oral contraceptive, the Opill. This filing represents a tremendous amount of work done by our HRA colleagues and our commitment and their commitment to women's health. It's a meaningful step forward to expanding affordable access of daily birth control products for women in the U.S. at a time when it is most needed.

The outcry of support for this filing was overwhelmingly positive, and we hope to launch this product in the U.S. late next year pending FDA approval, of course. Another bright spot in the quarter was gross margin. Perrigo's second quarter gross margin expanded sequentially from the first quarter by 310 basis points, well on the way to our goal of recapturing 400 to 500 gross margin points versus the first quarter by year-end. I don't want to sugarcoat this in any way. Rising input costs and severe labor shortages are still part of this dynamic macro environment. These headwinds have yet to ease, but despite that, the price increases we've been able to implement along with a number of procurement actions gives us confidence that we will still reach our gross margin goal. As I discussed earlier this year, our self-care transformation is complete.

Now is the time to optimize and accelerate the new Perrigo. An important part of that next phase is our global supply chain initiative, designed to maximize productivity and efficiency in order to deliver world-class service levels and enhance gross margins for years to come. The design phase is basically complete and we've begun what will be a five-year phased optimization, which ultimately should deliver between $100 million and $300 million in net cost savings. Let me give you a few examples. First, we'll be upgrading our demand planning systems utilizing the business intelligence and global data warehouse we put into place over the past few years. This is expected to result in reduced product obsolescence, reduced inventory and increased productivity in our facilities.

Also increasing productivity will be the implementation of a Perrigo work system that will provide visible and meaningful metrics at the shop floor level to enhance agility, which will again enhance productivity and free up capacity. We will be optimizing and streamlining the portfolio by SKU to reduce complexity. 80% of the complexity in our system is not consumer-facing. This is a big opportunity for both us and our customers. In a number of facilities, we will be modernizing manufacturing equipment to increase automation, increase capacity and reduce business interruption risk. And a final example is we will be creating centers of excellence for our different product streams at key locations around the world.

Hopefully, this gives you a flavor that our commitment to profitable growth, growing margins and superior service is not a short-term exercise. It's part of the fabric of Perrigo Company and our culture. As always, there'll be a cost required to achieve these savings. And I look forward to sharing the entire plan and the cost required to achieve them in more detail at the appropriate time. So in closing, it was a solid quarter. I'd even say, it was an extremely strong quarter in the context of the headwinds we continue to face. We are benefiting from strengthening fundamentals, margins that have begun to grow again and a strong flow of innovation.

We know our new self-care strategy is correct and our emphasis going forward is to optimize the newly configured company against this strategy and to accelerate profitable growth. Our priorities are to continue to drive growth in our six strategic product category pillars, successfully integrate HRA and achieve the related cost synergies, begin implementing the supply chain reinvention program with an eye to enhanced gross margins and to continually improve our organization and our culture. And of course, we will remain mindful of the difficult headwinds we and everyone else face in the short term. We will continue to adjust to handle those headwinds. But my big message is the tremendous future that has been set up for Perrigo and how it is all coming together as originally planned.

With that, I'll turn the call over to our CFO, Eduardo to discuss the financials in more detail. Eduardo?

Eduardo Bezerra - Executive Vice President and Chief Financial Officer

Thank you, Murray, and good morning, everyone. Before diving into our second quarter results in more detail, I would like to take a moment to introduce myself and share some perspectives from my first three months as CFO of Perrigo. Prior to joining the team, I had a broad base of responsibilities that I think are particularly applicable to the work ahead of us at Perrigo. For the past three years, I have the CFO position at Fresh Del Monte, a publicly traded global organization with a complex supply chain. Overseeing an operation that had to deliver perishable foods across all five continents in a matter of weeks, qualifies me well for a company that makes products with two-plus years of dating such as Perrigo. Prior to my time at Fresh Del Monte, I spent 21 years at Monsanto.

There, I held various positions from finance to commercial and strategy. I held CFO positions in various business units, led implementation of a global finance transformation, while upscaling the global finance shared service platform and eventually the integration efforts as part of the Bayer acquisition. Over the past three months, I have been busy getting to know Perrigo's business and our outstanding team members around the world. I took the time to visit our West Michigan facility, met our CSCA sales and marketing teams, met with our CSCI leadership team and had the opportunity to welcome our new colleagues from HRA in Paris.

I would say, the constant theme from my interaction so far is the passion and commitment that our colleagues have for their work and for the Perrigo vision. I'm really fortunate to lead such a talented and capable global finance organization and to be part of an amazing leadership team. As we look ahead at our priorities from a finance perspective, there are a few topics that I have brought to the top of my list.

