Prestige Consumer Healthcare Q2 2024 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q2 2024 Prestige Consumer Healthcare Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Phil Turpelilli.

Operator

Please go ahead.

Speaker 1

Thanks, operator, and thank you to everyone who has joined today. On the call with me are Ron Lombardi, our Chairman, President and CEO and Christine Sacco, our CFO. On today's call, we'll review our Q2 fiscal 'twenty four results, discuss our full year outlook and then take questions from analysts. A slide presentation accompanies today's call can be accessed by visiting prestigeconsumerhealthcare.com, clicking on the Investors Reconciliations to the nearest GAAP financial measures are included in our earnings release and slide presentation. On today's call, management will make forward looking statements around risks These are important to review and contemplate.

Speaker 1

Business environment uncertainty remains heightened due to high inflation, geopolitical events and supply chain constraints, as well as other various numerous potential impacts. This means results could change at any time and the forecasted impact of risk considerations is a best estimate based on the information available as of today's date. Further information concerning risk factors and cautionary statements available in our most recent SEC filings and most recent company 10 ks. I'll now hand it over to our CEO, Raman Bharti. Ram?

Speaker 2

Thanks, Phil. Let's begin on Slide 5. Our Q2 results largely aligned to our and built on a strong Q1 results. Net sales were $286,000,000 in the 2nd quarter, which were the 2nd highest level of quarterly sales in company history and slightly ahead of what we anticipated back in August. We were pleased with this performance, given we faced a challenging comparison from the prior year record results.

Speaker 2

Our portfolio diversity continues to be a strength with strong sales in certain U. S. Brands and our international business, mostly offsetting this tough comparison as well as the strategic exit of the private label business we've previously discussed. Revenue translated into strong earnings and cash flow. We generated $1.07 in earnings, up 5% versus the prior year, while experiencing sequential and year over year improvement in gross margin, as well as a consistent EBITDA margin.

Speaker 2

Strong free cash flow enabled the pay down of $55,000,000 in debt And we finished the quarter at 3 times leverage. We will continue to reduce debt while assessing other strategic capital deployment opportunities. So in summary, halfway through the year, we are on track to achieve our full year forecast, delivering strong revenue and earnings, Thanks to the execution of our proven business strategy. Now, let's turn to Page 6 to discuss one example of brand building that's driving Our Goody's headache powders define the form and have a long 100 plus year history of helping consumers treat headaches and other ailments largely in the Southeastern United States. After acquiring the brand over 10 years ago, We went to work leveraging learnings from consumers to drive increased usage of the brand.

Speaker 2

We used these and expanded with new forms and flavors as well as with targeted offerings like Goody's Hangover that solve on the go pain relief with great taste. Most recently, we leveraged these highly successful products with distinct marketing, designed to attract new customers, while deepening connections with existing ones. We've done this in 2 distinct ways. First, we've had wide ranging media emphasizing the concept of make the day count for consumers that has driven important brand visibility. 2nd, We've had successful national exposure on Thursday Night Football where the brands get to good marketing ads are driving increased interest in Goody's online.

Speaker 2

These recent marketing tactics are successfully leveraging our brand building toolkit to drive share with consumers and retailers and the results are clear. In the fiscal year to date, we've grown Goody's headache powders over 3 times faster than the overall analgesic category. Now, let's turn to Slide 7 for an update on ecommerce. Alongside these brand building efforts is our emphasis in aligning investments with channels that are important to consumers. As consumer shopping habits shift, our end goal is to be readily available and prominent to consumers wherever they shop.

Speaker 2

E commerce continues to be the key example of this. As shown on the left side of the page, we experienced Strong 6% consumption growth in the first half of the fiscal year. Equally important is that we've achieved Strong performance across all of our e commerce partners and with a consistent profit profile. Our success is driven by effective strategies including targeted content, effectively managing our product assortment and making broad investments with each of our e commerce partners to better connect with consumers. 2 recent examples are shown on the right side of the page.

