Earnings Call Transcript
PERRIGO Co plc (PRGO)
Earnings Call Transcript - PRGO Q1 2025
Operator, Operator
Good morning, ladies and gentlemen and welcome to the Perrigo Q1 2025 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Wednesday, May 7, 2025. I would now like to turn the conference over to Brad Joseph, VP Global Investor Relations. Please go ahead.
Bradley Joseph, VP Global Investor Relations
Good morning and good afternoon, everyone. Welcome to Perrigo's first quarter 2025 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 presentation, participants will make certain forward-looking statements. Please refer to the slides for information regarding these statements which are subject to important risks and uncertainties. We will reference adjusted financial measures that are non-GAAP in nature. See the appendix to the earnings presentation for additional details and reconciliations of all GAAP to non-GAAP financial measures presented. A few quick items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. Second, organic growth excludes acquisitions, divestitures, exited product lines and foreign currency fluctuations in both comparable periods. And third, Patrick's discussion will focus solely on non-GAAP results, except as otherwise noted. And with that, I'm pleased to turn the call now over to Patrick.
Patrick Lockwood-Taylor, CEO
Thank you, Brad. Good morning, good afternoon, everyone and thank you for joining today's call. I'd like to begin with an update on our progress against our Three-S Plan to Stabilize, Streamline and Strengthen Perrigo. Over the past 12 months, efforts to stabilize key parts of our business have yielded positive results. In our Americas business, store brand OTC, we've already secured new business awards and are now largely offsetting the previously disclosed losses that began impacting our top line in the second half of 2024. We remain on track for these new awards to more than offset losses by the second quarter of this year. Additionally, consistent production of high-quality, reliable infant formula has led to continued recovery in store brand share. Notably, first quarter 2025 infant formula net sales increased by 19% compared to the same quarter last year. More on both of these topics when I discuss our Q1 results in a few minutes. Efforts to streamline our operations have yielded significant benefits. In the first quarter, these accretive initiatives continue to produce very positive results. The supply chain reinvention program delivered an additional $8 million in benefit and Project Energize achieved an additional $20 million in annual savings, bringing the program's total annual run rate to $159 million, the high end of our previously disclosed range for Energize. Actions taken to improve service levels are also paying dividends with global service levels now at 94%. I have to give recognition to our global operations team for their outstanding service achievement. We also remain excited about strengthening our foundation for growth. I'm pleased to share that the synergistic relationship between our store brand business and OTC brands is yielding positive results. Our store brands generate substantial cash flow, enabling us to invest further into our OTC brands. This strategy is already paying off, as evidenced by our first-quarter results. Excluding the prior year's benefit from Opill retailer stocking, our OTC brands achieved solid organic growth of 5.9% year-over-year. This impressive performance was driven by strong sales of ellaOne, Nasonex, NiQuitin, and Compeed. These results reinforce our business model and our strategy. Lastly, to create a more efficient and effective new product pipeline, we have recently enhanced our stage gate process for new product development and we remain excited about our high-growth brands which we're expecting to begin delivering significant benefits in the second half of next year. At the same time, we are navigating through an uncertain macroeconomic landscape. Sales across the Self-Care categories we play in recently turned negative compared to the prior year and compared to their long-term growth rates of 3% or more, with contraction across most categories. This stems from more cautious consumer behavior due in part to inflation, tariffs, interest rates, and overall reduced consumer confidence. Although we believe that we are well positioned in the broader environment to account for these macroeconomic uncertainties, we feel it is prudent to widen our 2025 net sales projections. However, with the opportunities afforded by a unique business model and clear actions to offset tariff-related cost increases, we are reaffirming our adjusted EPS range and net leverage targets. Furthermore, we are reaffirming our midterm 2027 targets provided recently at our Investor Day. Stepping back, Perrigo is the largest U.S. manufacturer of OTC self-care solutions by volume. We operate 11 manufacturing facilities across the U.S., enabling 85% of our OTC finished goods to be produced locally by sourcing the majority of materials and components domestically. Most importantly, all this work is performed by our highly agile and productive team of over 5,000 dedicated U.S. employees. We will continue to look for opportunities to drive value from this large domestic asset base. Even though most of the products we sell in the U.S. are sourced domestically, given the global nature of consumer health supply chains, certain inputs for our business are exposed to tariffs. The tariff landscape has been extremely fluid, and our team has spent considerable time building mitigation plans for multiple scenarios. Based on what we know today, in 2025, we expect roughly a 1% gross increase to our global cost of goods sold. On a full year basis, this rises to approximately 5.5% of global COGS, all impacting our Americas segment. Approximately 80% of the expected increase will impact our U.S. oral care category as many of its inputs are currently sourced from China. The remaining 20% is expected to increase costs in our U.S. OTC business. We plan to offset these cost increases through strategic price actions, insourcing more manufacturing to our U.S. facilities where possible and other actions, including identifying new supply routes. We're committed to protecting our P&L and also our balance sheet in this dynamic environment, which Eduardo will provide further details on. The uncertain macroeconomic environment also presents several opportunities for Perrigo. Our unique business model with over 100 molecules across 100% price point coverage, coupled with our significant U.S.