Prestige Consumer Healthcare Q1 2025 Earnings Call Transcript

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August 8, 2024

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q1 2025 Prestige Consumer Healthcare, Inc. 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.

Operator

I would now like to hand the conference over to your first speaker today, Phil Tripolilli, Vice President, 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 Rob Labardi, our Chairman, President and CEO and Christine Sacco, our CFO. On today's call, we'll review our Q1 fiscal 'twenty five results, discuss the full year outlook and then take questions from analysts. A slide presentation accompanies today's call. It can be accessed by visiting prestigeconsumerhealthcare.com, clicking on the Investors link and then on today's webcast and presentation.

Speaker 1

Please remember some of the information contained in the presentation today includes non GAAP financial measures. 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 a complete safe harbor disclosure on page 2 of the slide presentation, which accompanies the call. These are important to review and contemplate. Business environment uncertainty remains heightened due to supply chain constraints and high inflation, which have numerous potential impacts.

Speaker 1

This means results could change at any time and the forecasted impact of risk considerations is the best estimate based on the information available as of today's date. Further information concerning risk factors and cautionary statements are available in our most recent SEC filings and most recent company 10 ks. Now I'll hand it over to our CEO, Ram Lombardi. Ram?

Speaker 2

Thanks, Phil. Let's begin on Slide 5. We are encouraged with our start to the year. Q1 exceeded our sales and earnings expectations set back in May. Our diverse portfolio continues to experience solid consumption trends, thanks to our proven brand building strategy and investments.

Speaker 2

Sales of $267,000,000 declined versus the prior year, largely due to supply chain challenges in Clear Eyes that were expected. However, the impact was better than forecast, thanks to improving production trends and our ability to expedite shipments to retailers that aligns with our focus on service. Meanwhile, the quarter also benefited from continued strong international growth that was broad based and led by our Hydralyte brand. The additional shipments were executed largely with temporary airfreight that resulted in a slightly lower gross margin than forecasted. In total, adjusted EPS of $0.90 declined less than anticipated, thanks to the sales upside.

Speaker 2

Free cash flow of $54,000,000 grew versus the prior year and continues to enable capital deployment that is used to enhance shareholder value. In Q1, we reduced debt by $35,000,000 while still repurchasing about $25,000,000 in shares and maintaining a leverage ratio of 2.8 times. Now let's turn to Page 6 for an update on Summer's Eve. As discussed last quarter, we are making progress in our women's health franchise, which is represented by 2 distinct number 1 market share brands, Monistat and Summer's Eve. Our action steps have led to largely stabilized Monistat sales trends, allowing us to further focus our efforts on returning Summer's Eve to growth.

Speaker 2

Summer's Eve begins with a long heritage and connection with consumers. It offers one of the most comprehensive product offerings in the feminine hygiene category made up of washes, wipes, sprays and other products designed for feminine hygiene needs. Within this wide assortment are 2 separate trends for our brand. Certain on the go offerings such as sprays and mists shown on the pie at left continue to face pressure from consumer behavioral shifts away from on the go sprays due to numerous factors. On the other hand, cloth and especially washes, which make up about 65% of brand sales, are performing comparatively well and are set up for long term growth.

Speaker 2

We believe new marketing and new innovation will help each of these form factors drive a return to sales growth. For Summer's Eve, our latest media campaign highlights its key consumer benefit of odor protection and gets back to communicating and connecting with consumers based on the brand's heritage around freshness and confidence. The recent launch of Summer's Eve Ultimate Odor Protection, which emphasizes this attribute and utilizes a patented odor reducing formula is one of our best performing new product launches of the last several years. This leaves us with conviction that the brand building campaign we've put in place is the right one and should build momentum as the year progresses. Now let's turn to Slide 7 for an update on Hydralyte.

Speaker 2

A reminder for our U. S. Investors that are not familiar with Hydralyte, It is a great tasting and efficacious oral hydration product that defines the category in Australia. With a 20 plus year history in the market, the majority of Australians recognized the brand immediately and continued to turn to it for numerous usage occasions like sickness, sport and exercise and excessive heat. The brand remains a large portion of our international business and represents a majority of our sales in Australia.

