Prestige Consumer Healthcare Q4 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 7 speakers on the call.

Operator

Welcome to the Prestige Consumer Healthcare Fiscal 2023 Earnings 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 speaker today, Phil Terpoli, Vice President of Investor Relations and Treasury. 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 Q4 fiscal 'twenty three results, discuss our full year outlook for fiscal 'twenty four and then take questions from analysts. A slide presentation that accompanies today's call can be accessed by visiting prestigeconsumerhealthcare.com, Clicking on the Investors link and then on today's webcast and presentation. Remember, some of the information contained in the presentation today includes non GAAP financial measures.

Speaker 1

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 and uncertainties, which are detailed in the complete Safe Harbor disclosure on Page 2 of the slide presentation that accompanies the call. These are important to review and contemplate. Business environment, uncertainty remains heightened due to the supply chain constraints, High inflation and various geopolitical factors, which have numerous potential impacts. This means results could change at any time and the forecasted impact of risk Consideration is the best estimate based on the information available as of today's date.

Speaker 1

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, Ram Lombardi. Ram?

Speaker 2

Thanks, Phil. Let's begin on Slide 5. We are very pleased with our record fiscal 'twenty three results that delivered strong growth, thanks to our diversified portfolio of brands that consumers know and trust. Revenues of $1,128,000,000 for the full year grew 3.5% organically. This was set against a record fiscal 2022 that grew over 10% as well as the backdrop of a challenging macro environment.

Speaker 2

Our base business trends were strong across the majority of our portfolio fueled by our long term brand building efforts and solid consumer demand. For the year, our international segment experienced outsized growth As well as the cough and cold and GI categories in North America led by Lewdens, Choriseptic and Dramamine. Many of these categories had declined meaningfully just a few years ago at the start of COVID and the resurgence as well as our strong Over the last few years is a testament to the benefits of the diversity of our portfolio. We'll talk about this in further detail later on. Our strong sales continues to translate to solid profitability.

Speaker 2

For the year, We generated adjusted EPS of $4.21 and free cash flow of over $220,000,000 We remain focused on delevering over time and achieved a year end leverage ratio of 3.3 times even after $50,000,000 in share repurchases and significant inventory investments during the year. We are set up to continue this long term leverage reduction in fiscal 2024 while retaining flexibility. Chris will discuss this further later on. Now let's turn to Slide 6. Our record fiscal 'twenty three performance driven by strong 3.5% organic growth is underpinned by our proven value creation strategy that's shown here.

Speaker 2

By executing this disciplined strategy over time, It's resulted in a resilient business model that continues to deliver value, not just in fiscal 'twenty three, but over the long term. First, we use our proven marketing strategies to leverage our leading portfolio of brands. Using consumer insights, We drive efficient marketing, channel development and innovation that are the cornerstones to our success. 2nd, the business model we operate leverages our leading financial profile to enable robust free cash flow. And 3rd, the model uses the first two points to enable strategic capital allocation optionality that further amplifies shareholder returns.

Speaker 2

Our ability to use cash flows both effectively and efficiently through disciplined Capital deployment creates value. The results of this execution is clear in our financial performance. We've had a successful multi year compound annual growth rate over the last 3 years. This includes organic growth above our long term target of 2% to 3% as well as double digit earnings growth. The performance is especially noteworthy against the backdrop of COVID-nineteen variance, supply chain challenges and inflation.

Speaker 2

By executing these strategic value creation strategies, we continue to position our business for long term success and value creation. So with that, let's turn to the next section and review how we've driven this growth in more detail. Slide 8 is a reminder of our distinct portfolio attributes that sets us up for success. The efficient deployment of capital and investments in our brands has both diversified our portfolio into many categories and enabled leading market shares for the majority of our brands. 1st, on the left side of the page is the diversity of the portfolio that is further subdivided by consumer ailments.

Speaker 2

With a diverse portfolio of brands across many categories, We are nimble in identifying opportunities for investment. We are also able to better mute the impact of any short term category changes. 2nd, the right of the page shows many of our leading brands, which are sub segments within these platforms. Our sales most often come from number 1 brands and brands with long consumer heritages, which enables us to focus on brand building using our category leadership and proven brand building tactics. Both of these business attributes are foundational to our success.

Speaker 2

Now let's turn to Slide 9. Here we can see the benefits of category diversity. Over the last 3 years, the disrupted and volatile environment led to a host of factors to navigate, including changes to consumers' habits, Supply chain and inflationary challenges. With this backdrop, any one category may face short term challenges and fluctuations, But the power of a diverse portfolio allows us to be positioned for consistent overall long term growth. For example, The Summer's Eve on the go format of products were impacted over the last few years as consumer habits shifted at the start of COVID-nineteen.

