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Date
Wednesday, Nov. 5, 2025 at 8:30 a.m. ET
Call participants
Chief Executive Officer — Patrick Lockwood-Taylor
Chief Financial Officer — Eduardo Guarita Bezerra
Senior Vice President, Investor Relations & Corporate Affairs — Bradley Joseph
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Risks
Total organic net sales declined 4.4% for the quarter, with a 1.6% reduction from global OTC and 2.8% from businesses under review, including oral care and infant formula.
Third quarter gross margin fell 110 basis points, cited as a result of lower net sales and an unfavorable product mix shift towards lower-margin store brands.
Perrigo reduced its fiscal 2025 organic net sales growth outlook to minus 2% to minus 2.5% and expects year-end net debt to adjusted EBITDA of approximately 3.8x, up from its previous 3.5x target, due primarily to revised net sales expectations.
Management noted, "financial performance in the context of soft market conditions and our infant formula position and performance is frankly not where we want it to be."
Takeaways
US OTC volume share -- Perrigo's store brand OTC gained 90 basis points in volume share over the last thirteen weeks across nearly all categories, led by smoking cessation, allergy, and women’s health.
European brand performance -- Key brands achieved five consecutive months of dollar share gains, supported by focused advertising and promotion (A&P) and innovation-driven strategies.
Project Energize -- Generated $163 million in gross annual savings, exceeding the $140 million to $170 million targeted range midpoint.
Organic net sales -- Declined 4.4% for the quarter, driven by a 1.6% drop in global OTC and 2.8% reduction from businesses under review (oral care and infant formula).
EPS -- Third quarter earnings per share were $0.80, up 1% year over year; year-to-date EPS reached $1.97, up 21% (27% organically).
Operating margin -- Meaningful sequential growth and margin expansion occurred, with third quarter operating margin up 318 basis points from the prior quarter due to lower unusual charges and ongoing cost controls.
Segment net sales -- CSCI third quarter organic net sales decreased 5.3%, while CSEA net sales declined 3.8%, with U.S. OTC up 0.6%. Third quarter growth in OTC was more than offset by a 4.4% decline from business under strategic review, including 3.8% from infant formula and 0.6% from oral care.
Cash & capital returns -- Third quarter operating cash flow was $52 million; year-to-date operating cash flow totaled $63 million, capital expenditures were $67 million, and $119 million was returned to shareholders.
Infant formula strategy -- A full strategic review was announced, and a planned $240 million investment is now paused; lost Good Start brand distribution contributed an additional $100 million impact to the outlook.
2025 guidance -- Updated outlook expects fiscal 2025 organic net sales to decline 2%-2.5%, gross margin of approximately 39%, reaffirmed operating margin near 15%, and EPS of $2.70 to $2.80, reflecting 5%-9% growth.
Derma cosmetics divestiture -- Remains on track to close in 2026, with proceeds designated for debt reduction.
Tariff impact -- Management expects $40 million to $50 million in margin impact from tariffs, to be offset partially by price increases and manufacturing actions, with no anticipated time lag.
Summary
Perrigo (PRGO 21.17%) achieved significant store brand OTC share gains in both the U.S. and Europe, despite confronting broad market softness in consumer health. Management announced a strategic review of the infant formula business, suspending the $240 million capital plan and signaling greater portfolio focus on higher-growth, high-cash-yielding consumer self-care. Revised 2025 guidance reflects lower organic net sales, a net debt to adjusted EBITDA outlook of approximately 3.8x (up from the prior 3.5x target), and reaffirmed operating margin (~15%) and dividend priorities. Cost-saving initiatives, including Project Energize, surpassed targeted savings and contributed to margin stability. Operating cash flow remained positive, supporting capital returns and deleveraging goals. Headwinds from tariffs, contracting infant formula performance, and evolving consumer demand patterns were cited as ongoing challenges.
Management stated, "the drivers [of category consumption decline] appear transitory and do not look structural in nature," emphasizing expectations for market normalization.