-based manufacturing provides us an advantage to deliver our essential self-care solutions to more customers and consumers. Firstly, consumer confidence in the U.S. is at a 12-year low. And in Europe, it's at the lowest level in 18 months. These weakening consumer expectations present significant opportunities for share gains for our mid-tier and store brands due to their value advantage in the marketplace. For example, total U.S. OTC store brand volume gained 50 basis points over the last four weeks as consumers are quickly adjusting their buying patterns. We will continue to closely monitor changes in consumer behavior and leverage demand generation activities to further capitalize on this trend. And secondly, with our vast U.S. manufacturing footprint across OTC, infant formula, and oral care, we have ample opportunity to win additional new volumes through contract manufacturing efforts. Now turning to our first quarter financial highlights. Organic net sales declined 0.4% which included higher net sales in the nutrition category, driven by the recovery in infant formula in addition to the upper respiratory category. This decline was offset by the impact of previously disclosed lost distribution of lower-margin products in U.S. Store Brand, which is not expected to be a sales headwind going forward, and the prior year Opill retail stocking of approximately $15 million. Importantly, excluding the lost distribution and prior year Opill sell-in, organic net sales grew 1.8% versus the prior year period. Gross margin expanded 440 basis points year-over-year to 41%, driven by business recovery in infant formula. Operating margin for the quarter meaningfully expanded by 550 basis points, driven by gross margin flow-through and benefits from Project Energize. First-quarter EPS grew by a robust 107% year-over-year to $0.60 per share. Digging a bit further into organic net sales, both brand and store brand offerings and the Upper Respiratory category performed well despite the impact of known lost distribution in the U.S. Store Brand business. This category benefited from higher incidences of cough/cold in the U.S. compared to the prior year and improved supply of the Physiomer brand in Europe. Pain and sleep aids were also impacted by known lost U.S. distribution, partially offset by higher incidences of cough/cold in the U.S. and improved supply of the Physiomer brand in Europe. Digestive health was impacted by lower category consumption for proton pump inhibitors used mainly for heartburn which more than offset U.S. Store Brand share gains. And an expected decline in VMS where we de-prioritized several SKUs in Europe. Lastly, as I just mentioned, our OTC brands grew solidly year-over-year. One year ago, we made a strategic pivot in U.S. Store Brand which was highlighted at our February Investor Day. This pivot focused on improving forecast accuracy and customer service levels in addition to share gain from Store Brand competitors, primarily through new business awards. I'm pleased to report that we're making significant progress with these efforts. Our service levels have improved, as I mentioned earlier, and new business awards remain on track for a positive contribution this year. Over the last three quarters, net business awards and losses have been a headwind to top line growth as we executed with this pivot. We expect this trend to reverse in Q2 this year as already secured new business wins ramp up, expecting to improve Americas sales growth in the second half of the year. Turning now to infant formula. Our quality production metrics across the network have dramatically improved key customer SKUs at shelf have been fully restored. These factors enabled first quarter infant formula net sales growth of 19% year-over-year. Infant formula industry dynamics continue to evolve, however, due to flat to declining U.S. birth rates, currently available manufacturing capacity, and foreign manufacturers gaining share. These factors have caused many domestic brands to recently increase marketing and promotions as they compete for volume share. These short-term pricing actions have temporarily reduced the price gap between national brands and store brands, slowing the pace of our store brand share recovery. We believe maintaining appropriate price gaps in this business is essential to the store brand value proposition with consumers and customers. So with this backdrop, we're engaging customers to close this short-term price gap. Additionally, spring shelf resets across several retail customers are expected to enhance our shelf placement and the number of store brand formula facings. At the same time, we are also reintroducing nearly 60 national brand equivalent SKUs in the second half of this year. We believe these actions will continue to accelerate store brand share gains in 2025. However, we are tempering our expectations for the year. In closing, we are steadfast on advancing our 3-year plan to stabilize, streamline, and strengthen Perrigo to provide the best self-care to everyone. We delivered strong first quarter results, led by recovery in the infant formula business and solid organic growth in our global OTC brands. While we are operating in an uncertain macro environment with consumer, customer, industry, and geopolitical risks, we're taking appropriate measures to mitigate these factors. Encouragingly, we believe Perrigo's unique business model provides opportunities for growth in this uncertain environment as we continue to advance our vision to provide the best self-care for everyone. Let me now turn the call over to Perrigo's CFO, Eduardo Bezerra. Eduardo?