Speaker 2

Although this doesn't change our ability to grow the brand and category long term and we anticipate growth again in fiscal 2024, It was a factor in our women's health performance over the last 3 years. Our diversity offsets these pressures. The 3 categories shown on the page, eye and ear care, skin care and GI are embodiments of this as key contributors to growth over the last 3 years. In eye and ear care, we've had success using a wide variety of tactics across Clear Eyes and TheraFears. The launch of Clear Eyes Sensitive leveraged consumer insights, which captured incremental consumers who believe they have sensitive eyes.

Speaker 2

In skincare, gains have been fueled by our Compound W brand, which continues to expand its number one share with consumers by offering a broad product assortment that appeals to a range of people who suffer from warts. Marketing efforts have emphasized this in ad placements across digital and other formats. Lastly, in GI, we've experienced solid growth in both our Dramamine and Hydralyte Franchises. For Dramamine, we've successfully leveraged the brand's heritage in motion sickness and tonnagea, where we are now the number one brand in the category. For Hydralyte, we continue to chip away at the brand's long term opportunity, expanding with consumers across their hydration needs for everyday health in areas such as travel, sports and exercise.

Speaker 2

In summary, the benefits of category diversity are clear. By opportunistically investing in growth in each of these categories, We've helped fuel solid organic growth over the last 3 years for the total company. Now let's turn to Slide 10 for a reminder of our brand building tactics. Our numerous brand building strategies Shown here on the page, focus around driving long term category growth. Each are executed based on opportunities identified from consumer insights that are specific to each brand.

Speaker 2

We continue to operate with leading established brands that are well positioned to leverage these tactics for long term growth. The end goal is long term success across channels and growth of the categories to which we are stewards. To start, we leverage learnings from consumer insights to identify where opportunities are, Then providing consumer solutions that solve identified issues. Next, we remain agile marketers, Investing in timely messaging to raise awareness of product efficacy and brand knowledge around the proven consumer solutions we offer. We also operate with a multi year new product development pipeline to ensure we continue to match the needs of consumers.

Speaker 2

And last, we use the ability to align our investments and product offerings with channels that are important to consumers, including fast growing channels like e commerce. This broad distribution strategy helps underpin the marketing tactics just discussed. In summary, each of these key marketing strategies play a valuable role in our success. They reinforce our long term organic growth objective of 2% to 3% annually, which we continue to feel good about delivering. With that, I'll turn it over to Chris for a review of financials and an update on capital deployment.

Speaker 3

Thanks, Ron. Good morning, everyone. I'll start by reviewing our 4th quarter fiscal 2023 financial results, then talk about our business attributes and resulting cash flow that have driven rapid deleveraging and capital allocation optionality. As a reminder, the information in today's presentation includes certain non GAAP information that is reconciled to the closest GAAP measure in our earnings release. Let's turn to Slide 13 to begin with 4th quarter results.

Speaker 3

Q4 fiscal 2023 revenue of $285,900,000 increased 7.1% and 8% on an organic basis versus the prior year. The growth was approximately split between international and North American segments. North America revenues were up 4%. The largest growth category in dollar terms was skincare, where we experienced growth across brands, including Compound W, who drove butt pace and NICs. The international segment increased approximately 33% in Q4 after excluding the effects of foreign currency.

Speaker 3

This capped an impressive year with the segment growing over 30% on a full year basis. The record performance benefited from favorable Consumer trends in many of our categories previously impacted by COVID-nineteen and continued strong sales for the Hydrilyte brand. Despite difficult comparisons, we anticipate further growth for the international segment in fiscal 2024. Adjusted EBITDA increased approximately 14% in Q4 and EBITDA margins remained consistent in the mid-30s. Adjusted diluted earnings per share for the quarter was $1.07 up 18% versus the prior year, with higher sales being the largest driver.

Speaker 3

Let's turn to Slide 13 for more detail around consolidated results for the full year. Record revenues of $1,130,000,000 for the full year fiscal 2023 increased 3.8% versus the prior year and 3.5% on an organic basis. Our broad and diverse portfolio enabled this result with strong revenue growth in cough and cold, GI and our international segment more than offsetting a dynamic supply chain landscape. By channel, we continue to experience solid consumption growth in e commerce. Total company gross margin of 55.4 percent for fiscal 2023 compared to last year's adjusted gross margin of 57.3 percent with the change attributable to cost increases, partially offset by pricing actions across our portfolio, which offset the dollar amount of inflationary cost headwinds.