Year-to-date global organic operating income increased 13%, attributed to infant formula recovery, disciplined cost controls, and continued execution on accretive initiatives.
In response to underperformance in infant formula, shelf position and insufficient space allocation were identified as primary causes of slower SKU velocity, with corrective steps in place.
Third quarter A&P reallocation generated approximately $30 million in incremental sales across key brands, with returns exceeding initial forecasts.
Gross margin compression was attributed to net sales deleverage and unfavorable mix rather than input costs or competitive pricing pressure.
Full-year tax rate is now expected to improve to approximately 18.5%, compared to the prior year Q4 rate of 14.9%.
Industry glossary
3S plan: Perrigo's strategic framework focused on stabilizing, streamlining, and strengthening operations.
CSCI/CSEA: CSCI refers to Consumer Self-Care International, and CSEA refers to Consumer Self-Care Americas, the company’s two reporting segments.
Project Energize: A multi-year Perrigo cost-savings and process optimization program targeting operational efficiencies.
A&P: Advertising and promotion expenditures, used here specifically to describe targeted brand investment for share gains.
Full Conference Call Transcript
Patrick Lockwood-Taylor: Thank you, Brad. Good morning, good afternoon, and thank you for joining today's call. I'd like to begin by addressing recent category consumption trends across consumer health, which remain soft, reflecting broad short-term market pressures. Against this backdrop, Perrigo Company plc has delivered sustained share gains and advanced key initiatives under our 3S plan to stabilize, streamline, and strengthen. These efforts are enabling us to navigate the challenging landscape by making steady progress on our strategic priorities and reinforcing our long-term value proposition. With that context, let's turn to how these trends influenced our year-to-date performance and our outlook going forward. Let's start with USOTC. Perrigo Company plc continued to outperform despite a challenging market.
While total OTC volume consumption has recently declined versus the prior year, Perrigo Company plc's store brand has delivered six consecutive months of share gains. These gains were driven by strong execution, consumer trade across from national brands, and new distribution of business wins against key store brand competitors. Diving in a bit deeper, you can see on the right-hand side of the slide that over the last thirteen weeks, Perrigo Company plc gained volume share of 90 basis points across nearly every OTC category we compete in, most notably smoking cessation, allergy, and women's health. Sustained volume share gains in this environment under our winning OTC strategy validate the strength of our value proposition to retailers and consumers.
In The EU, total OTC euro consumption has also recently declined. Despite this, Perrigo Company plc's key brands have gained dollar share for five consecutive months, driven by our strong brands with unique value propositions, our highly focused A&P investments in innovation, and targeted activation strategies. These durable gains highlight the strength of our category-led approach and the resilience of our key brands, including LR1, global formula, and our cough cold products, CydiaMare and Coldrex. Though our remaining brands in The EU have been impacted by similar trends to the broader market, our key brands illustrate the strength of our portfolio, where we have concentrated our resources.
In total, Perrigo Company plc's share gains across The US and Europe, particularly in the current challenging environment, underscore the strength of our execution and the relevance of our unique multi-price point OTC portfolio. Building on our share gains in both The US and Europe, let's turn to the progress we've made against our 3S plan: stabilizing, streamlining, and strengthening, which continues to guide our actions and priorities. We've stabilized our US OTC store brand business and are outperforming the market in the categories we compete in. As I just mentioned, we have gained volume share for six consecutive months.
This success in consistently growing share in a challenging market results directly from disciplined execution and is clear evidence that this business is winning in the market. In infant formula, the store brand has also gained share, and operationally, we are consistently delivering safe, affordable formula to parents and caregivers. We also continue to streamline our organization, delivering as one Perrigo Company plc. Initiated in 2022, our supply chain reinvention remains on track to deliver between $150 million and $200 million in benefits by the end of this year. Project Energize, which has generated $163 million in gross annual savings, is above the midpoint of our $140 million to $170 million range.
