Mustang Bio Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by. My name is Hermione, and I will be your conference operator today. At this time, I would like to welcome everyone to Q4 2024 Prestige Consumer Healthcare Incorporated Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to Phil Tarpoli, 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 fiscal 2024 results, discuss our outlook for 2025 and then take questions from analysts. A slide presentation accompanies today's call and 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 measure 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 supply chain constraints, high inflation and geopolitical events, which have numerous potential impacts. This means results could change at any time and the forecasted impact of risk considerations is our best estimate based on the information available as of today's date.

Speaker 1

Further information concerning risk factors and cautionary statements are available on our most recent SEC filings and most recent company 10 ks that was released this morning. I'll now hand it over to our CEO, Ron Lombardi. Ron?

Speaker 2

Thanks, Joe. Good morning, everyone. And now let's begin on Slide 5. Our fiscal 2024 results for revenue and adjusted EPS were approximately flat to the prior year due to our 4th quarter results. We were disappointed with this 4th quarter performance, which did not meet the anticipated growth objectives we communicated.

Speaker 2

Very strong consumption growth for the year in excess of our long term 2% to 3% target was not reflected in organic sales due to supply chain pressures late in Q4 that prevented our ability to fulfill retailer orders. I'll discuss this in greater detail in a moment. The results of this abrupt pressure in supply also affected both gross margin and EBITDA due to the lower than expected sales. Even against these Q4 headwinds, for the full year, we were still able to generate approximately $240,000,000 in free cash flow as anticipated. This performance enabled significant deleveraging to 2.8 times below our long term objectives and the lowest year end leverage ratio in the company's history.

Speaker 2

This allows us to further assess our capital deployment opportunities that enhance shareholder value, which Chris will touch on later. In summary, although we were disappointed by the finish to the year, the near term supply chain pressures we're facing do not sway us from our proven business strategy or long term brand building capabilities that have driven shareholder value. Now, let's turn to Page 6 for a discussion of supply chain and the recent constraints. To begin, we remind everyone that managing a large network of suppliers is an element of our business model and nothing new for us. With a broad range of product forms, the diversity of our products themselves results in a diversity of suppliers.

Speaker 2

Having this diverse supply chain enables flexibility to identify and source from the most optimal partners. For nearly 10 years, we've operated with over 100 third party suppliers, which includes long term contracts and deep relationships with critical suppliers to ensure we receive quality product on time. This strategy benefited us during the highly disruptive COVID supply chain environment, for example. Unfortunately, in the second half of March, we experienced significant disruptions in supply, primarily from a shortfall in the ear and eye category where both of our ClearEye suppliers faced simultaneous business interruptions related to maintenance and quality improvements. We expect these near term production limits to continue into first half of the upcoming fiscal year, but ultimately benefit our long term demand and quality needs.

Speaker 2

Longer term, we've been working behind the scenes executing our supply chain continuity strategy that features efforts we believe are right for ensuring future readiness and supply. First, we look to partner with multiple suppliers on critical products to ensure essential supply. This includes validating secondary and prospective suppliers in the event they are needed. 2nd, for key or critical products, we are open to internal production if optimal. Recently, following a multiyear transfer process, we've begun commercial production of certain Monistat products in our Virginia manufacturing site.

Speaker 2

During Q4, we also acquired 1 of Care Pharma's suppliers in Australia to ensure long term supply of certain Hydralyte and CEP products. 3rd, we continue to take a long term partnership approach with our 3rd parties when necessary. We've had a history of periodic investment with our 3rd parties to help limit business impact from various events. We believe these steps in active management of our supply chain are the right steps to a positive long term outlook in our ability to supply strong product demand for many years to come. With that, let's turn to Slide 7 to review our proven long term business attributes.

Speaker 2

Our proven business attributes that drive shareholder value are unchanged, delivering strong long term results and positioning us well moving forward. Our portfolio remains resilient and well positioned, benefiting from a broad range of leading brands across many categories. This enables flexibility in identifying opportunities for investment, while helping mute the impact of any short term category changes. These opportunities are fueled by our long term brand building strategy. Our strong financial profile gives us ample ability to invest in efficient marketing and innovation that allows us to drive long term growth for our leading brands.