Speaker 3

For fiscal 2024, we anticipate a similar focus to fiscal 2023, where we have and will continue to institute pricing actions and cost saving measures across our portfolio to offset the dollar amount of inflationary headwinds. In aggregate, We anticipate gross margin flat to up slightly versus fiscal 2023 with Q1 estimated to be approximately 55%. Advertising and marketing came in at approximately 13% as a percent of revenue for the fiscal year as expected, owing primarily to the timing of initiatives and reduced spending around certain categories due to strong consumer demand. For fiscal 2024, We'd anticipate an A and M rate of just over 13% of sales and up in dollars versus the prior year. G and A expenses were 9.5 percent of sales in fiscal 2023.

Speaker 3

For fiscal 2024, we anticipate G and A to decline slightly in dollars versus the prior year. Adjusted diluted earnings per share for the full year of $4.21 grew about 4% versus the prior year. Sales growth and disciplined cost saving efforts helped offset the impact of cost increases and rising interest rates. Below the line for fiscal 2024, we'd anticipate a normalized tax rate of approximately 24% and interest expense of $67,000,000 including $18,000,000 of interest in Q1. Although the magnitude of increases in variable interest rate targets have begun to stabilize, We will continue to face higher year over year rates through the first half of our fiscal year before beginning to see the effects of a more stable rate environment as well as lower variable interest rate exposure from our ongoing debt reduction efforts.

Speaker 3

Last, Adjusted results on this page exclude the impact of $281,000,000 net of tax, non cash goodwill and intangible impairments, primarily related to the company's Summer's Eve, DenTek and TheraTears brand names. The charge resulted from our annual valuation assessment, which was affected by a significantly higher discount rate applied to future cash flows versus the prior year. As a reminder, accounting rules do not write up The value of brands that have a fair value that exceeds book value. Most importantly, please note these adjustments have no impact on our long term outlook for the company as a whole. Now let's turn to Slide 14 to discuss cash flow.

Speaker 3

For the full year fiscal 'twenty three, we generated $222,000,000 in free cash flow as expected. As previously discussed, we strategically invested behind inventory in light of the current supply chain environment, finding opportunities to increase inventory to better support targeted service levels. Our stable EBITDA margins and strong cash flow enabled us to invest behind our brands, while continuing to reduce leverage for the year and complete a $50,000,000 share repurchase effort. We finished fiscal 2023 at 3.3 times leverage with approximately 75% of our debt fixed and no maturities until 2028. For fiscal 'twenty four, we anticipate a more normalized free cash flow profile of at least $240,000,000 in free cash flow and anticipate achieving around 2.7 times leverage.

Speaker 3

As shown on the right side of the page, this cash generation is underpinned by our leading attributes enable our financial profile. Our business model, where the vast majority of revenue is externally manufactured, results in low capital expenditures of 1% to 2% of sales annually. We are anticipating CapEx of approximately 1% of sales in fiscal 2024. Our products have strong margins driven by the characteristics of the categories we participate in, their importance to consumers' self care and the highly regulated nature of OTC that creates high barriers to entry. We have meaningful tax benefits from past acquisitions that result in a cash tax Great in the high teens, and we also remain focused on profitability with continuous cost saving efforts that help us maintain our strong mid-30s EBITDA margin profile.

Speaker 3

The result of this model is clear. We generate best in class and sustainable free cash flow and our free cash flow conversion remains strong. This attractive profile gives us the ability to continue to deploy capital in multiple ways as shown on Page 15. As Ron highlighted earlier, efficient and disciplined capital allocation is a critical third pillar to our business strategy, Balancing the use of our cash generation against various priorities of investing in our brands, deleveraging, M and A and share repurchases. Thanks to our leading cash flow profile and successful long term business growth, we now anticipate to operate at long term leverage of less than 3 times.

Speaker 3

We have confidence in our ability to achieve this lower leverage objective, while still investing behind strategic uses of capital that are shown on the page. Although these uses of capital such as strategic M and A opportunities may cause us to temporarily operate above this threshold objective, We anticipate our strong cash flows to bring us back to target levels rapidly. As a result, we continue to expect disciplined M and A and other cash uses to remain an important part of our strategy to adding shareholder value, while remaining cognizant of this revised leverage target. With that, I'll turn it back to Ron.