Also, as part of our streamlining, we have been positioning our portfolio to become a more strategically scalable TSR attractive portfolio. These efforts are leading Perrigo Company plc back to our core strength, which is consumer health. The sale of our derma cosmetics business remains on track to close in 2026. As announced this morning, we are now actively reviewing the infant formula business, and I'll get more on this in a moment. We also continue to strategically review our oral care business, which we announced at our February Investor Day. We've made meaningful strides to strengthen the organization. Our new leadership team is in place.
We are scaling new brand-building capabilities, and we have an improved and highly focused innovation process. Implementation of our commercial growth model is expected to unlock the full potential of our portfolio, enabling teams to scale more molecules more efficiently to more consumers across more markets. Finally, we are leveraging consumer insights and deepening our retail partnerships in ways that differentiate Perrigo Company plc versus the competition. This is a new way of operating, and the team is energized about the possibilities ahead. Now to our quarter three and year-to-date results, where our diversified portfolio continued to demonstrate resiliency in a challenging environment.
The third quarter organic net sales declined 4.4%, impacted by 1.6% from our global OTC business, due primarily to soft OTC category consumption, and 2.8% from businesses under review, both oral care and infant formula. Gross profit and margin were down year over year, reflecting net sales performance. Operating profit and margin were partially offset by prudent cost management, and as projected, the improper scrap expense experienced in quarter two did not repeat, which drove meaningful sequential growth and operating margin expansion of $180 million and 318 basis points, respectively. Collectively, these factors led to third quarter EPS of $0.80, up 1% versus the prior year.
Year to date, organic net sales declined 1.7%, primarily driven by 0.8% from the businesses under review that I just mentioned, in addition to 0.5% from the absence of last year's opioid launch stocking benefits. Our remaining OTC business accounted for the balance. Despite marketplace challenges, year-to-date gross and operating margins expanded, and organic operating income grew 13%, driven by continued execution of our accretive initiatives, recovery in infant formula, and prudent cost management. Year-to-date EPS grew 21% or 27% organically to $1.97. Year-to-date consumption across consumer health has been dynamic and unpredictable. Quarter one saw year-over-year growth. Quarter two moved from growth to decline in June, and this decline significantly accelerated in the third quarter.
The drivers appear transitory and do not look structural in nature. Combined with updated assumptions for our own infant formula business, these factors have led us to revise our 2025 outlook. Is this the right decision for the long-term stewardship of Perrigo Company plc and our shareholders? In US store brand OTC, Perrigo Company plc increased dollar, unit, and volume share in five of the seven categories where we compete. In Europe, our key brands, EllaOne, Jungle Formula, Compeed, and our Cough and Cold franchise also outperformed expectations. To capitalize on this momentum, we reallocated additional A&P investments in both regions, generating approximately $30 million in sales over and above our initial forecast and delivering a solid return on investment.
At the same time, market consumption trends have been softer than anticipated. Over the latest thirteen-week period, US OTC volume as a total category declined 3.2%, while Europe grew just 0.6%, falling short of our original assumption by roughly 700 and 500 basis points, respectively. This represents an estimated $150 million to $170 million impact on our 2025 net sales outlook. Lastly, while infant formula has stabilized operationally, store brand share recovery will take longer than expected, which, in addition to lost Good Start brand distribution, is contributing an additional $100 million impact. Continuing with infant formula, today we announced a strategic review of this business as we assess its long-term role within the Perrigo Company plc portfolio.
While we have stabilized this business, the external environment has quickly shifted, which will require sustained investment and disproportionate management focus, making its long-term fit alongside our faster-growing, higher cash-yielding, consumer health OTC portfolio less strategic. As a result, the team will consider a full range of options, in addition to pausing our previously announced investment of $240 million. No matter the outcome of this review, our corporate priorities are unchanged: reduce leverage, sustain our dividend, deliver for customers and shareholders, and focus on our high-potential OTC portfolio to expand consumer access and household penetration. During this review, the business will continue to operate as normal, ensuring consistent and reliable supply with high-quality formula to customers and consumers.