Speaker 2

On the top, there are a few examples of online brand story pages, which help upgrade the user experience of learning about an overall brand while shopping actively for a specific product. On the bottom is a reminder of investments around content. We continually refresh online content for each of our brands to help drive traffic and ultimately purchases as consumers seek solutions for their healthcare needs. So in summary, We continue to win with consumers across e commerce through our investments in online content and digital advertising and are well positioned for further growth. Now I'll pass it to Chris to walk through the financials.

Speaker 2

Thanks, Ram.

Speaker 3

Good morning, everyone. Let's turn to Slide 9 and review our Q2 revenue of $286,300,000 were largely as expected and decreased 70 basis points from the prior year after excluding the effects of foreign currency. As Ron highlighted earlier, Q2 faced the most difficult comparison to the prior year and also includes about a 1 point headwind related to the strategic exit of the private label business. EBITDA and EPS both increased 4.2% and 5.4%, respectively, in Q2 from the prior year, largely attributable to the timing of A and M spend. EBITDA margin in the quarter remained consistent with our long term expectations.

Speaker 3

Let's turn to Slide 10 for more detail around consolidated results for the first half. For the 1st 6 months of fiscal 2024, revenues were approximately flat at 566,000,000 By segment, excluding FX, North America segment revenues declined, while the International segment increased 8.5% versus the prior year. In North America, the largest category growth drivers in the first half were strong dermatological and eye and ear care sales, which helped partially offset declines in women's health. Our international segment performed slightly above our long term expectations, thanks to strong performance across numerous brands. We continue to experience solid mid single digit year over year growth in the e commerce channel, as Ron highlighted.

Speaker 3

Total company gross margin of 55.6 percent in the 1st 6 months was down slightly versus the prior year, owing to challenging comparisons in Q1. This gross margin was as we expected and attributable to cost increases, partially offset by pricing actions and cost savings across our portfolio, which offset the dollar amount of inflationary cost headwinds. For the full fiscal year, we continue to anticipate gross margin flat to up slightly versus fiscal 2023, with Q3 estimated to be flat with Q2. As a percent of sales, advertising and marketing came in at 13.5% for the 1st 6 months. For fiscal 'twenty four, we still anticipate an A and M rate of just over 13% of sales and up in dollars versus prior year with approximately 14% of spend in Q3.

Speaker 3

G and A expenses were 9.5 percent of sales in the 1st 6 months, consistent with the prior year. Finally, Diluted EPS of $2.13 was up slightly versus $2.11 despite a headwind related to the timing impact of cost increases and higher interest rate. For the balance of fiscal 2024, we still anticipate an interest expense of approximately $67,000,000 with lower sequential interest expense in Q3. Finally, our Q2 tax rate was 23.9% We still anticipate a tax rate of approximately 24% for the remaining quarters of fiscal 2024. Now let's turn to Slide 11 and discuss cash flow.

Speaker 3

For the first half, we generated $106,100,000 in free cash flow, down mid single digits versus the prior year due to the timing of We continue to maintain industry leading free cash flow and are maintaining our outlook for the full year of $240,000,000 or more. At September 30, our net debt was approximately $1,200,000,000 $1,000,000,000 of which is fixed, and we achieved a covenant defined leverage ratio of 3 times. We still anticipate being below 3 times leverage by fiscal year end absent other strategic uses of cash This is consistent with our objective of targeting to operate below 3 times leverage over the long term. With that, I'll turn it back to Ron.

Speaker 2

Thanks, Chris. Let's turn to Slide 13 to wrap up. More than halfway through the year, We have solid business momentum, thanks to our proven business strategy and leading consumer healthcare portfolio. We are reaffirming our full year outlook, Thanks to our diverse portfolio of brands. For fiscal 2024, we continue to anticipate revenues of 1,135,000,000 to $1,140,000,000 and organic revenue growth of approximately 1% to 2% versus fiscal 2023 or organic revenue growth of 2% to 3% after excluding the exit of the non core private label business.