Speaker 2

Leveraging its clear number one market share position, Hydralyte focuses its efforts on finding ways to grow the category with consumers using proven brand building tactics. Most recently, Hydralite continues to emphasize the reason to hydrate with more than just water through both retail and digital touch points. These robust efforts continue to yield results. Compared to 5 years ago, the Hydralyte brand has grown at a mid teens CAGR, thanks to improving both usage rates as well as expanding household penetration within its core Australian market. We see a runway for further growth with these tactics along with long term geographic opportunities beyond Australia and New Zealand.

Speaker 2

With that, I'll pass it to Chris to walk through the financials. Thanks, Ron, and good morning, everyone. Let's turn to Slide 9 and review our Q1 fiscal 2025 financial results. As a reminder, the information in

Speaker 3

today's presentation includes certain non GAAP information that is reconciled to the closest GAAP measure in our earnings release. Q1 revenue of $267,100,000 declined 4.4% from $279,300,000 in the prior year and 4.3% excluding the effects of foreign currency. As expected, EBITDA and EPS both declined in Q1 from the prior year with the majority of the change driven by lower revenue and the quarterly timing of certain costs. Let's turn to Slide 10 for detail around these consolidated results. As I just highlighted, our Q1 fiscal 2025 revenues decreased 4.3% organically versus the prior year.

Speaker 3

By segment, excluding FX, North America segment revenues decreased 5% and international segment revenues increased 5.3% versus the prior year. As Ron noted earlier, we exceeded our Q1 sales forecast owing primarily to our ability to move supply constrained Clear Eyes product to customers more rapidly than anticipated to meet demand. This helps eye and ear care category performance exceed our expectations along with strength in our TheraTears, Dbrox and Stai brands. This performance was more than offset by declines in women's health and cough cold categories where we faced continued pressure in on the go summer deep offerings as Ron discussed, as well as the planned impact of retail ordering in the cough and cold category. We experienced impressive double digit year over year growth in the e commerce channel, continuing the long term trend of higher online purchasing.

Speaker 3

Total company gross margin of 54.7% in the first quarter was approximately flat sequentially, but below the prior year due to continued cost inflation and the use of higher cost airfreight on ClearEye's product, which was only partially offset by pricing actions and cost savings efforts. For the full fiscal year, we now anticipate a gross margin of approximately 56% due to the higher air freight costs incurred in Q1. We still expect the increase from the prior year to be driven by pricing actions and cost savings that more than offset inflationary cost headwinds. Q2 gross margin is estimated to be approximately 55.5%. As expected, advertising and marketing was up in dollars and as a percentage of sales coming in at approximately $39,000,000 or 14.7 percent of sales.

Speaker 3

For fiscal 2025, we still anticipate an A and M rate of just over 14% of sales and up in dollars versus the prior year. G and A expenses were 10.8 percent of sales in Q1 due to the timing of certain expenses. We still anticipate full year G and A of approximately 9.5% as a percent of sales. Adjusted EPS of $0.90 compared to $1.06 in the prior year, down from the impact of lower Q1 revenues, air freight costs and the timing of A and M and G and A spends. For full year fiscal 2025, we expect adjusted EPS growth of approximately 5% to 6% as well as an EBITDA margin in the low to mid-30s consistent with our long term trends.

Speaker 3

Finally, looking below the line, interest expense of approximately $13,000,000 benefited from the effects of our continued debt reduction efforts. Our Q1 adjusted tax rate of 22.9 percent excluded an unusually large discrete tax item we do not anticipate repeating. We anticipate a normalized tax rate of just under 24% for the remaining quarters of fiscal 2025. Now let's turn to Slide 11 and discuss cash flow. In Q1, we generated $53,600,000 in free cash flow, up double digits versus the prior year.

Speaker 3

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 June 30, our net debt was approximately $1,100,000,000 $1,000,000,000 of which is fixed, and we maintained a covenant defined leverage ratio of 2.8 times. In the quarter, we repurchased approximately 400,000 shares for $26,000,000 and we'll continue to evaluate further repurchases opportunistically for the remainder of fiscal 2025. With that, I'll turn it back to Ron.

Speaker 2

Thanks, Chris. Let's turn to Slide 13 to wrap up. Our business is building momentum and our fiscal year is off to a good start. We are reaffirming our full year outlook, thanks to our diverse and leading consumer healthcare portfolio that is helping to offset near term supply chain headwinds in eye care. For fiscal 2025, we continue to anticipate revenues of $1,125,000,000 dollars to $1,140,000,000 and organic revenue growth of approximately 1% versus fiscal 2024.