Eduardo Bezerra, CFO
Thank you, Patrick. Hello, everyone. Looking at the first quarter financials, starting with the GAAP to non-GAAP summary. Primary adjustments to our non-GAAP financial results were: first, amortization expense of $56 million; second, restructuring charges of $29 million, primarily related to the nutrition network optimization we announced during our Investor Day and Project Energize; and third, unusual litigation of $9 million. 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. Moving to our first quarter gross profit results. Gross profit of $428 million grew 8.1% or 13.8% organically compared to the prior year, driven by business recovery in infant formula in addition to benefits from our supply chain reinvention program. Operating income of $147 million grew almost 58% or 71% organically, driven by gross profit flow-through and Project Energize cost savings which more than funded higher infant formula and OTC brand investments. This operating income growth in addition to lower interest expense led to a 107% increase in adjusted earnings per share which included unfavorable impacts of $0.03 from a higher tax rate and $0.04 from divested businesses, exited product lines, and currency translation. Gross margin expanded 440 basis points, including a 50-basis point headwind from divested businesses and exited product lines, while operating margin expanded 550 basis points, including a 30-basis point headwind from these same factors. As expected, sequential gross margin expansion outpaced operating margin expansion as we invested in infant formula and OTC brands to drive top-line growth for the year. Looking at net sales performance by segment, starting with CSCI. Reported net sales were impacted by prior year divestitures, exited product lines, and currency translation. Organic net sales growth in the quarter remained strong at 4.5%, driven by supply recovery of key products, favorable sell-in, and slightly higher incidence of cough and cold in certain countries along with strong sales of nicotine in the health lifestyles category. In CSCI, net sales declined 3.6%, driven by the impact of lost distribution in store brand and the prior year benefit from OP retailer stocking. The rest of the business was flat year-over-year. First quarter operating income in both segments delivered double-digit organic growth versus the prior year. In CSCI, operating income of $86 million grew 10% organically as gross profit flow-through and benefits from Project Energize were partially offset by divested businesses, exited product lines, and the impact of currency translation. CSCI operating income of $100 million grew 90%, driven by infant formula business recovery and benefits from accretive initiatives. These factors more than offset higher advertising and promotion investments, primarily in the Opill brand and infant formula business. First quarter earnings per share of $0.60 increased $0.31 or 107% versus prior year, driven by business performance, primarily infant formula recovery and accretive initiatives. A higher effective tax rate this year was offset by lower interest expense as well. Cash on the balance sheet at the end of the first quarter was $410 million. As a reminder, first quarter typically generates the lowest cash flow in the year. Q1 operating cash was an outflow of $65 million as cash generation was more than offset by higher inventory levels of $63 million, reflecting the rebuild of infant formula inventories, including safety stock; $43 million related to a securities litigation settlement; and restructuring costs of $17 million. During the quarter, we also invested $26 million in capital expenditures and returned $41 million to shareholders through dividends. Looking at the balance of the year; let me provide a bit of color on actions we're taking to mitigate the impacts from tariffs and optimize capital allocation in the current environment. First, in Oral Care, we have temporarily paused ordering inputs from China. We have enough oral care inventory on hand to prevent short-term supply disruptions to customers as we are in process of implementing strategic price actions, insourcing more production to our U.S. oral care manufacturing facility where feasible, and assessing alternative supply countries of origin. Second, we paused major capital investments in our nutrition network optimization until we have more clarity on the macro environment. This decision has no impact on our ability to continue delivering our affordable infant formula to consumers and customers. Lastly, we identified further working capital improvements across the enterprise. In total, we expect these actions to mitigate estimated cash impacts from tariffs and we are reaffirming our net leverage target of 3.5x by the end of 2025. Lastly, we remain confident in our cash flow