In summary, we are executing our 3S plan with discipline, growing share in US store brands, and gaining share in our key European brands. These results show the resilience of our unique business model and validate our value proposition, even in a soft consumption environment. At the same time, we are delivering benefits from the supply chain reinvention and from Project Energize. We're also sharpening our focus on consumer health with the announced sale of Dermocosmetics and are actively reviewing both infant formula and oral care.
While soft OTC consumption and infant formula are prompting a revision to our 2025 outlook, the momentum from our 3S plan and our share gains reinforce our confidence in Perrigo Company plc's ability to capture the durable demand for trusted consumer health solutions. With that, I'll now turn the call over to Eduardo to walk through the financials.
Eduardo Guarita Bezerra: Thank you, Patrick. Hello, everyone. Looking at the third 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 charge of $21 million primarily related to Project Energize and supply chain reinvention, and third, unusual litigation of $50 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. As Patrick noted earlier, softer OTC category consumption in both The US and Europe weighed meaningfully on top-line performance this quarter.
Since he already provided detail on those drivers, I will begin my commentary with gross profit. Third quarter gross profit of $417 million declined $30 million year over year, primarily due to the impact from lower net sales and divestitures and exited products. These factors partially offset benefits from our supply chain reinvention and favorable currency translation. Gross margin for the quarter declined 110 basis points due to the same factors and included higher sales from relatively lower margin store brands versus our branded product portfolio. Year to date, gross profit of $1.2 billion decreased $27 million year over year, including a $40 million impact from divestitures and exited products.
Organic gross profit was flat to the prior year, while organic gross margin was up 60 basis points stemming from infant formula recovery and accretive initiatives. I will discuss operating profit and earnings per share in just a moment. Turning to net sales performance by segment, starting with CSCI. Third quarter organic net sales decreased 5.3%, impacted primarily by soft OTC category consumption trends partially offset by share gains in key brands and new products. Year to date, CSCI organic net sales grew 0.7%, driven by restored product supply in the pain and sleep category, in addition to growth in healthy lifestyle driven by key brands including Jungle Formula and Iquitin.
These drivers were partially offset by decelerating category consumption beginning in the second quarter. CSEA third quarter net sales declined 3.8% with U.S. OTC growth of 0.6% driven by sustained share gains across five of seven store brand categories and growth in our contract business. Growth was led by upper respiratory, skincare, and women's health, which were partially offset by digestive health and healthy lifestyle. Third quarter growth in OTC was more than offset by a 4.4% decline from business under strategic review, 3.8% from infant formula, and 0.6% from oral care.
Year to date, CSA net sales declined 3.1% due to an impact of 1.1% from business under strategic review and the absence of the prior year opioid allowance stocking benefit of 0.8%. The remaining OTC business was down 1.2% as continued soft market consumption was partially offset by store brand share gain. Third quarter operating income of $173 million decreased $9 million. Operating income was down 4.9% due primarily to lower net sales flow through and higher operating expenses in infant formula. This impact was partially offset by growth from the rest of the business, including benefits from Project Energize and prudent cost management. Divestitures and exited products were fully offset by favorable currency translation.
Year to date, operating income of $455 million increased $41 million driven by global OTC benefits from accretive initiatives, infant formula, and favorable currency translation, partly offset by divestitures and exited products. Organic operating income grew 13.2% in the period. Despite clear marketplace challenges, third quarter 2025 EPS was $0.80 compared to $0.81 in the prior year. Year to date, earnings per share of $1.97 was up almost 21% or 27% organically. Turning to balance sheet and cash flow. Third quarter operating cash flow was $52 million, bringing year-to-date operating cash flow to $63 million. Year to date, we invested $67 million in capital expenditures and returned $119 million to shareholders through the year.
Cash on the balance sheet at the end of the third quarter was $432 million. Given our updated outlook, which I will explain in a few minutes, we now expect year-end net debt to adjusted EBITDA of approximately 3.8 times versus our prior target of 3.5x, due primarily to our updated net sales expectations. We remain on track to close the derma cosmetics divestiture in 2026 and expect to use the net proceeds to advance our deleveraging goal. As part of our strategic review of the infant formula business, we have paused the previously announced $240 million investment until we determine the best path forward for the business.