Speaker 2

We're expecting Q2 revenues of $282,000,000 down slightly year over year, again due to ClearEye's timing. We continue to look for ways to improve ClearEye's shipments into retailers to support in stock levels. However, this doesn't change the full year outlook, but may shift sales from the second half into the first half. For EPS, we continue to anticipate adjusted EPS of $4.40 to $4.46 for the full year. For Q2, we'd anticipate EPS of 1.08 dollars Lastly, we continue to anticipate free cash flow of $240,000,000 or more with the benefit of capital deployment optionality that has a history of maximizing value for our shareholders.

Speaker 2

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

Operator

Thank you. At this time, we will conduct a question and answer session. To ask a question, you will need to press star 11 and wait for your name to be announced. To withdraw your question, please press star 11 again. First question comes from Rupesh Parikh with Oppenheimer.

Operator

Go ahead. Your line is open.

Speaker 4

Good morning and thanks for taking my question. So just going back to the supply chain, it sounds like from your commentary, you guys are on track in resolving the supply chain issues as you guys expected. Just want to confirm that. And then as you look at the eye category, have you seen any shell for share loss? Or is it playing out exactly as you guys would have expected on the consumption basis?

Speaker 2

Good morning, Rupesh. In terms of the ClearEye supply chain, we continue to be in line with what we talked about back in May in terms of production. Q1, we saw the ability to use some airfreight to get stuff in a bit sooner at the end of the quarter than what was originally anticipated. And as I just said in the prepared remarks, we're looking to see if we can get a bit more into the first half versus the second half by continuing to use airfreight. So, ClearEye supply chain on track at this point.

Speaker 2

We continue to feel good about it. In terms of share in consumption, Clear Eyes continues to be well positioned at shelf. So we've been focusing on making sure that we've got product available at shelf. So maybe not all the SKUs, but SKUs that can meet consumer demand at the shelf. So, so far it's still good in terms of consumption and share.

Speaker 4

And then maybe just one follow-up question. Just given some concerns on the pharmacy channel, Walgreens closing stores, it looks like CVS is rationalizing their supply chain. Just how do you guys feel about inventory in the channel within pharmacy and any concerns about inventory destocking going forward?

Speaker 2

Yes. At this point in total, we haven't seen really any headwinds from retailers reducing inventory in total. Certainly some channels have some activities going on that's being offset by growth in other channels. And then the other thing I'll comment on is what you may be hearing from others in the industry is it's really more cost cold and other categories that we don't play in, in a big way at this point. So we'll see how that plays out, but at this point, we continue to be well positioned to get through that.

Speaker 4

And then just my final question, just given some concerns out there on the consumer, as you look at your categories and are you seeing any shifts to private labor or any other new consumer dynamics during this past quarter?

Speaker 2

Yes. As we've talked about over the last couple of quarters, Yvesh, what we've seen is consumers shifting where they buy, looking for better value for the brands that they bought historically rather than any change in what they buy. So at this point, we continue to believe that taking care of your health or someone in your family is the last place you look to make a change or save a few pennies.

Speaker 4

Great. Thank you. I'll pass it along.

Speaker 2

Okay. Thank you.

Operator

One moment for our next question. Your next question comes from Susan Anderson with Canaccord Genuity. Go ahead. Your line is open.

Speaker 5

Hi, good morning. Thanks for taking my questions. I was wondering just in terms of the North America business, can you maybe give us an idea of how much the decline was due to Clear Eyes versus the Women's Health versus the weaker cold cough season? And I guess should we expect that same trend as we look into next quarter?

Speaker 2

Yes. So we have a little bit of a hard time hearing at the beginning. I think, Susan, you're asking us to give a little detail behind the makeup and what drove sales decline year over year? Yes, correct.

Speaker 5

Between those three things. Yes. Hi, Chris.

Speaker 3

Hi, Gwen. It's Chris. So as we look to the various categories, women's health, I would say, as expected, and you'll just be able to see these categories versus the prior year, it was down about $5,000,000 Cough, cold, again, as expected, down similarly to women's health. We're expecting coughcold trends to be flat to down slightly, right? The seasonality of and versus the comps of last year is what's going to drive the improvement in the Q2 versus the Q1.

Speaker 3

Women's Health, seeing improvement as Ron mentioned in his prepared remarks, but likely to be a bit challenged still in the second quarter, have a little bit of FX headwind in the Q2 that we're planning for, but sequential improvement in eye care expected. And remember, as we commented in the remarks that you heard, the ear and eye care category also saw strong performance from TheraTears, Debrox and SKYY. So really all the brands in that portfolio hitting on all cylinders.