Speaker 2

Finally, the business attributes we operate with provide robust free cash flow, which enables strategic capital allocation that further amplifies shareholder returns over time. This has enabled substantial leverage reduction over the last 5 years and has helped as a multiplier to our financial performance. The result is clear. Over the last 3 years, even with the challenges exhibited in March, we've grown revenue and adjusted EPS at a CAGR rate of approximately 6% 9%, respectively. Now let's turn to the next section and review some of the brand building factors that drive this performance.

Speaker 2

On Slide 9, you can see a reminder of the key highlights of our proven brand building playbook. We continue to operate with leading established brands that are well positioned to leverage these tactics for long term category 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 provide 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 our proven consumer solutions.

Speaker 2

We also operate with a multi year new product development pipeline to ensure we continue to match the needs of consumers. Finally, we align our investments and product offerings with channels that are important to consumers, most notably with the fast growing e commerce channel. This broad distribution strategy reinforces each of these marketing tactics. With that, let's turn to Slide 10 and discuss a few category highlights of fiscal 2024. Looking across our product categories, the 3 shown here, GI, Skin and Ear and Eye Care exhibited the strongest performance in fiscal 2024.

Speaker 2

In Ear and Eye Care, we continue to maintain strong brand equity across our portfolio, which includes Clear Eyes, TheraTears and Stye eye drops as well as Zbrox ear care. Over time, we've done this via proven marketing tactics across TV and digital content as well as strategic new product introductions. In skincare, NYX continues to drive overall category growth as the market leader, benefiting from improving lice treatments as well as the fiscal 2024 launch of Nix, Treat and Prevent, which continues to help grow the overall lice treatment category. Lastly, in GI, Gaviscon in Canada is experiencing nice growth, while our leading Dramamine franchise continues to leverage iconic media campaigns, most recently with its Drama Llama campaign. In summary, we continue to utilize a wide range of marketing and innovation tactics, which are driving nice consumption growth and leave us well positioned in each of these categories going forward.

Speaker 2

Now let's turn to Slide 11 to discuss the women's health product category. Our women's health franchise is represented by 2 distinct brands, Summer's Eve and Monistat. Each brand leads their respective subcategories with a dominant number one share and a long term connection with consumers. As discussed over the last year, the categories faced disruptive pressure post COVID as consumer behavior shifted. While we continue to face challenges, most notably in the Summer's Eve On the Go offerings, we are optimistic about the long term opportunity for each brand and are beginning to see improving trends in both businesses.

Speaker 2

For Summer's Eve, our latest media campaign highlights and reemphasizes its key consumer benefit of odor protection. This is leveraged by the recent launch of Summer's Eve Ultimate Odor Protection, which utilizes patented odor reducing ingredients in a pH balanced formula. Although early, the product is off to a nice start receiving positive consumer feedback as well as earning a number one new release flag on Amazon. With Monistat, we've launched a digital first media campaign titled Monistat That, which reminds consumers of the brand's efficacious heritage in treating yeast infections. In addition, we continue to expand Monistat use cases with Monistat Maintain, which extends its heritage in yeast into overall vaginal health and maintaining a healthy pH balance.

Speaker 2

These actions are taking hold and Monistat has returned to growth in the last 12 week consumption period. So in summary, we are making progress heading into fiscal 2025 and continue to feel good about the long term growth opportunities for our women's health brands. Now let's discuss our international segment strength on the next page. Shown on the left of slide 12 is a breakdown of our international business, which includes numerous products sold throughout the world. The majority of our business is still largely concentrated in Australia where our business is focused around 3 major areas: Hydrolite and Oral Hydration, Best Nasal Sprays and Eye Care under the Murene, Zatadine and Clear Eyes brands.

Speaker 2

We've experienced solid growth over time throughout all geographies. We had another strong year in fiscal 2024, achieving impressive 10% organic revenue growth against a tough prior year comparison. Over the longer term, we've experienced over 20% sales growth annually on a 3 year basis. The markets continue to grow nicely on a multiyear basis and today represents approximately 15% of total company sales. Moving forward, we continue to focus on our leading and well positioned brands that can grow category and share over time, such as Hydralyte.

Speaker 2

Although we expect growth to moderate against increasingly difficult comparisons, we continue to anticipate a 5% or more annual growth for this segment based on our strategy. Now let's finish up on Slide 13. Our brand building efforts are complemented by aligning investments with channels that are important to consumers. E commerce continues to be the key example of this. It's an increasing portion of consumer shopping habits and our early investments have helped us drive continued strong performance across across e commerce partners.