First, is delivering on our financial results, both earnings and cash flow, which remain on track to achieve this year on a constant currency basis despite continued macroeconomic volatility which will translate into positive operating cash flow.

Second is recapturing gross margin, which we made significant progress during the second quarter with a 310 basis point sequential improvement versus Q1 in gross margin. But we have more work to do.

Third, the team is well underway to reinvent our supply chain with a goal of optimizing our ability to deliver our needed self-care products to consumers and customers. As Murray stated, we look forward to sharing more details about this soon.

Let's now take a look at our financials, starting with our GAAP to non-GAAP summary. We reported a consolidated GAAP loss from continuing operations of $65 million for the second quarter of 2022 or a loss of $0.48 per share - per diluted share. On an adjusted basis, net income from continuing operations was $59 million and adjusted diluted earnings per share from continuing operations were $0.43 per share or $0.49 per share on a constant currency basis versus $0.50 per share in the prior year quarter. A few adjustments to the GAAP P&L this quarter are worth noting.

Second quarter 2022 pretax non-GAAP adjustments totaled $186 million, primarily driven by adding back amortization of $63 million and acquisition and integrated related charges of $101 million. Full details of our adjustments can be found in the non-GAAP reconciliation table attached to this morning's press release. Non-GAAP tax adjustments for the quarter were $62 million, primarily driven by the tax effect of pretax non-GAAP adjustments. This led to an adjusted effective tax rate for the second quarter of 2021 of 23%. Turning to our quarterly results on Slide 23, let's walk through the highlights. Perrigo net sales for the second quarter increased 14.3%, including a six percentage point headwind from adverse currency movements.

Organic net sales increased 17.2%, driven by solid performance in both segments, stemming from strong consumer demand. Gross profit grew 8.7% or 17% on a constant currency basis versus prior year, driven by higher volumes and increased pricing, as well as the addition of HRA. These increases offset higher costs, including cost of goods sold, inflation, increased freight expenses and lower plant productivity driven by tight labor market conditions, specifically in our U.S. facility. As a result, gross margin in the quarter declined 190 basis points versus the prior year. Operating income was relatively flat to prior year but grew 7.9% on a constant currency basis. Favorable gross profit flow-through was partially offset by higher operating expenses driven by the inclusion of HRA in addition to higher employee and distribution costs.

Operating margin was 160 basis points below prior year, but again, we achieved a sequential improvement of 230 basis points versus Q1. Turning to our segment results. CSCA net sales increased 17% compared to last year, driven by continued strong demand for cough and cold products, and strong performance in our Nutrition and contract businesses. Gross profit increased by 3% versus prior year as a flow-through of strong top line results offset significant inflationary cost pressures in freight and cost of goods sold in addition to the lower U.S. plant productivity I just mentioned.

These factors, however, led to a gross margin decline of 380 basis points versus prior year. As expected, CSCA adjusted gross margin grew to 190 basis points versus Q1, driven by favorable mix and positive pricing. Operating income for the quarter was $105 million, slightly below the prior year as favorable gross profit flow-through was offset by higher distribution expenses and the year-over-year impact of divestitures. Looking at results for the CSCI segment. Net sales on a constant currency basis increased 25.8% inclusive of a positive benefit from the addition of HRA. Organic net sales grew 10.6% driven by continued demand for cough/cold and flu related products as well as a rebound in categories impacted by COVID in the prior year, including sun burn care and head lice sufferings.

Pricing was also positive in the quarter. Gross profit was $206 million, up 31.9% on a constant currency basis, driven by the addition of HRA, increased sales volumes and pricing. These factors drove a 240 basis points increase in adjusted gross margin versus the prior year. Operating income increased 36.3% on a constant currency basis. Favorable gross profit flow through more than offset higher operating expenses, which increased due to the inclusion of HRA as well as higher employee and travel-related expenses as our sales force is 100% back to meeting in person with our customers. Moving now to the balance sheet and operating cash flow.

Cash on hand was $485 million at the end of the second quarter, down from $2 billion at the end of the first quarter due to the $1.9 billion cash payment for the HRA acquisition, which was partially offset by incremental borrowings from our refinancing and cash generated in the quarter. Operating cash flow for the first half of the year was $62 million, which represents an increase in operating cash generation of $144 million versus the same period last year. In addition to acquisitions and divestitures and cash movements related to our debt refinancing, we invested $49 million in capital expenditures and returned $70 million to our shareholders through dividends during the first half of the year.