Speaker 2

For Q3, we anticipate revenue of $280,000,000 a year over year increase consistent with the full year growth expectation. As a reminder, our fiscal Q3 is typically the most difficult quarter of the year to forecast given the holiday season and the potential lumpiness of retailer order patterns during this period. For EPS, we continue to anticipate diluted EPS of $4.27 to $4.32 for the full year, most likely at the higher end of the range, Thanks to the power of our cash flow. For Q3, we anticipate EPS of $1.04 up slightly versus the prior year. Lastly, we continue to anticipate free cash flow of $240,000,000 or more, and we still expect being below 3x leverage by fiscal year end as we continue to execute our disciplined capital deployment strategy.

Speaker 2

With that, I'll open it up for questions. Operator?

Operator

Thank you. At this time, we'll conduct a question and answer session. And wait for your name to be announced. Our first question comes from the line of Rupesh Parikh with Oppenheimer. Your line is now open.

Speaker 4

Good morning and thanks for taking my question. So I guess I wanted to kick it off just with the Women's Health segment. Just curious if you could just give us color in terms of how you're thinking about the recovery. I think earlier you expected it to improve later this year, but just curious the latest thinking on women's health.

Speaker 2

Good morning, Mupesh. I think as we talked about on the last quarterly call, the category is slowing down. We continue to feel good about the Summer's Eve positioning. We've got some new products expected later in the year and we continue to focus on it. So Continue to feel good about the brand's positioning and expect things to turn later in the year early into next year.

Speaker 2

Great.

Speaker 4

And then On the competitive front, just curious if you're seeing any changes from private label competition or even other branded players?

Speaker 2

No, no real change in share We're new entrants that's disrupting anything, Rupesh. So it's kind of just overall category trends at this point.

Speaker 4

Great. And then we've all seen, I guess, the bankruptcy of Rite Aid. So just curious as well if you're seeing any shifts Between channels, just given changing consumer dynamics and just what's happening with some of the challenges in the pharmacy channel?

Speaker 3

Hey, Rupesh. Good morning, it's Chris. So First of all, concerning Rite Aid specifically, we're not anticipating a disruption to our full year outlook as a result of the filing. For context, They're not one of our top 10 customers globally. That said, we have seen some channel shift, mainly into mass and e commerce.

Speaker 3

But As we've talked about generally positive for us, right, our share online is generally higher than it is in brick and mortar. And we're well positioned, right? We're So we always say we want our product to be available to consumers wherever they shop. And so, we wouldn't anticipate a channel shift, meaningfully impacting us.

Speaker 4

Great. Thank you for all the color I'll pass it on.

Operator

This question comes from the line of Susan Anderson with Canaccord. Your line is now open.

Speaker 5

Hi, good morning. Nice job on the quarter. I was wondering if maybe you could talk about the cold cough season. It sounds like it was a driver of I guess there's been some mixed commentary out there. Just curious how you've seen it start out and how you expect it to play out or how you're modeling it for the season?

Speaker 2

Thanks. Good morning, Susan. So we've been talking about kind of 3 factors to consider For the cough cold season for us, and it's been consistent really since the beginning of the year. The first is For our business, we've got expanded capacity versus last year. So we're able to ship more because we can get more from the The second impact that we've considered is the change or changes in how the retailers are planning the season And what level of inventory they may keep on hand for cough cold.

Speaker 2

And then of course, the third is the cough cold incident level. So As we sit here today, those three factors continue to line up with what we thought about for the year. So we were anticipating Cough, cold for the year to be in line with last year. So as our supply is better this year, it's offset by an anticipated lower level of incident levels And likely lower stocking for coughcold outside of the traditional season. So that's how we're viewing it at this point.

Speaker 5

Okay, great. That's helpful. And then maybe if you could talk about the dynamic in the quarter between pricing and unit growth. And then I know in the past you talked about kind of volume normalizing as we go into the back half. I guess, how do you feel about that dynamic?

Speaker 5

And would you expect then the growth there to be more equal as we look forward?

Speaker 3

Yes. Good morning, Susan. So that's exactly right. We're still benefiting from certain Pricing actions that will roll over largely in the second half of this year. So probably easier to talk first half in totality, Right.

Speaker 3

We were up slightly on an organic basis and that was largely driven by price. In the second half, we anticipate that to reverse and therefore, Consistent with our original guide, we still expect our growth to be about half price, half volume for the year.