Speaker 5

Okay, great. And then I guess maybe just a follow-up. So on the eye care business, it sounds like the manufacturing plants are not necessarily quite up and running yet. Is that correct? And I guess, when you guys expect them to be and should we expect more air freight to impact gross margin in the Q2?

Speaker 5

Thanks.

Speaker 2

Yes. So production levels really through the end of July continue to be in line with what we anticipated. So we've got 2 suppliers and they're again largely as expected and we anticipate that they'll be continuing to ramp up the output level as the year continues. And then for the Q2, I think as we mentioned earlier, we anticipate some additional airfreight to continue to focus on service levels. So if we can expedite, get it in and get it back out to the retailers to help with in stock at shelf, that's what we're going to

Speaker 3

be focused on. And that's obviously included in our guide.

Speaker 5

Yes. Okay, great. Thanks so much.

Speaker 2

I'll pass it along. Thank you.

Operator

Thank you. One moment while we prepare the next question. Next question is from Linda Bolton Weiser with D. A. Davidson.

Operator

Go ahead. Your line is open.

Speaker 6

Yes. Hi. So I was wondering, in terms of the track channel POS data, which I know doesn't tell the whole picture, but still the data actually look really pretty strong for ClearEyes, like oddly strong actually. Can you shed a little light on how the POS does look so strong even though there are some supply issues? Is it just that retailers had enough inventory?

Speaker 6

Or just can you kind of give a little more color on why it actually does look so good?

Speaker 2

Yes. So consumption is outpacing our shipments into the retailers for ClearEye. So that's the first part of it. The second is, we've been focused on making sure we've got some products available that we can ship so that there's something at shelf. So when consumers are showing up at the shelf, Linda, there's product there for them, which is what's driving consumption.

Speaker 2

And really it's the continuation of strong performance for that brand. It's really nothing new for us. We've got some new products out there and some campaigns that we've had going on for a while here that continue to do well in the marketplace.

Speaker 6

Okay. And then just on the Women's Health business, I know you commented that Monistat is largely stabilized. Can you just refresh us on exactly the actions taken and what is kind of stabilizing that business? I mean, given that it's driven by incident by illness incidents among women. So how can that be controlled?

Speaker 6

So what are the marketing actions that you've taken that have stabilized that?

Speaker 2

Yes. So a couple of things. First, the marketing campaign and the messaging was refined over the last year to better connect with consumers. So our digital and TV messaging is more on point than it was kind of a year, year and a half ago. And then there's really two parts of the Monistat business.

Speaker 2

We've got Cure, which you're right, Linda, it is linked to incident levels, use infection incident levels. And then there's the care line of products, where we've got a number of new products out, the boric acid wash, that is really doing well. So it's never one thing that turns the brand around, but it's those elements around Monistat that have repositioned it to really being positioned back for growth. And then to get into Summer's Eve, as I mentioned on the prepared remarks, we continue to make good progress on wash and wipes with new products and digital messaging that are out there. And we continue to focus on the on the go to get that segment revised, right.

Speaker 2

We're the market leader with more than 50 shares for that segment and it's really up to us to get that element back to growth and we're focused on it.

Speaker 6

Okay. Thank you. That's it for me. I'll pass it on. Thanks.

Speaker 2

Thank you, Linda.

Operator

Thank you. I'll now bring up the next question. Next question comes from Anthony Rivetski, sorry, I apologize, with Donati and Co. Please go ahead. Your line is open.

Speaker 7

Yes, no problem. And good morning all and thank you for taking the questions. So first,

Speaker 2

can you just give a

Speaker 7

little bit more details as far as the impact of airfreight on your gross margin? And I know there was a partial offset of some pricing actions. So if you could be a little bit more specific as to those two things, that would be great.

Speaker 8

Yes. Good morning, Anthony. It's Chris.

Speaker 3

So airfreight was the entire difference delta to our expectations. We had guided to 55.5% for the Q1, and airfreight was really the difference there.

Speaker 7

Okay. All right. That's very helpful, Chris. Yes, thanks. And then so I know you guys gave some color as to what you expect for the Q2.