trajectory and net leverage expectations through 2027 which we detailed at our Investor Day. Turning to our outlook for 2025. As we know, the macro environment has become more uncertain. As such, we're taking a more prudent approach to our targets by widening net sales growth expectations to between 0% and 3% for reported and 1.5% and 4.5% for organic growth. We believe these adjustments reflect the right balance of risks and opportunities in the current environment at the current level of global tariffs. These ranges now include assumptions for strategic price actions and potential elasticities of demand, slower consumption in the categories where we play, and a more tempered outlook in infant formula. These ranges also now include upgraded assumptions for positive volume trends that are emerging in our OTC store and value brands as consumers shift to value-oriented offerings. A few other noteworthy items. We expect approximately a 5.5% or between $145 million to $155 million gross increase to global COGS from tariffs on a full year basis which we anticipate offsetting with actions we just discussed. In 2025, the gross increase of roughly 1% or approximately between $30 million to $40 million will likely not impact the P&L until the fourth quarter due to the timing of tariff implementation, inventory on hand, sales velocities, and inventory purchases. We are reaffirming the rest of our 2025 outlook, including constant currency adjusted earnings per share target of $2.90 to $3.10 per share equated to strong double-digit growth. Lastly, as infant formula recovers store brand share and CSCA store brand new business wins ramp up, we expect phasing of earnings in 2025 aligned with historical trends of approximately 40% in the first half of the year and the remaining 60% in the second half. In summary, our first quarter results reflect the continued execution of our Three-S Plan. We have been proactive in our approach to tariffs and believe we have appropriate actions in place to offset known impacts while our business model is well positioned to provide consumers and customers with the self-care solutions they need at excellent value. Let me now turn the call back to Brad. Brad?
Bradley Joseph, VP Global Investor Relations
Thanks, Eduardo. Operator, can you please open the call for questions?
Operator, Operator
First question comes from Chris Schott of JPMorgan.
Unidentified Analyst, Analyst
This is Ethan on for Chris. Just to start off, I appreciate all the commentary on tariffs today. But as we look to 2026 and consider the impact of tariffs, how should we think about the potential impact to EPS with where we sit today and given the actions discussed to mitigate tariff exposure? And then, one more question after that.
Eduardo Bezerra, CFO
Thank you, Ethan. As we discussed today, we have implemented several actions to address the situation, including adjusting pricing, increasing sourcing for potential oral care operations, and exploring alternative sources. We anticipate that these measures will completely offset the impact we are experiencing, not just this year but also as we move into 2026. Therefore, we do not expect any significant changes to our projections for 2025 in terms of the bottom line, nor for 2026 and 2027.
Unidentified Analyst, Analyst
Very helpful. And then just given the updates on infant formula today, how should we think about sales ramping as we go through the year at this point? And then maybe just remind us on what a normalized level of sales looks like?
Eduardo Bezerra, CFO
We experienced a substantial recovery in infant formula sales during the first quarter, increasing by about 19%, reaching approximately $105 million. We anticipate this upward trend will continue into the second quarter, with significant growth expected in the latter half of the year due to the introduction of 60 new SKUs in our store brand portfolio, which we believe consumers are eager for. We are also closely monitoring the nutrition business, particularly the pricing dynamics in the marketplace and potential promotions from national brands, and how these factors might impact our sales. At this point, we expect sales in the first half to be similar between Q1 and Q2, with an anticipated growth of nearly 50% in the second half of the year.
Operator, Operator
Your next question comes from Susan Anderson of Canaccord Genuity.
Susan Anderson, Analyst
Nice job on the quarter. Thanks for the additional details there on the infant formula. I guess maybe just one follow-up. You mentioned the potential to win some contract manufacturing. I guess I'm curious, are you already seeing brands come back to you to manufacture? And then do you have any updated thoughts just on the government guidelines for international manufacturing potentially getting walked back in the back half of the year?