Now that the HRA acquisition is closed, our capital allocation priorities are: one, we remain committed to growing our dividends. We have a strong track record of accomplishing these with 18 consecutive years of dividend increase. Two, we will continue to assess capital needs required to optimize our supply chain and operations. And three, we plan to reduce our debt over the next three years with an ultimate leverage target below 4 times in addition to assessing the potential for share repurchases, if appropriate.

Look at our fiscal 2022 guidance on Slide 27. Given the strength of our results, we are increasing our organic net sales year-over-year growth range to 9% to 10%, from 8% to 9% previously while reaffirming our all-in year-over-year net sales growth range of 8.5% to 9.5%. The increase in organic net sales growth outlook is expected to be offset by the worsening impact of currency translation.

Our updated adjusted diluted earnings per share range is now $2.25 to $2.35 per share versus the previous range of $2.30 to $2.40 while there is no change to our thoughts on delivering a constant currency EPS range of $2.40 to $2.50. In closing, I'm excited about our business, and we continue to see momentum across both segments. Our team continues to deliver strong results in a very dynamic macroeconomic environment and we remain focused on factors that we can control. I look forward to meeting many of you over the coming days and months.

With that, operator, can you please open the line for questions?

Question & Answers

Operator

[Operator Instructions] The first question is from Stephanie Wissink of Jefferies. Please go ahead.

Christian - Jefferies - Analyst

Hey, everyone. It's Christian [Indecipherable] on for Steph this morning. Congrats on a nice quarter. First, we have a two-part question around trade inventory levels. I think you commented on this earlier, but I wanted to confirm. So could you just give us an update on what you're hearing from the retailers? And if you think about the growth outlook for the year, is there any way to break out how much you think it is takeaway driven versus maybe more of a reflection of lagging inventory levels? And then the second part to that question as a follow-up would be with the color on strong demand trends, could you help us think about demand levels relative to your current available capacity?

Murray S. Kessler - President and Chief Executive Officer

The first one, when you - let's just sort of cut it back to our core over-the-counter business in the U.S. The European numbers are easier to track. There's no inventory at pharmacies and they're trending right along with consumer takeaway. The U.S. business is actually tracking right along, the OTC business is also tracking right along even though on the surface it looks a bit higher, right? You've got roughly 18% to 20% OTC growth looking against IRI takeaway of about 9% or 7%. But when you add e-commerce, which you can't see, when you add a couple of major retailers that are not in IRI, that's closer to 9%. Then when you take the 20% and you take out the Perrigo's business from last year, that was, as you recall, was internal and then we had to report it as external sales, it's about 9%, 10%.

So there isn't a big difference for us in consumer takeaway versus what we're shipping. It's very much in line. Okay. Now - and by the way, the inventory levels are where they need to be. We - they didn't put enough inventory in cough/cold. So we got a little bit of benefit that compared to the reduction last year, but nothing to influence the business going forward. So I feel good about over-the-counter products in the U.S. inventory levels. Now let's go over to Nutrition. Nutrition is primarily - it's an infant formula story. We're tracking right along. We can't make it all.

And frankly, at this point, after making $70 million more feedings and running - we were running 115% of capacity, 117%, there is a moment where you have to pause a little bit and clean the factories, and you just can't run 24 hours a day, seven days a week forever or the factory is going to struggle. So we're doing all of that maintenance because safety has to be our first priority. So we won't keep up with all of the demand. The good news from an ongoing business perspective, is even once retail shelves are full again and moms are able to not panic about them having to order and buy and they see the availability.

It will be months and months where we're replenishing both wholesale inventories and our own inventory. So that will keep running. And I said months ago, I thought that would take to the end of the year. Now I'd say it's going to take at least until the end of the year. And then on Oral Care, we've been able to replenish our inventories there. We've been, again, short getting product out of China and the challenges with rate. And I think we're in a better situation there. So that's why I kept saying on the call, I thought the fundamentals were strong.

Okay. So that's sort of where we were. Where we are? The hardest part - the only thing that keeps me up at night right now is labor shortages. And this has been from COVID to the war to truckers to - it's been one battle after another, and we keep tackling them. But the biggest issue we face right now is having enough people to run third chip to meet demand. Flat out, that is what we are working the hardest on to be able to have the proper inventories, to be able to ship and have the proper service level. So that's our battle today. So you said do we have enough today? We're a bit short, and we are working on it daily.

Christian - Jefferies - Analyst

Okay. That's very helpful. And that segues well into my next question. I guess, just given kind of some of the choppiness in the macro supply chain, right, I know you flagged it. But could you comment on any sort of conservatism in gross margin expectations as we move through the balance of the year?