Speaker 2

Thanks, Chris. As we move forward into our next fiscal year, we are confident in our business attributes that leave us well positioned for future growth. It's a proven business model that delivered value creation throughout disrupted environments, thanks to a variety of attributes. Our brands are trusted and diverse, which gives us the ability to limit the impact from any individual category slowdowns. This diversity stretches beyond just brands, but into diversity of channels, geographies and suppliers, each of which benefits our business in periods of uncertainty and volatility.

Speaker 2

This enables us to leverage our proven brand building strategy Opportunistically that grows categories and as a byproduct are brands. Our superior financial profile has generated consistent and increasing cash flows over the long term. And finally, the model continues to be scalable. We have the right resources to continue our disciplined Capital deployment playbook, while reinforcing investments in our existing business. Now let's flip to the next slide to discuss our fiscal 2024 financial outlook.

Speaker 2

For fiscal 2024, building off a very strong prior year, We 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 planned strategic exit of non core private label business that we have historically operated as a service for certain retailers. Q1 revenues are anticipated to be approximately $278,000,000 up slightly from the prior year. We anticipate EPS of $4.27 to $4.32 for fiscal 2024. Regarding EPS, our outlook for fiscal 2024 reflects the continued Temporary impact of higher interest rates that accounts for an over 2 percentage point headwind to earnings. Thanks to our disciplined P and L management, This is more than offset by efficient brand building and cost management efforts leading to our outlook for earnings growth at a faster rate than sales growth.

Speaker 2

For Q1, we expect EPS of approximately 1.01 Lastly, we expect solid free cash flows of $240,000,000 or more in fiscal 2024. This will enable the mindful approach to capital deployment optionality Chris discussed. We've announced a $25,000,000 share buyback plan today and plan to reduce leverage to below 3 times during the fiscal year, while continuing to invest in our brands to ensure long term success. Our company has a track record of value creation and these anticipated uses of cash will help reinforce that. With that, we'll now open the lines up for questions.

Speaker 2

Operator?

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Susan Anderson of Canaccord Genuity. Susan, your line is live.

Speaker 4

Thank you. And nice job on the quarter. I was wondering if maybe you could talk give a little bit of color on the gross margin, the puts and takes there for the Q4 and then How we should think about it for this year and then also any cadences throughout the different quarters?

Speaker 3

Yes. Good morning, Susan. This is Chris. So for Q4, as anticipated, inflationary pressures and distribution costs were Just over 150 basis point headwind year over year for us, but our pricing and cost saving efforts offset the dollar impact of that Dollar for dollar. So, impacted the margin obviously, but the dollar impact was negligible.

Speaker 3

And then we had a little bit of unfavorable mix in the quarter. And we guided Q1 of fiscal 2024 to about 55%, guided the year to flat to up slightly. We're calling for some additional inflationary pressures in fiscal 2024, but again, we expect cost savings And pricing actions to offset those dollar for dollar in fiscal 2024 as well. So a little bit of a negative margin impact from that, but additional Cost savings enable us to call the margin flat to up slightly. So we expect some sequential gross margin improvement from the 55 in the Q1.

Speaker 3

As a reminder, we're really laser focused on managing our EBITDA margin, right? So as we continue to progress on our march towards more normalized Gross margins, we would look to invest that back into different levels of A and M and maintain our EBITDA margins in the mid-30s.

Speaker 4

Okay, great. That's really helpful. And then on the international business, it looks like it even picked up Sequentially off of very strong numbers this year. I'm assuming that's all Hydralyte. I guess, is that new products or just continued growing demand for the brand in Sure.

Speaker 4

Yeah. And then I'm just curious on your thoughts in the U. S. I know you guys don't have rights to the brand here, but is there maybe potential opportunity here? It Seems like the hydrating beverages are kind of picking up steam here and challenging Gatorade.

Speaker 4

So just wanted to get your thoughts there.

Speaker 2

Yes. Good morning, Susan. So, first of all, really, we saw growth across the international portfolio, Not only the Hydralyte business, the Care business in Australia, but the small business that we have in Europe as well Have all been firing on all cylinders over the last couple of years. So primarily Hydralyte drives the big dollar move because it's The majority of the sales, but really the international business has been growing well there. And for 2024, we continue to expect Strong growth, more in line with our long term outlook in the mid to high single digits for that international business after a couple of record years, but We continue to feel good about the momentum for that business in total.