Speaker 5

Okay, great. Thanks. And then if I could maybe just add one more on the capital allocation. I guess how are you thinking about you're at 3 times leverage, so almost Reaching your goal by the end of the year, I guess, how are you thinking about beyond that balancing share repurchases and debt pay down and then also M and A opportunities as we look forward?

Speaker 2

So really it's no different than it's been for the last few years, Susan, which is we'll continue to evaluate any M and A opportunities that come up, look at stock Buyback as a way to offset dilution of shares each year and then Longer term, we'll consider a dividend. But again, our leverage target is below 3, which is that next phase and we'll get there Anticipating getting there at the end of March. So we continue to feel good about the capital allocation optionality that we have going forward.

Speaker 5

Great. Thanks so much. Good luck for the rest

Operator

of the year.

Speaker 2

Thank you, Susan.

Operator

Thank you. One moment for our next question. This question comes from the line of John Anderson with William Blair. Your line is now open.

Speaker 6

Hi, good morning everybody.

Speaker 2

Good morning, Tahoe.

Speaker 6

During the first half of the year, your sales essentially flat, But you've reaffirmed the full year outlook for 1% to 2% growth, which means we're going to expect to see an acceleration In sales growth in the second half of the year, could you talk about your visibility to that and what Some of the underlying drivers are of that improvement on a year over year basis that you're expecting in the second half? Thanks.

Speaker 2

So the first place I'll start with, John, is comps. And as I mentioned during the prepared remarks today is for the Q2 in particular, We comped the highest level of quarterly sales ever in the company's history. As a reminder, last year, we were still in Kind of a funny ramp up in return to normal activities and catch up in Supply chain and a number of other factors last year that kind of drove the comps. So as we get into the second half of our year, We begin to return to I think more of a normal level of comps to help drive year over year gains. That's really the big factor.

Speaker 6

Okay. And You mentioned, Ron, in your response on to the question on coughcold that, one of the factors there You're considering is changes in retailers' planned inventory levels. I guess, thinking they might hold less inventory This year than last year. Is that comment specific to coughcold or is there a broader trend Now with things normalizing from a supply chain standpoint, where retailers are looking To just kind of hold less inventory in aggregate and could that affect your shipments?

Speaker 2

Yes. So Particularly the coughcold, right? Last year, the supply chain of many suppliers for coughcold were trying to catch up. So retailers were trying to carry as much inventory as they could because of that uncertainty in the supply chain. And then just as importantly, like last year, Coughcold incident levels were happening all year long.

Speaker 2

So retailers were carrying a different level of inventory to support A year round cold incident level rather than the historical seasonal. And I think as we get into this year, we're starting to see signs that's returned to Seasonal peaks and valleys. So it's really a different inventory profile held by the retailers rather than lower levels. If you see the fine difference there. And then yes, right, we're hearing a lot of the same things you are from other CPG companies that their businesses are being impacted by retailers thinking about carrying lower levels of inventory, Not so much in our categories and specifically our subsections of our categories, right.

Speaker 2

So at this point, really no major impact that we would expect. And our outlook for the year, I think, is supporting the levels we'd expect going forward.

Speaker 6

Okay. That's helpful. Last one for me. On gross margin improved, I think, a little bit sequentially. And is that the I guess the first question on that is, Was that seasonal or are you seeing early signs of Some of your efforts to, I guess, restore gross margins after a couple of years of gross margin erosion, which was Largely, I think, are solely due to just kind of the price cost dynamic.

Speaker 6

Are you starting to feel like you've got some traction Such that we could see ongoing gross margin improvement from here. Thanks.

Speaker 3

Yes. Hi, John, it's Chris. So, really the latter. Gross margin coming in this quarter for Q2 as expected Compared to the outlook we gave in May, Q3, we said should approximate Q2, right? And we're still calling the year to be flat to up slightly.

Speaker 3

We are starting to see some relief on certain costs sequentially like logistics costs, freight that you're hearing from people, but It's a little bit more marginal for us just given the magnitude of freight as a percent of our sales that we've talked about in the mid single digit range. So We're seeing a little bit of recovery there and some of our cost saving efforts are starting to pay off. No reason to think we can't continue the march back to more normalized levels.