As a quick update, our oral care business is still undergoing a strategic review. Taking all of these into account, as outlined by Patrick, we are updating our fiscal 2025 outlook from the low end of our previous organic net sales outlook range to minus 2% to -2.5% organic net sales growth due to softer than expected OTC category consumption in both The US and Europe, as well as lower than anticipated infant formula share growth. As a result of the top-line updates, we now expect a gross margin of approximately 39% for the year.
We are, however, reaffirming operating margins for the year of approximately 15%, and benefits from accretive initiatives and prudent cost management offset the gross margin adjustment. We also expect a slight improvement to our full-year tax rate to approximately 18.5%. These updates translate to a 2025 earnings per share range outlook of $2.70 to $2.80, equating to 5% to 9% growth versus 2024. A few comments on our year-over-year Q4 expectations before I close my remarks.
On the top line, we expect organic growth in our global OTC business of approximately flat to 1%, while sales in our nutrition category are expected to be down year over year due to lower contract volumes and the comparison against restocking activity in the prior year quarter. Q4 margins are expected below prior year levels due to the impact of lower volumes and tariff-related costs. Operating expenses for the total company are expected to be relatively flat year over year. Finally, we're lapping a prior year Q4 tax rate of 14.9% versus our expectation of approximately 18.5% on a full-year basis for 2025. In closing, this quarter reflected both the resilience and the pressures in our business.
Softer OTC consumption and slower infant formula recovery weighed on sales, but we still delivered year-to-date earnings per share growth of more than 20% and double-digit organic operating income growth. Margins are holding through disciplined cost management and the benefits of our efficiency programs. We remain committed to returning cash to shareholders while reducing leverage, supported by the pending derma cosmetics divestiture. We adjusted our 2025 outlook to reflect current realities, but our actions to streamline the portfolio, manage costs, and focus investments on high-performing brands give us confidence that Perrigo Company plc is positioned to navigate the near-term challenges and deliver stronger, more durable performance over time. Thank you, I will now turn the call back to Brad.
Bradley Joseph: Thanks, Eduardo. Operator, can we please open the call for questions?
Operator: Thank you. And ladies and gentlemen, we will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star followed by the number two. With that, our first question comes from the line of Susan Kay Anderson with Canaccord Genuity. Please go ahead.
Susan Kay Anderson: I guess maybe just a follow-up on the infant formula. There seems to be, I guess, a pretty widespread between the sellout data and your sell-in. Just curious, was that mainly destocking by retailers in the quarter? I think you said you did say that your share was up in the quarter. And then I was curious how the new SKUs that you introduced, how those were doing. And then just, you know, in general, what kinda drove the miss versus your original expectations. Thanks.
Eduardo Guarita Bezerra: Hi, Susan. Eduardo here. So a couple of comments here. So, first of all, yes, we're seeing a pickup in our store brand share. It's been at a slower pace than we originally anticipated. Right? So, remember we were expecting to be at the low 20s at the end of the year. Given the competitive environment, we still continue to see significant, you know, important formulas coming to the marketplace. We're seeing growth in our store brand share. So in Q3, we did several actions in terms of rollbacks and promotions to make sure that we meet consumers where they need. And so that has evolved, and we're seeing significant improvement in our share, but below our original expectations.
And then to that point, because of that, we are revisiting our net sales guidance. Remember, we said in Q2, we were expecting about 25% growth in the second half of the year. Because of that competitive pressure and also we're seeing a slower market development there. We're seeing a reduction on that side in terms of the overall market that's impacting our share. Another important component, as you may remember, Q4 last year, we had a significant contract volume sales. And then as originally expected, those are not materializing as well because of, you know, the new imports that are getting to the marketplace today.
Patrick Lockwood-Taylor: Susan, you also asked about SKU velocity. You actually hit the nail on the head. The distribution buildup of new SKUs has been per plan. The velocity we're seeing on those SKUs is below expectation. The reasons are clear and being fixed. It's position on shelf, and it's a matter of shelf space given to store brand, is below what it historically was. That's impacting business for retailers and, of course, for us and is being addressed.