Patrick Lockwood-Taylor, CEO
Susan, this is Patrick. Hope you're well. Thank you for the question. Yes, we are seeing an increase in activity for contract manufacturing; obviously, our competitors will be looking at a domestic supply route, and we continue to negotiate through those. As it relates to infant formula specifically, just to add to the question, we are very encouraged by the FDA Commissioner's most recent comments where the FDA has committed to stepping up foreign inspections on terms similar to how they run inspections on U.S. manufacturing facilities, i.e., no free notification. We continue to work with the FDA as they consider formulation and regulatory changes. We're encouraged by the comments that the commissioner will follow good science and reliability. That's absolutely the correct approach here as far as we're concerned. We continue to want to ensure in an industry which is a matter of national security that we are fully utilizing all the capacity of world-class manufacturing that's available in the U.S. whilst adhering to the highest efficacy and safety standards in the world on infant formula.
Susan Anderson, Analyst
That's great to hear. I have a couple of follow-up questions. Regarding the organic sales during the quarter, it seems that some categories, like cold cough, performed better than anticipated, while there were slightly lower sales in the Digestive Health category. Could you elaborate on what contributed to that? Additionally, were there any other categories that performed differently than you had expected this quarter?
Patrick Lockwood-Taylor, CEO
I will make a comment and then hand it over to Eduardo. There were no significant surprises. The digestive wellness category was influenced by distribution changes as we exited certain businesses last year, which resulted in relatively predictable sales patterns for the quarter. In the Americas, we saw stronger performance in Upper Respiratory, but this was somewhat counterbalanced by weaker performance in Europe. Overall, the effect of the two regions balanced out for the company. Additionally, we often overlook the international business during these discussions, but it actually achieved double-digit profit growth and around 5% sales growth this quarter, which is very encouraging. We are performing better than some major competitors, experiencing nearly 6% global growth in our OTC brands, especially in Europe where we had significant market share growth in our key focus brands mentioned during Investor Day. In summary, organic sales were largely in line with our expectations. We anticipate that as the U.S. Store Brand business recovers, we will see an acceleration of revenue in the Americas, keeping us on track and indicating strong OTC brand performance, which operates at a gross margin approximately 50% to 60% higher than the rest of the business, making its growth particularly beneficial.
Eduardo Bezerra, CFO
Yes, and to provide some additional details on CSCA, we've noted since last year that we anticipated a transition year where the benefits of the contracts we are securing would outweigh losses, beginning in the second quarter and bringing significant advantages in the latter half of the year. Q1 still reflected some of that. Excluding the impact of the lost distribution, and considering that last year in Q1 we launched Opill with several retailers, our organic net sales grew nearly 2%. This aligns pretty well with our initial expectations. Regarding Digestive Health, we noticed a slight shift in consumption from PPI to embeds within the subcategory, but there is nothing significantly concerning for the remainder of the year.
Susan Anderson, Analyst
Perfect. That sounds great. And international sounds really strong. Really quick, Eduardo, if I could just ask on the gross margin. I know that was greater than expected in the first quarter, a lot of that driven by the infant formula business. I think you guys had said around 40% for the year previously. So I guess, should we expect it to be a little bit better now because of the infant formula? Or how should we think about the gross margin in the rest of the year?
Eduardo Bezerra, CFO
We're still expecting 40% for the full year, Susan. In Q1, our manufacturing operations performed better than we had originally anticipated, which is very positive. This is linked to what Patrick mentioned about operating in a much more reliable manner, providing significant benefits such as reduced obsolescence and stoppages. This leads to a much more efficient operation, which was a key driver for our results. We are monitoring this closely, and while we do not expect to maintain the same level of high efficiency, we are keeping a close eye on it.
Operator, Operator
Your next question comes from Keith Devas of Jefferies.
Keith Devas, Analyst
I would like to delve deeper into the expanded range for net sales for the year. On one hand, you mentioned consumer uncertainty, which is valid. However, you also indicated that this might result in gains for store brands, some distribution successes, and lowered expectations for infant formula, considering the actions of some competitors. It would be helpful if you could highlight the factors influencing the widening of this range for the year, especially since you pointed out both wins and potential tailwinds for your company. I'm curious if you could elaborate on this further.