Speaker 2

We grew e commerce approximately 8% in the fiscal year and it now represents approximately 15% of our sales. Our success is driven by effective strategies we've touched on before, including targeted content and marketing, effectively managing our product assortment and making broad investments with each of our e commerce partners to better connect with consumers. Moving forward, we continue to expect strong e commerce growth through these investments and long term strategy. 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. Let's turn to Slide 15 and review our and fiscal closest GAAP measure in our earnings release. Q4 revenue of $277,000,000 compared to $285,900,000 in the prior year and was down 2.9% on an organic basis. Strong consumption trends and strong organic international segment growth of 7% were more than offset by supply chain pressures late in Q4 that inhibited our ability to meet order demand as well as continued women's health category weakness and the strategic exit of the private label business.

Speaker 3

Due to the lower revenue, we experienced a lower EBITDA margin and diluted EPS from the prior year, which was only partially offset by lower interest expense. Let's turn to Slide 16 for more detail on full year and grew 20 basis points versus the prior year when excluding FX. By segment excluding FX, North American segment revenues were down 1 point percent, while the international segment increased approximately 11% versus the prior year. In North America, the largest category growth drivers were strong ear and eye care, GI and dermatological category sales, helped partially offset the Q4 supply chain challenges, declines in women's health and the strategic exit of the private label business. Our strong digital performance continued and we finished the year with high single digit year over year e commerce growth.

Speaker 3

The International segment performed above our long term expectations, thanks to strong performance across numerous brands and geographies. Total company gross margin of 55.5 percent for fiscal 2024 was up slightly versus prior year as anticipated despite Q4 supply chain constraints and the resulting reduced fixed cost absorption. For fiscal margin of 56% or more with improvement from pricing actions and cost savings more than offsetting continued inflationary cost headwinds. Q1 gross margin is estimated to be approximately 55.5%. As expected, advertising and marketing for fiscal 2024 was up in both dollars and on a percentage of sales basis versus the prior year.

Speaker 3

For fiscal 2025, 20 We would also anticipate this higher year over year rate of spend in the Q1. Fiscal 'twenty four G and A expenses of 9.4% sales was largely consistent to the prior year. In fiscal 'twenty five, we anticipate G and A of approximately 9.5% with about $28,000,000 of spend in Q1. Adjusted diluted EPS of $4.21 was flat to the prior year with the benefit of our debt reduction efforts and share repurchases offset by the lower Q4 revenues and associated cost headwinds. Our normalized Q4 tax rate was 23.6 percent.

Speaker 3

For fiscal 2025, we expect a tax rate of just under 24% and interest expense of approximately $52,000,000 down materially from the prior year. Now let's turn to slide 17 and recap cash flow. For the full year fiscal 2024, we generated approximately $240,000,000 in free cash flow, up nicely versus the prior year as expected. Our stable EBITDA margins and strong cash flow enabled us to invest behind our brands, while continuing to reduce debt, finishing the year at 2.8 times leverage and net debt of $1,100,000,000 at March 31. Approximately 90% of our debt is fixed and there are no maturities until 2028.

Speaker 3

For fiscal 2025, we anticipate a similar free cash flow profile of at least $240,000,000 As shown on the right side of the page, this cash generation is underpinned by our leading attributes that enable our financial profile. Our business model where the majority of revenue remains externally manufactured results in low capital expenditures of 1% to 2% of sales annually. We are anticipating CapEx of just over 1% of sales in fiscal 2025. Our products have strong margins, thanks to the characteristics of the categories we participate in, their importance to consumers' health and the regulated nature of OTC that creates high barriers to competitive entry. We have meaningful tax benefits from past acquisitions that result in a cash tax rate in the high teens.

Speaker 3

And we remain focused on profitability with continuous cost saving efforts that help us maintain our strong mid-30s EBITDA margin profile. The result of this model is clear. We generate best in class 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 18. Our strong financial profile and resulting free cash flow makes management of capital deployment a critical pillar in ensuring our success.