Susan Kay Anderson: Okay. Great. Thanks for the details there. I guess maybe just a follow-up on the CSCI business. On a couple of the segments. I think in women's health, you talked about some supply constraints. I guess just curious what drove that there, and I think it's been resolved now. And then also in BMS there, I think you mentioned the priority of nutraceuticals. So I'm curious kind of what's driving that. And then I think you also said consumption was a little weaker in BMS and international. Just curious if the consumer is kind of pulling back on that category. Thanks.
Eduardo Guarita Bezerra: Yeah. So a couple of things there. As we compare to last year, right? So last year we had a stronger Q3. There were also some early signs of, you know, coughing cold last year, than what we're seeing this year. So we expect a shift between Q3 and Q4 in CSCI. Specifically to your question regarding women's health, there were some supply issues on our EllaOne, which is the key brand that we have there in Europe, but those have been resolved. And we expect that to pick up back in Q4. Also in EMS, yeah, the nutraceuticals portfolio is something that we have been deprioritizing overall versus some of our brands that we have.
Both in The Netherlands and Germany that are performing relatively good. And then the last piece on the soft OTC consumption, that's something that we're seeing more broadly. But as we look into Q4, when we highlight our expectation to be flat to 1%, we expect a significant pickup in CSCI as compared to what we saw in Q3. So again, last year we saw a stronger Q3 Q4. This year, we expect a shift because also seasonality. As well as we expect more taking place in Q4 versus what you saw in Q3 this year. That's why we're expecting an important growth sequentially in CSCI that's about 5% to 6% on net sales.
Susan Kay Anderson: Okay. Great. That's very helpful. Thanks for all the details.
Eduardo Guarita Bezerra: Thanks, Susan.
Bradley Joseph: Next question, please.
Operator: Thank you. And your next question comes from the line of Keith Jude Devas with Jefferies. Please go ahead.
Keith Jude Devas: Good morning. Thanks for the question. I'm curious if you guys can just provide maybe a little bit more color on what changed intra-quarter on both OTC and infant formula versus the original plans? You guys have given a lot already, but I guess the volatile consumption we're seeing across a lot of categories in staples, and it doesn't feel normal. So I'm curious what you think is driving it, whether it's, you know, added consumer pressure or maybe mitigating to lower pack sizes and maybe how your conversations with retailers have also evolved over the years?
Patrick Lockwood-Taylor: Yeah. Hi, Keith. On OTC consumption, we're back reviewing this data yesterday. In quarter one, we saw consumption growth actually ahead of expectation between three and three point five points. Quarter two, remember this, we get this data like you retrospectively. Quarter two, we started to see a slowdown then moving into slight decline. With actually June appearing to be flat to year ago sort of past three average. That then continued and actually accelerated. Really from August onwards. And October consumption was weak as well. Okay? So this has been dynamic and highly unpredictable. And obviously softer than we and many others had anticipated.
On infant formula, and I just talked to this with Susan, the SKU velocities that we've seen have been below expectations. That's obviously affected revenue, and that's affected our share build. But we believe is addressable. To your question on drivers, there is a multitude of tactical drivers. Be it feature levels, display levels, some changes in distribution, some changes in pricing effect. We've seen over the last two to three years very strong price inflation in this category. Which was building category value. That seemed to come to an end in quarter one. You have seen though trade across into store brand.
You're aware that store brand OTC is growing share and we're growing our share within that as well. This doesn't appear to be structural. There is no real change in incidence levels across these treatment categories. Changes in consumption habits across different generations, there is some effect of that, but I don't think that is material and certainly not some. I think there is some speculation that people consumers are burning through pantry stock to a greater extent than they historically have done. I haven't seen data personally confirming that, but I have heard the hypothesis. And the cough cold season is definitely down on a year ago. Through now. But we are still out looking an average season.