Speaker 6

And then maybe I will squeeze one more in. Is the comments on capital allocate excuse me, on leverage, wanting to operate below 3 times Long term, is that fairly new? I guess I'd missed that. I hadn't heard that before. And then does that kind of Maybe limit your willingness to engage in M and A and term as you work to achieve that goal?

Speaker 6

Thanks.

Speaker 2

Yes. So John, I think we announced that back on the May call at the start of the fiscal year that it was our new phase, Right. Prior to that, I think we were between 4.5 and 3 or something like that. So it really, I think, is just Reemphasizing our focus on operating at lower levels of leverage over time, it really doesn't handcuff us In terms of optionality and it's our job if an M and A opportunity shows up that we think is compelling for the shareholders to figure out how to get it done and we would rise above 3 for a period of time if it made sense. So It's not meant to put a ceiling on things, but rather just emphasize the importance of operating at lower levels of leverage going forward.

Speaker 6

Great. Thanks so much. Good luck going forward.

Operator

Sure. Thanks, Don. Thank you. One moment for our last question. This question comes from the line of Kyung Kim with Morningstar.

Operator

Your line is now open.

Speaker 7

Hey, good morning and congrats on a solid quarter. You guys have identified product innovation as one of your key priorities and talked about launching Dramamine in Nausea category as an example. And it's been great to see that Win shares in that space over the few quarters. And so I guess looking at your other portfolio, what other brands or which product categories do you kind of view that You can do a similar thing with?

Speaker 2

Yes. So good morning. Thanks for the question. So, yes, new product development and innovation It's an important marketing element of how we think about long term brand building. And if you look over time At our brands, you've seen that we've pulsed in new products and innovation and refreshments to the product offering really across the broad portfolio.

Speaker 2

Everything from brands that we don't talk about like STI, where we launched a new STI drop a few years ago and it quickly Rose to one of the better selling SKUs within the STY category, to Summer's Eve, where we've launched products over the last couple of years, it's our largest brand. So it's an important element across the portfolio and is a big driver of not only share in sales, but growing the categories for our retail partners. So going forward, you'll continue to see That element of long term brand building show up across our portfolio.

Speaker 7

Great. That's helpful. And As more large pharmas kind of spin out their consumer division, as J and J did with 10b this year and Sanofi kind of planning to do the same thing by next year, Do you think you'll feel more competitive pressures in the industry or do you expect the landscape to be more or less same as usual?

Speaker 2

Yes, we would expect it to be more of the same. Whether these Big consumer healthcare companies are embedded in a big global CPG company or independent like we've seen KenView and Halion Lately, they're focused on different things than we are. They're looking for move the needle opportunities, which are big brands, Big categories, different regions than we compete in, as part of their business objectives. So we're going to continue to focus on Those niche smaller categories that we can be successful in can define the categories and will likely look For opportunities to acquire brands that they may shed as they further focus on those bigger opportunities. So nothing new there.

Speaker 2

That's been the case for The last 10 to 20 years, so more of the same.

Speaker 7

Got it. That's helpful. And just one last question for me. With the FDA cracking down on products across different categories, such as the oral decongestion pills and eye drops, Do you feel pretty strongly about your portfolio? Or are there any threats that maybe we should be thinking about?

Speaker 7

Thank you.

Speaker 2

Yes. So quality is the starting point for everything we do here, right? We need To deliver and sell quality product that delivers against what the consumer expects out of it. So we start there. The recent announcements around recalls of sterile eye care products that have been sourced outside of North America And from suppliers that aren't necessarily proven over the long term is just a reminder of the importance of it And just something that we continue to focus on.

Speaker 7

Got it. That's really helpful. Thanks, guys.

Speaker 2

Okay. Thank you.

Operator

Thank you. I'm showing no further questions at this time and would now like to turn it back to Ron Lombardi, President and CEO, for closing remarks.

Speaker 2

Thank you, operator, and thanks to everyone who's

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Prestige Consumer Healthcare Q2 2024
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