Patrick Lockwood-Taylor, CEO
Keith, this is Patrick. I trust you're well. Thanks for joining us this morning. A very fair question and I think implicit in some of the language that you've used is exactly what we face, which is this dynamic real-time shifts. We are working on a large number and an increasing number of opportunities in the U.S. on competitive takeaway. We're working with retailers on implications of consumers trading down and what that means in terms of distribution, shelf promotional activity. The key concern, obviously, with the erosion of consumer confidence is maintaining household penetration in consumer goods categories. We're well positioned to do that. We operate across all price tiers and can offer superior value as consumers are evaluating their discretionary income choices. So that is active current work, but it's absolutely not a forecast grade yet; it's current work. Why, therefore, soften just as we work through implications of discretionary income impacts. What does that mean? Whilst we have a broad range of hypotheses, these need to be converted into plans and forecasts and we're just not at the stage of doing that. So frankly, we thought it was prudent to just widen the range but provide commentary that we're managing risk and aggressively pursuing opportunity as well. On infant formula, in particular, the store brand share recovery has been very good. It's been impacted in the very short term by some surprising promotional activity in what is an extremely inelastic category. These don't tend to lead to long-term share gains. They tend to be value erosive but we have to respond to that in order to maintain the gain on store brand. That's very important to consumers, obviously, very important to Perrigo. And we're committed to do that and will support store brand accordingly and are holding our end-of-year exit share target. That's just extremely important structurally to the health of this business for us in the midterm. So summary, the range reflects the broad range of work and the dynamic nature of the situation and the fact that you have consumer patterns in flux at the moment.
Keith Devas, Analyst
Great. That's very helpful. And then maybe just a quick follow-up. As the margin has come back on the gross margin side, you guys are slowly choosing to reinvest with SG&A up. It'd be great if you could add some context on where specifically you're choosing to reinvest and what parts of the business, I guess you're prioritizing first? And then I'll pass it on.
Eduardo Bezerra, CFO
Yes. So Keith, as we talked a little bit, infant formula is a priority. So as we talked about, we're working with all the retailers. We're adding back about 60 new SKUs. So we want to make sure that consumers see that on shelf and understand that they have options at the time. A critical time right now that consumer confidence and economics are being stretched, having more store brand number of SKUs to choose from is critical. So making sure that we have that full visibility at the consumer level is one. Second, Opill as well. Remember, this is the second year that we launched these new brands and we continue to see significant progress there. We expect consumption this year to more than almost double what we saw last year. We want to make sure that we will continue in the right trajectory.
Operator, Operator
The next question comes from Korinne Wolfmeyer of Piper Sandler.
Unidentified Analyst, Analyst
This is Sarah on for Korinne. First, had talked about taking some pricing. Any color around when that will come in which products it would be on? And then how that compares to past price actions?
Eduardo Bezerra, CFO
So you're speaking specifically on the Oral Care business, correct?
Unidentified Analyst, Analyst
Yes.
Eduardo Bezerra, CFO
Yes. So we're working right now with all the major retailers on that, right? So first of all, it's really explaining the impact of tariffs across their portfolio and what are the actions that we could do jointly between looking to alternative sources. We have a manufacturing facility in Michigan for oral care that has available capacity. So that's a key opportunity that we work with the retailers to see how much can we bring in-house versus China. But there will be an adjustment on price even by doing that. We're working with them on these opportunities. We expect some of those actions to take place in the next three months that we're going to start seeing that in the marketplace.
Unidentified Analyst, Analyst
Okay, very helpful. And then just on the brand divestitures and exits that you laid out at the Investor Day, any color around what kind of progress has been made so far? And then how much we can expect for the remainder of the year? And then if there are any impacts from the current market conditions that have altered plans here?
Eduardo Bezerra, CFO
Well, so specifically, regarding those two categories that we're assessing, we continue to do the work there. Of course, specifically in the U.S. market, there's been a little pause on looking to some of those investments, but we're watching that closely and we are continuing to assess any further opportunities there. On the brand side, we continue to look into opportunities, mainly in our international portfolio. Nothing significant to share at this stage.
Operator, Operator
Your next question comes from Daniel Biolsi of Hedgeye.
Daniel Biolsi, Analyst
Patrick and Eduardo, I really appreciate all the details around tariffs. I'm wondering, should we anticipate any lower sales from the upper respiratory products in the fall because of the late cold season orders that we had?
Patrick Lockwood-Taylor, CEO
Thank you for your question and for being with us this morning. I haven't seen any data indicating that issue. We were checking yesterday, and I have not observed any impacts from inventory destocking for us. At this point, it’s too early to predict any incidents. We usually operate under a normal seasonal assumption and provide guidance on how variations in demand might affect production. Whether demand is stronger or weaker than usual, we need to manage cash flow in real time while being agile enough to respond to changes. Regarding any material impact from tariffs on our upper respiratory products, as previously mentioned, 85% to 90% of our production for U.S. sales occurs in the U.S. We have the capacity to ramp up if the season strengthens, and we are open to collaborating with other manufacturers to use our domestic capacity to reduce their tariff impact. Overall, we do not anticipate any significant impact.