Murray S. Kessler - President and Chief Executive Officer

Well, I would have said last quarter that it was probably conservative, even though I said we were going to recover the 400 to 500 basis points. So we got 300 out of that. But I will tell you, cost still went up again and that - I was glad I was a bit conservative, so we can still be on track to deliver what I said we would and be able to handle the excess additional costs and some productivity issues from the labor situation. So I don't think there's a ton of upside there. I think we're right on - kind of right on track.

Thank you. Next question please. And Kate, are you there.

Operator

Yes, I am. And the next question is from Elliot Wilbur of Raymond James. Please go ahead.

Elliot Wilbur - Raymond James - Analyst

Thanks, good morning.

Murray S. Kessler - President and Chief Executive Officer

Good morning.

Elliot Wilbur - Raymond James - Analyst

Fast forward and thinking about this year's cough/cold season, Murray, and some of the absorption issues that the company encountered over the last 12 to 18 months with respect to that product category. I know you mentioned in the text that you have experienced some lower plant efficiency issues, primarily due to labor shortages. But specifically, with respect to that category, how should we be thinking about sort of your per unit costs on that line headed into the peak cough/cold season?

Murray S. Kessler - President and Chief Executive Officer

Well, I'll answer it a little bit. Eduardo, you can help me out here a little bit. We're - I probably would say and you correct me Eduardo, I'd probably say we, I would have expected to start seeing some favorabilities versus a year ago, but with continued labor shortages we will continue to be challenged on productivity and until we get those third chip positions filled and can fully run out to the demand and the plans we have built. We will continue to have some - not worse than it was before, but not getting better like it should as fast as I would like. Having said that, we got better pricing, so that I want to cover it. Our original estimates, we did better than I said we would do and that helped to keep us right in line. And I'm going to still stick with overall 400 to 500 margin recovery from first quarter to fourth quarter.

Elliot Wilbur - Raymond James - Analyst

Okay. And then just with respect to pricing realization benefits through the course of the year, could you repeat the number that you provided in the quarter? I want to say - I thought I heard you say 4%, but I want to make sure that, in fact, is accurate? And then just sort of where you - where are you in terms of planned pricing actions for the year? I know that you previously indicated…

Murray S. Kessler - President and Chief Executive Officer

I mean, they're still north of 60% of the pricing actions that we have gotten approved at retail yet to hit. So they'll hit in the third and the fourth quarter, and it is 4% for the first quarter. And remember, that's the average across all of the businesses. In certain categories, it's more aggressive and in super competitive categories. It's less. That's the blended average and that compares to years and years and years of 2% to 3% pricing erosion. So it's a pretty big swing for us. And on your last question, I want to make sure I'm answering it. You are correct that cough/cold cost will look better because we are back producing cough/cold. And now the productivity issue that I talked about now with labors kind of blended across the board. But I think the good news is if you're watching the Perrigo story is gross margins are growing again.

Elliot Wilbur - Raymond James - Analyst

Okay. And then just last question. I know you're planning on providing a much more comprehensive picture at some point in the future. But anything between sort of now and year-end that you can say with respect to the women's health business ex U.S. in terms of potentially expanding the recent OTC contraceptive approval in the U.K. into additional geographies. Any potential for any additional improvement?

Murray S. Kessler - President and Chief Executive Officer

Well, it is. Listen, ellaOne business with women's health, which is the starting point, we're organizing a whole separate business unit around women's health. I think the opportunity is so big. And ellaOne is probably in 80 countries as we start right now. So I mean, we - the next big one for the Opill and you saw it filed was a couple of weeks ago was in the United States. It's in the process of being filed in at least three more countries in Europe as we speak. They're not on as fast to track. And what will be interesting is we're looking at the normal process of 10, 12 months, I think it's 10 months has the FDA has to evaluate this and then launch later in the year. There's been a lot of pressure by a lot of groups supporting this.

The AMA has come out, the Gynecological Association. Governors have written to the FDA. Congressmen signed - there is like 20 or 30 Congressmen who signed a letter, a group of women's CEOs have stepped, but there is a lot of support for this application. So the big question will be, could that get expedited, I have no idea at the moment in the U.S. But if it does, it will come with investment, and we'll lay that out for you as well. But don't think our women's health strategy is just this. It will be contraception, but it will also be sort of all different stages of women's life. And it will - like you said, we'll come forward with the full plan. But we already make Perrigo and a number of other products as well, and I think this is a real opportunity for Perrigo to stand out and own a major segment of the market globally.

Elliot Wilbur - Raymond James - Analyst

Okay, thank you.

Operator

And the final question today comes from Chris Schott of JPMorgan. Please go ahead.