Speaker 3

With approximately $1,000,000,000 of free cash flow anticipated over the next 4 years, we anticipate disciplined cash deployment against the various options of investing in our brands, M and A, share repurchases and deleveraging. The number one priority continues to remain investing in our strategic brands to ensure long term success. From there, we continue to pursue strategic M and A and continue to see an active marketplace. We have ample capacity to acquire additive businesses and our scale and long term expertise in consumer healthcare gives us a long term advantage in identifying, acquiring and successfully integrating transactions. Next, share repurchases.

Speaker 3

By achieving meaningful leverage reduction over the last several years and demonstrating a long term sustainable and growing free cash flow profile, we believe a multiyear share repurchase program affords us the flexibility to offset dilution, return capital to shareholders in an opportunistic way and still remain flexible to pursue M and A and other deployment options. The announced approval of up to $300,000,000 in share repurchases is a testament to this outlook and our confidence in the long term profitable growth of our company. Finally, although we anticipate reducing debt and leverage in fiscal 2025, our reduced leverage and attractive debt profile leaves us best positioned to prioritize the deployment options that I just walked through. With that, I'll turn it back to Ram.

Speaker 2

Thanks, Chris. Let's turn to Slide 20 to discuss our outlook. In fiscal 2025, we anticipate continued solid consumption growth of our leading portfolio, thanks to our proven brand building strategy. That said, in the near term, we anticipate certain supply chain headwinds, particularly in eye care to continue in the first half of fiscal twenty twenty five before recovering in the second half. This leaves our revenue and EPS outlook for the full year below our long term expectations entirely due to this first half forecast.

Speaker 2

For full year fiscal 2025, we anticipate revenue of $1,125,000,000 to 1,140,000,000 dollars and organic revenue growth of approximately 1%, where we continue to anticipate a slight FX headwind. Q1 revenues are anticipated to be approximately $260,000,000 reflecting a continuation of the supply chain challenges experienced late in Q4. Although it's very early to forecast, we currently expect Q2 revenues to decline slightly year over year, but we'll provide a full update in August. We anticipate EPS of $4.40 to $4.46 for fiscal 2025 or approximately 5% to 6% growth versus the prior year, driven by gross margin expansion and lower interest expense, thanks to our strong cash generation. We expect Q1 EPS of approximately $0.86 Lastly, we expect solid free cash flow of $240,000,000 or more in fiscal 2025.

Speaker 2

The stable profile to the prior year gives ample support to our multi year $300,000,000 share repurchase program and continued disciplined capital deployment optionality that maximizes long term shareholder value. Now let's turn to Slide 21 to wrap things up. This page is a reminder that our diverse portfolio of leading healthcare brands provide a great starting point that supports long term top line organic growth of 2% to 3% annually. While we are certainly disappointed with our Q4 performance and anticipated fiscal 'twenty five first half weakness from these near term supply challenges, we remain fully committed to our proven business strategy and long term business outlook. We continue to focus on brand building that is the key enabler to our long term success.

Speaker 2

Our superior financial profile has generated consistent and increasing cash flow over the long term that leaves us increased accretive capital deployment optionality of over $1,000,000,000 in free cash flow in the next 4 years that Chris discussed previously. We remain confident in the big picture that our business attributes support our proven formula of solid organic growth, leading free cash flow generation and a proven capital deployment strategy that will unlock shareholder value. With that, I'll open it up for questions. Operator?

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Rupert Spillink with Oppenheimer. Please go ahead.

Speaker 4

Good morning and thanks for taking my question. So just going back to the supply chain commentary, two questions here. So first, what's the confidence in resolving some of the challenges by the second half? And then from a guidance perspective, is there a way to quantify what percentage point headwind it is to your top line growth in the implied guide?

Speaker 2

Good morning. So your first question, I guess the level of confidence that we have is, there's a plan in place for both of the ClearEye supplier to get back to historic levels. And at this point, they're in line with expectations at this point. So, we expect in the quarter ended June that we'll see increasing recovery. The beginnings of things stabilizing in the second half and then a recovery excuse me, second quarter and then a recovery in the second half.

Speaker 1

And then Rupesh, you were asking about quantifying the impact of the supply chain disruptions to the revenue guidance?

Speaker 3

Yes, Kashy, it's Chris. So for the year, that's about a point of a headwind, right? And as Ron just commented, we would expect the impact to be greater in the first half, certainly Q1 with some recovery as we move throughout the year. We do expect some modest pipe in the back half of the year. So when I put that all together, I'm at about a one point headwind for the year.