For cold. So again, multitude of tactical factors. No evidence that we've seen that this is a structural change and we would expect, therefore, normalization of the market as I think you've heard some of our competitors say.
Eduardo Guarita Bezerra: And also, Keith, just to complement what Patrick said, right? So different than what I mentioned about CSCI that we expect the Q4 is stronger than Q3, right? So, as compared to what happened last year, we expect to see some trends continue in U.S. OTC. So we expect a normal season in cough and cold as compared to last year, we expect Q4 to be down. So the net effect of being zero to one it's positive on the CSA side of about five to six. And negative on the on the on the US. and distribution that we're seeing on that side in The US. Also, important thing is the reduction that we see in infant formula.
That helps contribute significantly with that. Because of as I mentioned, lower contract volumes and also lower pace of regaining our store brand share on the infant formula.
Keith Jude Devas: Got it. That's very helpful. If I could squeeze in a follow-up, curious how you guys are also just thinking about reinvestment plans just given the pullback in consumption on OTC and now you know, pausing the infant formula investment. Are there any areas where you're looking to increase spending? There's obviously some green shoots with new business wins. And then obviously, international. So interested in how you're thinking about maybe potentially reallocating spend going forward.
Patrick Lockwood-Taylor: Yes. I'll comment first, Keith, and then Eduardo. As you heard me say in my comments, our priorities remain the same. Deleverage, maintain our dividend, but we will revisit investment in organic growth. Okay? We see increasing evidence of performing businesses, U.S. Store brand, you're right to mention the acceleration of share growth we're seeing in our key international branded business and our brands in The US. There is opportunity probably to accelerate the revenue on those. Okay? But we need to look across all business cases and all our priorities in determine what's best obviously for the asset long term, but also for shareholders.
So, yes, we will be undertaking another look at capital allocation given that decision we've made on infant formula. But the priorities won't change. We just may increase the level of some of those allocations.
Eduardo Guarita Bezerra: Yeah. Nothing else to add here, Keith.
Bradley Joseph: Thanks, Keith. Thanks for the question.
Operator: All right. Thank you. And the next question comes from the line of Ethan Harris Brown on behalf of Chris Schott with JPMorgan. Please go ahead.
Ethan Harris Brown: Hi. This is Ethan on for Chris Schott. Thank you for taking our questions. Just to start off, maybe following up on some of the previous questions, I was just wondering where infant formula share now sits, and then as we look ahead to 2026, maybe how you're thinking about the business's ability to recapture share and just priorities for that. Thank you.
Patrick Lockwood-Taylor: Yeah. Good morning. Thanks for the question. My view is we have seen we're at about a 16 share. We have three building blocks to continue growing that in '25 and into '26. And I would expect over the next twelve months with those building blocks that we have you're getting to the sort of eighteen to twenty area in terms of share.
Eduardo Guarita Bezerra: And again, important there to mention is, you know, as we announced this morning, on our infant formula strategic review, right, so we're looking to multiple options of how we want to look into that business, you know, to make sure we optimize that. And, you know, both on our near term, but also long term, you know, and make sure this is gonna be the best result also for shareholders.
Ethan Harris Brown: Perfect. And then just one more question for me. Just overall looking to 2026, appreciate that it's still early. But was just hoping you can maybe provide how you're thinking about the different pushes and pulls in the business. As well as maybe the ability to grow EBITDA looking ahead to next year? Thank you.
Eduardo Guarita Bezerra: Yeah. So a couple of comments here. So you know, we're still early. You know, it takes on the planning process. Right? So it's to sort of provide the deep details. But there are some headwinds and tailwinds that we're looking at right now, right? So again, as Patrick highlighted, we do not believe the OTC market has been impaired structurally. We're seeing it's basically, you know, a short-term consumption impact there. So we believe there is stabilization expected for 2026. So more expecting to be like a flat to a small percentage growth. With that said, we continue to expect our share gains to continue there. And also translating to growth slightly ahead of the market.