Daniel Biolsi, Analyst
And can I do a follow-up on the Nutrition category in terms of the inventory rebuild across all customers, not just your largest chains? Just where your on-shelf availability is and then the in-stock for the smaller SKUs?
Patrick Lockwood-Taylor, CEO
Yes, very good. Good question. We are rebuilding that rapidly. I'd probably characterize it as we are at good levels of on-shelf availability. Probably the second big distribution surge that you're going to see across the rest of this year is we're introducing 60 SKUs. Those shelf resets will be happening any day now through the next couple of months. That will also increase our share of distribution. That will be a positive impact on store brand share trajectory. So on track and strengthening the fundamentals of that infant nutrition go-to-market over the next few weeks.
Operator, Operator
The last question comes from Chris Schott of JPMorgan.
Unidentified Analyst, Analyst
This is Ethan on for Chris. Just one more follow-up question from us. As you think about the potential impact of pharma-specific tariffs, to what extent could that have an impact on the business? And then maybe any commentary on how quickly you could offset that impact as well?
Patrick Lockwood-Taylor, CEO
Chris, good to hear from you. I'll start and then Eduardo gives some more detail. This has been fairly fluid for us trying to understand tariffs as it has for multiple industries. We continue to see evolution in what tariffs, what level of tariffs, what specific country impacts, etc. Based upon our current assumptions, we could see up to about $100 million impact. How we will mitigate that is through pricing. It's through onshoring, looking at alternative supply routes, including where we source API. And it is that latter that is probably quite meaningful for us. So basically, whatever we've done on oral care is what we would look to execute across pharma. 40%, 45% of our business is in Europe, as you know and that's not impacted. So this is U.S. We have a playbook now, and that's what we would execute here. We're in close liaison with the administration providing input to how they're thinking about pharma and the implications for the pharma industry given the administration's stated aim of reducing cost burden to patients and consumers. This needs to be thought through extremely carefully. But we have the playbook ready. We're just awaiting what these decisions and impacts are. And it seems to be a case of whatever is announced could potentially then change as it's further executed. Eduardo?
Eduardo Bezerra, CFO
No, nothing else to add at this stage.
Operator, Operator
Thank you, ladies and gentlemen. That concludes our question-and-answer session. I will now turn the conference back over to Patrick Lockwood-Taylor, CEO.
Patrick Lockwood-Taylor, CEO
Thank you very much and thank you to everyone for joining today. As you heard today, we're making great progress in our stabilized initiatives, really benefiting our Americas business. We're also maintaining our EPS guidance while broadening the range on revenue which we feel is prudent. As you heard me mention earlier, we often don't spend enough time on the contribution and the importance and the growth of our international business which has really turbocharged growth over the past few years and now accounts for well over 40% of our global sales and that's accelerating. In Q1, net sales in the international business were mid-single digit, plus 5%. And organic adjusted OI grew plus 10%. Just for comparison purposes, the adjusted OI of the international business was over $85 million in Q1, nearly as much as the Americas business OI of $100 million and that gap is narrowing. That's very important. For perspective, that business is now almost 4.5 times larger in terms of revenue than our entire infant formula business and is approaching the same size as our U.S. OTC business. It is a large and accelerating part of the Perrigo Enterprise. This business and why it's important to really understand it also embodies the potential of our Three-S Plan on a global basis. We're driving benefits from streamlining as we've consolidated brands, as we've consolidated categories, and as we consolidate the organizational structure and the supply strategy. It's also benefited enormously from strengthened initiatives. We're seeing disproportionate share growth in our highest potential brands that we talked about at our February Investor Day. We are, as you heard, disproportionately driving investment and focus on those most accretive categories of brands and geographical operations. And as you heard me talk to, we're moving to regional clusters passing those savings to the bottom line. So in closing, we're advancing our Three-S Plan to Stabilize, Streamline and Strengthen Perrigo and we have clearer initiatives being executed well across each of those verticals. With our 100-plus molecules and an additional 150 actives across 100% of price point coverage, Perrigo's unique business model provides significant opportunities for growth, especially in this uncertain environment. And as we convert those opportunities, you will hear those being reflected in our earnings announcement and our future book. Thank you very much for joining us today.
Operator, Operator
This concludes today's conference. Thank you for attending. You may now disconnect your lines.