Speaker 4

Great. And then maybe just my follow-up question. So Chris, just on the guide, again, I'm not sure how much clarity you can provide, but as we think about your EPS guidance, any how should we think about what's implied for debt pay downs and buybacks at this juncture?

Speaker 3

Yes. So at this point, we would normally in our guidance assume all of the free cash flow is going to debt pay down. Obviously, with $135,000,000 of variable debt as we begin this fiscal, that would imply we're building cash on the balance sheet. I commented on the attractive long term fixed debt that we have about $1,000,000,000 of notes that don't have a maturity until 2028. So, the guide right now is contemplating essentially no share buybacks.

Speaker 4

Okay. So essentially if the cash bills, can we just model interest income? Is that the way to think about it?

Speaker 3

That's correct.

Speaker 4

Okay, great. Thank you. I'll pass it along.

Operator

Your next question comes from the line of Susan Anderson with Canaccord Genuity. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking my questions. I guess maybe just a follow-up on the supply chain issues as it relates to the eye care. I guess I'm curious if your competitors are also having some of the same issues with supply or is it just your brands not sure if they use the same supply or not? And then I think there was an issue with quality at one of your suppliers a couple of years ago.

Speaker 5

So I'm just curious kind of how do you gain confidence that the supplier has fixed these issues? Thanks.

Speaker 2

Yes. Good morning, Susan. So first of all, the 2 suppliers that we have for the Clear Eyes brand are primarily exclusive to our brands. So others that compete in the industry have their own supply chain and would be subject to different factors. So that's the first part of it.

Speaker 2

The second part of it, the quality, we had a recall a couple of years ago and it was actually related to a former supplier that we left because we had quality concerns about and we got caught up in the very tail end of that. So that was actually a number of years ago and a minimal impact on us. I think this is also a good point to comment on how we think about managing our sterile eye care. We've partnered with 2 quality suppliers who've been partners with us for very long periods of time. Our eye care business has been growing nicely quite a while now and we've been in catch up mode trying to keep up with demand and we've actually worked with both of them to expand capacity.

Speaker 2

And one of those suppliers, who did some upgrades late in calendar '23 and early into calendar 'twenty four is in the process of recovering from those maintenance upgrades and on a path back to having what we believe are going to be higher levels of output later in the year. And the second supplier who we worked with again for quite a while had an extended break as they did some quality upgrades and what we initially thought might be a 1 week shutdown turned into something longer and they're just getting back up into production levels as we speak here. So, I've been with the company for about 14 years and I've never seen a disruption like this in our eye care before where both of the suppliers where we've been working with and making investments in had a simultaneous disruption. So very much unexpected and very unusual, highly unusual.

Speaker 5

Okay, great. Thanks for the color there. That was really helpful. And then I was just curious, is this just impacting the North America business or is it also impacting the international markets or is that a different supplier? And then, I think you mentioned that you purchased maybe a small plant in Australia to help with some production.

Speaker 5

I guess, just curious, it doesn't sound like it, but is this changing maybe your capital light strategy of using mostly third party suppliers? Or is it just a little bit of leaning into some production on your own? Thanks.

Speaker 2

Okay. So the first question about the international eye care supply, there's a small amount that comes from the 2 North American suppliers. The vast majority of their product though for international eye care comes from other suppliers. So a little bit of impact, but nothing material. Now to your question about the acquisition of the Care Pharma supplier that closed in the 4th quarter.

Speaker 2

So they've been a long term supplier of both Hydralyte and SES powdered products, family owned. And when the founder approached us and said that they were considering selling the business, we stepped back and said, I think the best thing for us to do is to own this. Their primary business is making Hydrolight and powdered products. So it's primarily supporting the Care Pharma business. So in a lot of ways, it made sense for us and continues to give us a competitive advantage to own that facility and make those products for ourselves.

Speaker 2

So it's not unlike what we've got going on in the Lynchburg, Virginia facility, both with the fleet and the Summer's Eve product that's been made there historically. I've commented in the past how that gives us an advantage. There's some level of vertical integration. And then as I also announced in the earlier in the call today, we started commercial production of Monistat products there in recent months after a multi year tech transfer and investment program where we expanded manufacturing capacity to Monistat cream products. So no change in our strategy, Susan.