On the infant formula side, foreign manufacturers have grown US share. And so we're looking at that to make sure we continue our plans to recover our share but at the same time acknowledging there will be more idle domestic capacity in The U.S. impacting absorption for domestic players. And also we're addressing the stranded cost impact of our derma cosmetics divestiture. Right? So we expect to close that by end of Q1. And so we expect about nine months of inorganic headwind of approximately $100 million on our top line. And depending on the timing of the close, that will have some net EPS impact. On our bottom line.
Patrick Lockwood-Taylor: The other is tailwind. We have a strengthening innovation pipeline. Versus this year. Fairly significantly. We also have improving brand programs in terms of new advertising, packaging, and rollouts to more markets. So what has been driving that share growth for us we see accelerating across more categories, brands, and geographies with even more innovation.
Bradley Joseph: Thanks, Ethan. Appreciate the questions.
Operator: And the next question comes from the line of Daniel Biolsi with Hedgehog. Please go ahead.
Daniel Biolsi: Hi. Good morning. So regarding the 110 basis points in gross margin pressure in the quarter, it sounds like that was mostly sales deleverage and mix. And it doesn't sound like it was related to input costs or competitive price changes. Is that right?
Eduardo Guarita Bezerra: Yes, that's correct.
Daniel Biolsi: And then the margin impact that you're expecting from tariffs of $40 million to $50 million is that and that's before mitigation efforts, but will there be a lag in terms of like when you're taking higher prices and when you're gonna incur those costs?
Patrick Lockwood-Taylor: Well, so we do not expect a lag. So as we highlighted, we have already, since the beginning of the year, been working on that. And we expect a third of that coming from price and the remaining through the different manufacturing actions that we're doing either in sourcing or looking for other suppliers there. That has been in flight already. So we already see some impact on the margin taking place in Q4, but offset the serious comportion pricing. And that also continues into 2026.
Daniel Biolsi: Okay. And do you think that there's going to be any changes in that competitively where certain manufacturers imported or source it domestically? Will that have any sort of share changes that you expect in '26?
Eduardo Guarita Bezerra: Well, you know, it's been a very dynamic, you know, scenario with the recent also announcement on the China tariffs, right? So we continue to evaluate that. But you know, as we continue to see our strong position and significant US manufacturing, you can see that translating to our share gains. Right? So because of our strong position that we have in the marketplace, we continue to expect that to accelerate into 2026 as we drive more strategic partnerships and joint business plans with our key retailers, because they want us to help them grow in a moment like that where consumers are trading down, they want to make sure there is enough optionality with store brand.
And that's where we believe we can really add a lot of value to that. So I don't know, Patrick, any comments there?
Patrick Lockwood-Taylor: Thanks, Daniel.
Operator: And that is all the questions that we have at this time. I would like to turn it back to Patrick Lockwood-Taylor for closing remarks.
Patrick Lockwood-Taylor: Thank you very much, and thank you for the questions, and again for joining us today. So just a few closing remarks from me. Obviously, first of all, this is a very difficult market condition with much softer consumption than anyone could have reasonably predicted. We've had to pivot within that. Within that context, though, we're starting to win. This is the first time in many years that we're growing share. And we're growing it at a rate that's ahead of our expectations. But our financial performance in the context of soft market conditions and our infant formula position and performance is frankly not where we want it to be. We'll continue to make adjustments to address that.
And set up a successful 2026. We've launched and announced today's strategic review of our infant formula business. This is to shore up and focus on our scalable OTC platform and, of course, any impact to our 2027 outlook given that strategic review will be shared once the review concludes. As I've mentioned, we remain committed to deleveraging. Targeting below 3.5x with the dermocosmetic proceeds going to debt reduction. We have a significant growth opportunity ahead of us by expanding our unparalleled molecule asset base for small price points, brands, and markets. We're further deepening our strategic retail partnerships to drive mutual demand and our investments in brand building, innovation, digital, and analytics are fueling our increasingly winning formula.
Our aim is to continue to grow share through superior consumer propositions and brand experiences, and disciplined execution. Focused on driving cash flow and total shareholder return. Again, many thanks for joining us today.
Operator: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.