Speaker 2

In terms of the We've got a lot of other opportunities to focus on across our portfolio. We had the slide in our prepared remarks today that shows the success we've had Broadly across the portfolio over the last 3 years. So we're really focused on continuing to support that momentum. So The hydration market in North America really isn't something we've got on the agenda.

Speaker 4

Great. And then just one last one on the women's business. How are you thinking about that for this year? I guess, do you expect it to normalize after Kind of stabilizing off of those COVID numbers. And I guess, is it still consumers just not returning to the doctor's office?

Speaker 4

Or do you think they've kind of gotten back to their normal routines now?

Speaker 2

Thanks. Interestingly, as we Sit here today and look back over the last 3 years, excluding cost coal, the women's health category is The one that seems to have had the most impacted and impacted the longest during this disruptive period, not only were Shopping habits impacted, but kind of the underlying usage occasion as we talked about, I think last quarter as well. But as we sit here today for fiscal 2024, we expect our women's health businesses both SummerSieve and Monistat to get back To growth for fiscal 2024 and we continue to feel good about their long term growth opportunity. So Despite those two franchises being disrupted over the last couple of years, we continue to feel good about their leading positions and their opportunities going forward.

Speaker 4

Great. If I could just maybe follow-up really quick on so it sounds like Com Hem W was strong in the quarter. If you could just remind us, Was this the Q1 where you saw that strength also come back?

Speaker 3

No. Compound W has been Forming pretty well throughout the year. So expanded usage distribution and such. So really a great year for Compound W. So it's Not really linked to COVID.

Speaker 3

It performed well throughout the period.

Speaker 4

Great. That sounds good. Thanks so much. Good luck the rest of the year.

Speaker 2

Thank you,

Operator

One moment for our next question. Our next question comes from Mitchell Panaro with Sturtevant and Co. Mitchell, you are live.

Speaker 5

Yes. Hi. Good morning. I was curious from an A and M spend on and if you said this, I apologize, the sort of The sequence throughout the year, whether there's any unusual timing? And then second, what you intend to focus The A and M spending on?

Speaker 3

Yes, Mitch, maybe I'll take the first part of that, which is, as you know, our A and M plans Are built from the ground up with our marketers in various initiatives. So as we saw in this year, the cadence was shifted weighted more towards the first half of the year based on Certain new product launches and various marketing initiatives, as we look to fiscal 'twenty four, we would expect that to be spread more evenly throughout the year.

Speaker 2

Yes. And Mitch, in terms of your questions around where our focus is going to be, it's going to continue to be around our largest brands. So our power core brands will continue to get investments above the company average. And then As we have historically, we'll post investments to different core brands, where we have new product launches or other opportunities To support during a given year. Again, another comment, our advertising and marketing spend over the last 3 years has fluctuated A bit and quite a bit from quarter to quarter, but we continue to build our plans up from the bottoms up based on our brand opportunities.

Speaker 2

And like any good CPG company, we talk about always wanting to invest more for the long term support of our brands, but we feel good about where we've been investing and how we're set up to support growth long term and specifically for fiscal 2024.

Speaker 5

I mean to that end also, will there be any do you intend to launch any new line extensions in fiscal 2024?

Speaker 2

Yes, we'll have a stream of some new products out in 2024 like we do every year. We don't talk about them ahead of them showing up at retail. But again, new product development and an innovation pipeline is an important part of what we do Here to make sure we've got a funnel of things coming in and in this space it takes time to get things to market. So It's more of the same for us, which is always starting with consumer insights to understand where the opportunities are and then getting them out to market. And I think Compound W and Dramamine are 2 great examples of the long term success of bringing out a steady pipeline of new products.

Speaker 2

In the last year, it's also been true for Summer's Eve where we've had the spa launch and then DenTek with New Guard. So If you look at across the portfolio of brands, you see evidence of it happening every year, Mitch.

Speaker 5

Okay. And then Just one last question on revenue. But do you how do we look at the private label Exit, is it sort of evenly is it sort of the 1st three quarters and then you lapped some of it in the 4th quarter? And then on the foreign currency headwind, I don't know if you said it, but what type of headwind do we expect This year.

Speaker 2

Sure. So for the private label business, it will be pretty much even For the whole year, for the most part. Chris, you want to take the FX comment?

Speaker 3

Sure. So FX is expected to be a headwind for the year of about $2,000,000 Our exposure is largely around the Australian and Canadian dollars and the Australian in particular really swung in fiscal 2023. So we're actually going to have Some tail some headwinds, unfavorability from FX in the first half and then we expect it to shift to favorability in the back half, but netting out to about $2,000,000

Speaker 5

Got it.