Speaker 2

If it makes sense and gives us an advantage to have more control and investment over the product, we'll continue to do that.

Speaker 3

And Susan, this is Chris. I would just piggyback on that by saying no change to the CapEx that we contemplate or have been experiencing in the past few years or we guided to fiscal 'twenty five at about 1% to 2% of sales.

Speaker 5

Okay, great. Thanks again. Very helpful. Good luck this year.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Trevor Saff with William Blair. Please go ahead.

Speaker 6

Hey, everyone. Trevor on here for John Anderson this morning. Just two questions for us. The first, if you could help kind of ballpark the quarter and the sales miss, it looks like the sales miss was about $10,000,000 How much of that was related to the supply chain issues and how much was related to the issues or the challenges facing the women's health categories?

Speaker 3

Yes. Hi, Trevor. Good morning. This is Chris. So for Q4, the vast majority of the miss related to eye care.

Speaker 3

You can see decline in the category. Remember also that Clear Eyes isn't the only brand within the category, right? And we've been experiencing, as Ron mentioned in his remarks, considerable consumption gains and demand for eye care. And so regarding the actual versus our expectation, that was the vast majority of the miss.

Speaker 2

Trevor, if I can add to your question about the women's health. Again, the 2 brands that I commented on earlier, Monistat has largely been stabilized and we actually saw some growth in the Q4. For Monostat, we continue to feel good about the position of that brand and its growth opportunity for fiscal '25. Summer's Eve continues on its journey of getting stabilized and getting positioned to return to growth. Consumption trends continue to improve.

Speaker 2

We began the launch of some new products during the quarter and they'll roll out into retail over the next handful of months here. And it's really the on the go and the sprays portion of the category that continues to be disrupted by the change in consumer habits. So if you break up the Summer's Eve category into wash and wipes, we actually are seeing consumption growth and the new products do well there. And it's the continued decline in the sprays portion that's dragging down the total brand.

Speaker 6

Got it. Got it. Thanks, Ron. That actually answered my second question on women's health. So I'm all good now.

Speaker 6

Thanks.

Speaker 2

Great. Thank you, Trevor.

Operator

Next question comes from the line of Mitchell Panayo with Stedivan. Please go ahead.

Speaker 7

Yes. Hi, good morning. Just back to the supply chain issues. So

Speaker 2

it seems this came as it seems

Speaker 7

it came as a surprise to you. Was there any was there no like sort of forewarning about your suppliers' plans for maintenance and improvements and things like that? Or can you talk a little bit about how that all came about?

Speaker 2

Yes, it was unexpected. Really the intent or the size of the impact was unexpected. As I said, we've been working with both of the suppliers to expand capacity. And the 1st supplier who went down for maintenance upgrades earlier in the calendar year was expected to come up at historic production levels and then start to increase. And we saw matter of fact the opposite of that, they came out at lower levels and they've been working to recover back to historic levels before we expect them to see increases.

Speaker 2

So it kind of unfolded as the quarter played out. And then for the 2nd supplier, it wasn't anticipated that they were going to be shutting down for some quality upgrades and that shutdown as it unfolded went from what was initially thought to be very short, maybe a week to a month or more for the shutdown and then the return back to commercial product released production. So as you just said, it was unexpected both in terms of timing, the way it unfolded and the size of the impact on the business, not only in the Q4, but what we expect over the first half of fiscal twenty twenty five. Okay.

Speaker 7

And was there any gross margin impact in the quarter as a result? I mean, I realize that it's sort of variable cost, but I didn't know perhaps if you were spending extra money to secure product or something from somewhere else and having an impact on the cost of goods?

Speaker 3

Yes. Hey Mitch, it's Chris. So for the Q4, the impact was minimal, right? We lose the leverage. You think of more fixed cost in nature such as warehousing as an example that would impact margin when the top line misses like that.

Speaker 3

But gross margin came in line with our expectations largely and so not meaningful.

Speaker 7

Okay. And then, you talked, Chris, about the gross margin. It sounds like you said 55%, I guess, 0.5% is sort of your expectation for Q1. So is it just a gradual build through the year? Is there anything driving that other than just to your point about sort of losing a little bit of that fixed cost leverage in the first half?