Chris Schott - JPMorgan - Analyst

Hi guys, just my first one was when I think about gross margins in the second half in this 37% to 39% range, is that starting to get back to, I guess, a normalized level prior to some of these supply chain initiatives? Or should we think about there being more gross margin recapture to think about, I guess, as we go into 2023?

Murray S. Kessler - President and Chief Executive Officer

I definitely think you should be thinking of more. I mean, one of the biggest - you've got pricing that's a driver, great, but you still - the productivity, we will get that issue solved just like we solved the distribution one, just like we've solved every other issue that we've had, and that's a big number. The obsolescence number going through cough/cold of no season and back in the shelf life and a lot of throwaways, you've seen a couple of quarters in a row where we've had some one-timers that should not - they're different than last quarter, but that's all having - coming out of a disruptive business.

And that all has recovered. The bulk of the 37% to 39% let's face it, you're getting a big piece of that from HRA. So the depressed core margin is still for the grabbing. And that's this whole supply chain initiative that I talked about $100 million to $300 million, you're talking - that's meant to get gross margin growth and progression for years to come, not just for '23.

Chris Schott - JPMorgan - Analyst

Okay. Perfect. The other one I was just tuning in my hands around is we just think about the economic environment we're in. Can you just talk about the impact a recession would have on your business? I think, obviously, going back to 2008, 2009, it was a really nice tailwind. As I think about the profile today, it does seem like the company is a bit more balanced between some national brands ex U.S. versus the Store Brand business in the U.S. Just talk a little bit about just if we head into a recession over the next year or so, how it - the kind of pushes and pulls for Perrigo on that?

Murray S. Kessler - President and Chief Executive Officer

I think you just did a good job answering the question. We're more balanced than we were before. I mean, I think we're already seeing a benefit. You hear that from every major retailer that we deal within their conference calls, they are all talking about saying down trading to a private label or Store Brand that we had a chart in this presentation that - which is mostly share recovery from what we lost last year to national brands. But we've gone from an OTC, I think, like 27 back up to 26.5 up to 29, 300 basis point recovery in the last four or five months. Our switching studies are now starting to show switching from national brands down to private label and store brand. And that's - if history repeats itself, which you would say it should, that's a benefit.

On the other hand, there's also inflation in Europe and we're more branded in Europe, so we'll watch that more carefully. But fortunately, we have sort of unique selling propositions, and we're not overly aggressive with pricing. We're probably at the same or our price gaps haven't widened in any way. So it will be what happens to the market. And Perrigo, just one of the things I'm proud of, of what we've done is we've taken a company that was sort of lopsided and we've reconfigured it and now you do have a very balanced portfolio. You're roughly now half international, half U.S. and you roughly now have Store Brand and branded. And so hopefully less susceptible to external factors over the mid- to long-term, and then we can grow the business on the fundamentals, which are getting stronger every day.

Chris Schott - JPMorgan - Analyst

Perfect. And just last question from me is just can you get an update on - I think with the HRA deal last year, you talked about roughly $1 of accretion. And I just wondering if it's an update in terms of, does that target still kind of hold? Or with the macro environment, do we need to rethink that a bit? Or just any color there?

Murray S. Kessler - President and Chief Executive Officer

I think you need to adjust different currency, and that affects it. I talked about $150 million in operating profit impact, and we're right on that. And to be fair, I'm still working through with the accountants the cost of achieving some of those, how much hits the P&L or how much is adjusted, etc. But you will have a clear line of sight to that $150 million that we talked about on day one.

Chris Schott - JPMorgan - Analyst

Great, thank you so much.

Eduardo Bezerra - Executive Vice President and Chief Financial Officer

And of the currency, you can do the math on the currency, yes. When I was talking that, it was $1.19.

Chris Schott - JPMorgan - Analyst

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Murray Kessler for closing remarks.

Murray S. Kessler - President and Chief Executive Officer

Yes. Thanks, everybody, for your interest in Perrigo. I guess my big takeaway for this quarter, I've been here for close to four years now. We've come through the transformative of years, and we're very focused on now accelerating in margins and profitable growth. But it was notable to me as the quarter was going on sort of the win after win after win we've had which were the results of years, the filing wins, the Nasonex switch, the filing of HRA, the results of HRA being included, share gains across the Board in the company. And you can feel it, it's vibrant in the company.

And I know we all still deal in a difficult macroeconomic environment. We're focused on delivering numbers, but I'm most excited about seeing this new company that we've configured going forward, starting to accelerate, and I think you're going to see some real progress over the next few years here of this self-care strategy and what it can mean in creating value.

So thanks for your interest, and we'll talk to you in the next call.

Operator

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PERRIGO CO PLC

Q2 2022

Earnings Transcript

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