Speaker 2

All right. Thank you much. Appreciate it. Thanks, Mitch.

Operator

One moment for our next question. Our next question comes from John Anderson with William Blair. John, you are live.

Speaker 6

Good morning, everybody.

Speaker 2

Good morning,

Speaker 6

John. Just wondering, it looks like in the 4th quarter, The shift perhaps in North America shift ahead of consumption, at least The consumption that we can see through syndicated data, is that the case? And if so, What were some of the dynamics that kind of caused that? And I was wondering if you could Give us your perspective on kind of all channel consumption, both for the Q4 and the full year.

Speaker 2

So for starters, right, those generic consumption reports you get are missing a whole bunch of our fastest growing Segments, particularly international. So if you look at it in total, it might look like it was ahead. But it wasn't too far ahead with the exception that the inventory investments that we made back in the 3rd quarter allowed us to begin to catch up on some of the categories like coughcold, where we had been kind of going hand to mouth all year. So there was a little bit of catch up in some of those categories, but for the most part, it wasn't too far ahead Of consumption for the majority of our categories.

Speaker 6

That makes sense. And with respect to that point on kind of catch up because I know you have as others have been trying to catch up in certain categories, Where do you broadly speaking, where do you think you sit, retailers sit with respect to having kind of The pipeline and shelf stock that they want or prefer, is there more catch up Come in fiscal 2024 or are we back to kind of more normal levels?

Speaker 2

Yes. So for the most part, I think inventory at retail is in good shape. A little bit of catch up and cough cold still to come for us. Again, in particular, we added liquid cost capacity in Q3, Late Q3, Q4 that helped us catch up a bit, but we're still catching up on the Lodzins business, but the other categories for the most part are in pretty good shape. So As we head into fiscal 2024, we don't think that retailer inventory will be much of a headwind Or tailwind in total for the whole year.

Speaker 6

Okay. That's helpful. And then, I guess I just wanted to make sure I understand, given The kind of the gross margin trend and the absolute gross margin rate in the Q4, how we kind of get back to 55% or excuse me, how we kind of flat to up year over year. What's coming that is going to drive a reversal in the trend More towards gross margin expansion going forward. Is it just a matter of more price Or are there other things, mix or accretive new product innovation?

Speaker 6

Just trying to get a sense for how you're seeing that? Thanks.

Speaker 2

Yes. So for starters, if you look at what we expect sequentially for gross margin, we kind of Hit the bottom in Q3 and Q4 and as we get into 2024, we expect To lift off of those levels and be fairly static through fiscal 2024 and then we expect A multi year recovery back to the 58%. And it will be Some price, but it's really going to be more cost savings and a program where we're focused on improving the margins of the product that we sell through new products at incremental gross margins and other programs over time. And again, as Chris has mentioned, I would say, but on Our focus has been managing the inflationary impact dollar for dollar through price increases during the short term, which is How we've been able to manage our consistent EBITDA margins around 34%, and we'll step off of that over Time as we recover back to 58%, John.

Speaker 6

Okay, thanks. And last one, you mentioned Looking forward, operating over time operating the business with a lower leverage ratio than you have historically sub-three, I think you said, does that mean you're going to be less Likely or aggressive on the M and A front? Or how are you kind of thinking about Changes to capital allocation then more broadly. Thanks.

Speaker 2

Yes. The new leverage target of operating at Three times or less over the long term really doesn't have any impact or change to the capital allocation, Either priorities or thoughts that we have about the business. John, you've heard us say many times in the past, our job Is to figure out how to get things done the right way so that the investors appreciate it and it continues to position the business for long term value creation. Talking about operating at less than 3 over the long term doesn't put a ceiling or limit the way we think about investing for the long term. So As opportunities come up for M and A, we'll continue to evaluate them.

Speaker 2

And if they make sense, just like We have over the long term, we'll figure out how to get them done the right way. So this new less than 3 doesn't really change the way we think about running the business and it doesn't put Any limitations on what we want to do for the business.

Speaker 6

Great. Thanks for all the detail. Appreciate it. Thank you, John.

Operator

I would now like to turn it back to Ron Lombardi for closing remarks.

Speaker 2

Thank you, operator, and thanks to everybody joining us on what I think is a busy earnings morning, and we look forward to Updating you all on our continued progress at the end of the Q1. So thanks for joining us and have a good day. Thank you

Operator

for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Prestige Consumer Healthcare Q4 2023
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