Speaker 3

Yes. Certainly, we'll provide more color as we go through the year, Mitch. But there is a bit of a step up in the back half for things we just talked about like leverage on the increased supply and also the timing of certain pricing actions, but really cost saving efforts that we expect to as the inventory flows through on the P and L, cost saving measures that may be in place in the first half, but really will flow through the P and L in the back half. So a moderate step up as you work through the year.

Speaker 7

Okay. And then and you just touched on my last question was just on pricing. Absent the issues in the Q4, what was the pricing impact versus volume?

Speaker 3

Yes, it was as expected. We set this year out to say about half of our growth we assumed would come from price and half from volume. That's improved from last year. If you remember, we were 2 thirds price and that's exactly what we experienced to your point absent the last couple of weeks of the quarter there. And I would just also just mention for fiscal 'twenty five, Mitch, which may have been your follow-up question.

Speaker 3

We have opportunities, think about the positioning of the brands where we have continued inflationary pressures. We think we have opportunity to take additional price. And again, for next year, we would anticipate that's about half of our growth.

Speaker 7

Okay. I guess one more question. Any do you anticipate any change in retail channel performance or is it going to be more of the same with the drugstore mass e commerce? Is it going to be the same type of percentage distribution from in retail?

Speaker 2

Yes, Mitch. I think at this point for fiscal 'twenty five, we would probably anticipate the same kind of trends that we've seen begin to stabilize over the last couple of quarters in terms of where consumers have shifted to shopping. But I think again the important thing for us is it really doesn't matter. Our products are broadly distributed. Our margins are consistent across channel.

Speaker 2

We look to support and invest behind all of our retail partners no matter what channel that they're in. So we kind of expect things to kind of stay where they are, but for us it doesn't really matter.

Speaker 7

Okay. That's all for me. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Linda Bolton Weiser with D. A. Davidson. Please go ahead.

Speaker 8

Yes, hi. So in parsing through the breakdown of your gross margin performance by international versus North America, The North American gross margin was actually still up really strongly year over year and it was the international gross margin that's been down for a couple down year over year in a few quarters. So I guess my first question is, are you saying the gross margin would have been even up more in North because it was already up really strongly? And then secondly, why is the international gross margin trending down year over year?

Speaker 3

Good morning, Linda. This is Chris. So, as I mentioned to Mitch, the gross margin impact for Q4, I'm speaking specifically for North America, was a modest impact due to the sales mix. But yes, we have seen some nice improvements in the North American gross margin, largely driven by cost savings and pricing actions that we've taken. On the international front, it's really the number one driver there is mix, mix of products, mix in the region.

Speaker 3

I think to Hydrilyte as an example was a higher percentage of our sales, which is a larger gross margin than other products in the region, and then inflation internationally just as it is here in North America. So, the biggest driver of the international piece is the mix.

Speaker 8

Okay, thanks. And then just to go one more question on the supply issue. It sounded like that second supplier you were describing that the shutdown was because of quality related upgrades. So I mean that actually sounds a little negative. Like it sounds like they had some whatever FDA crack down or something on them.

Speaker 8

So I guess going forward, are you thinking you're going to stay with that supplier? Or why wouldn't that be reason to again look for a different supplier? Thanks.

Speaker 2

Yes. So yes, thanks Linda. So the quality upgrades are proactive and looking to continue to set the right manufacturing environment to produce quality product on time. So we can we plan to continue to stay with them. We think they're a high quality supplier and are focused on quality product on time.

Speaker 2

So we think it's the right kind of thing to be proactive to shut down and do things ahead of a problem.

Speaker 8

Okay. And then finally, I've had some experience with like I follow Clorox. They had some supply issues. Well, theirs was due to a cyber attack, different story. But Phil, when you have supply issues, you're going to lose maybe even some shelf space and you're certainly going to lose some market share just in the near term in a quarter or 2.

Speaker 8

So what are you figuring in, in terms of expectations for that? And then are you specifically figuring in extra advertising and promo or extra merchandising spend in order to get back that market share that you're inevitably going to lose?

Speaker 2

Yes. So first of all, I don't we're not of the opinion that the expected recovery here in the eye care supply chain is going to result in us losing share. We don't think we're going to be out at shelf in any significant way that's going to cause consumers to start reaching for a brand that they've never used and don't have a history of trust with, right? The difference between OTC products and other consumer categories like household cleaning, right, and we were big in that category for a long time, is, right, the trust associated with putting drops into your eyes is a pretty significant barrier, which is why eye care has one of the lowest levels of private label penetration in OTC. So at this point, we don't expect loss of distribution or loss of shelf presence to lose share.

Speaker 8

And how many weeks of inventory do you think retailers in general have on hand of some of these products of your product?

Speaker 2

Yes, it's really all over the place, Ben, depending on the retailer, right? The best in class world class retailers with a great supply chain carry maybe 8 weeks, something like that. And other business models may carry 2 or more times that amount depending on their business setup. Again, I think the other thing that's important to note for Clear Eyes, right, if you go to the shelf and look, we have a very broad offering of assortment. So think about our redness treatment.

Speaker 2

We have Max Red. We have original strength redness. We have 1 ounce. We have half ounce. And then we have other products that have redness relief in addition to other efficacy treatments.

Speaker 2

So when you go to the shelf, you're looking for clear eyes. There's going to be options out there. So if you usually buy the 1 ounce max red, you may reach for the half ounce max red as an example.

Speaker 8

Okay. And then, sorry, just one last one from me. On the capital allocation, like do you think that just to make sure these issues get worked through and everything, are you maybe just pulling back a little on your thoughts about doing some M and A? I know you're in a position to do something balance sheet wise, but do you think this delays that just to get things moved over? And then on the share repurchase, $300,000,000 I mean, if you do $50,000,000 a year, that's 6 years.

Speaker 8

So are you planning 6 years for the $300,000,000 or and then why wouldn't there be any in figured in for FY 2025? Thanks.

Speaker 2

So let me start on the topic in general and I'll let Chris answer a couple of the specifics. And I'm glad you brought this topic up. I think one of the things that's important that doesn't get lost in our Q4 and fiscal 'twenty four performance is our continued strong cash flow generation and the success that we've had and the progress we've made in deleveraging. And to your point, Linda, we are sitting now with lots of different optionality around capital allocation. Our Board approved a $300,000,000 multiyear stock buyback, which Chris will talk about in a second.

Speaker 2

With leverage at 2.8 times, we expect it to likely to continue to go lower and have the continued ability to think about M and A. We're in a position to evaluate opportunities as they show up. So this lever, capital allocation, as a meaningful value creator shouldn't be lost in the hiccup of what happened late in the first quarter and the recovery in the first half of fiscal twenty twenty five. So thanks for bringing the topic up. I'll let Chris comment on some of the particulars.

Speaker 3

Yes. Hi, Linda. So maybe just to use your example of a $300,000,000 program with $50,000,000 a year, I'll remind you that over the next or $75,000,000 excuse me, over the next 4 years, we expect to generate about $1,000,000,000 of free cash flow. And so I think we have ample capacity as we sit here today to do more than one thing, right? That's what Ron is referring to, right?

Speaker 3

This is the lowest level of leverage the company has experienced and that enables increased optionality. And so, why nothing in for fiscal 'twenty five? It's going to be fluid. As we said, our number one priority will remain to invest in our business. Our number 2 priority is now to execute on disciplined M and A, to answer that question specifically.

Speaker 3

Our 3rd priority now is our share repo program, right, with the 4th really being deleveraging. So as I think to fiscal 'twenty five specifically, our first objective on this share repo program is going to be to offset share dilution, similar to what we've done the last couple of years. Further buybacks will be opportunistic, now and in the future because they'll be balanced against the M and A landscape and the opportunities that we see there. For fiscal 'twenty five, specifically with $135,000,000 left of variable debt, we would look to continue to delever as we work through likely paying that off as we exit fiscal 'twenty five. So I think the message here is multi year program to provide optimal flexibility.

Speaker 3

We have the stable and consistent cash flows and now appropriate leverage levels to be able to do more than one thing and that's what I think our message was for today.

Operator

That concludes our Q and A session. I will now turn the conference back over to Ron Lombardi, CEO, for closing remarks.

Speaker 2

Thank you, operator, and thanks to everyone for joining us today, and we look forward to providing an update on our next call. Have a good morning.

Operator

Ladies and gentlemen, that concludes today's call. Thanks all for joining. You may now disconnect.

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Earnings Conference Call
Mustang Bio Q4 2024
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