Speaker 7

You reaffirmed your full year guidance, obviously. So as we look at the back half of the fiscal year and we look to update our models for Q3 and Q4, anything there you can call out there as far as how to think about the cadence of sales and earnings? I know, Ron, you had mentioned something that there might be a little bit of a shift from Q I guess from the back half to the second quarter. But anything else you can add to as we look to recalibrate our models for the balance of the fiscal year?

Speaker 8

Yes, Anthony. So obviously, we're not giving specific guide to

Speaker 3

the back half quarters, but I would just remind you of the comps that we're going to be lapping from Q4 of fiscal 2024.

Speaker 7

Okay. Got you. Yes, you'll have an easy comp in the 4th quarter as well. All right. And then lastly for me, as far as the international segment, so that was up again here in the quarter.

Speaker 7

Anything you can call out as far as your ability or confidence level and your ability to sustain that performance internationally?

Speaker 8

Yes, Anthony. So international, as

Speaker 3

you mentioned, has had a few years now of really impressive growth and coming off of those comps. Hydralyte, we highlighted on the call had nice growth. Sales were up double digits in the period. A few other brands and geographies were up. We have a brand called Zetadine that is an allergy eye care and Australia had a real strong quarter.

Speaker 3

So really a diversified portfolio over there in our international segment similar to what we have here in North America. And as expected, the results, I think, organically were up 5.3%, in line with our long term algorithm of 5% plus and no reason to think that's going to slow down anytime soon. We feel confident that, that can continue.

Speaker 7

All right. Well, that's great to hear. Thank you and best of luck.

Speaker 2

Thank you.

Operator

We can't buy for our next question. The next question comes from Mitchell VanHiro with Sturtevant and Co. Go ahead. Your line is open.

Speaker 9

Hey, good morning. I was curious, I may have missed it, but cough and cold was down significantly, 2nd consecutive quarter of double digit declines. I didn't really quite understand why it's that large. And then also in oral care, down in mid teens, I was curious why the weakness there?

Speaker 2

So for coughcold, I'll start with Mitch. It's really a comp issue here, right? Last year, retailer order patterns were still different than the historic level of the seasonality. So it's really a comp issue for us. We expect more of a seasonal trend for coughcold stuff.

Speaker 2

So we'll see the preseason buys maybe at the tail end of our Q2, early Q3, we'll see where that goes. And then we'll wait to see how incident levels play out. But as I think Chris mentioned earlier, for the whole year, we anticipate that the cough coal segment will be flat to down slightly for our shipments into the retailers. And then for oral care, it's really timing for the whole year performance versus the Q1 of last year. So and again consumption, this is another example where consumption is outpacing our shipments into the retailer.

Speaker 2

So it's a timing issue.

Speaker 9

Okay. And with I mean, obviously, you're in needs based have a needs based portfolio. But are you having conversations with your customers regarding either pricing or promotion or anything, are they asking for anything more in terms of sort of helping with price to get I don't say consumers back in stores or buying branded, but is there any I don't see pressure, but are they asking for any discounts or promotions more so than normal?

Speaker 2

Yes, really no change in that dynamic, Mitch. We're not like the food aisles where inflation has had a different kind of impact on those that part of the store for us where needs based, and consumers are looking for those trusted brands with products that have proven to work for them. So, at this point, we really haven't seen any changing in that kind of dynamic.

Speaker 3

Yes, Mitch, to highlight that in our original guide, we talked about expecting about half of our growth from price and half from volume. So we're still anticipating volume growth, which we have now for several years. So I think to highlight Ron's point, a little different than some other categories you may be hearing about from others.

Speaker 9

Thank you. And then, hey, Chris, on G and A, it's up. What were the discrete costs or items that caused the little bump this quarter?

Speaker 3

Yes. So really just timing, I'd expect that to step down now for the remainder of the year, just the timing of initiatives, nothing no one thing within G and A.

Speaker 9

And then finally, just I'd just love to hear your comments. Any change or anything unusual that you could call out in the M and A environment over the last quarter?

Speaker 3

Yes. No, the pipeline continues to be consistent with what we've seen over the years. We continue to look at things and we'll remain disciplined. We have a lot of capital allocation optionality during the quarter. We repurchased some shares, right, we paid down some debt and we'll continue to keep M and A as kind of our number 2 priority for cash flow allocation after investing in our brands.

Speaker 3

But nothing no change to what we've been seeing, Mitch.

Speaker 9

Okay. Thank you.

Operator

Your next question comes from Trevor Saffir with William Blair. Go ahead. Your line is open.

Speaker 10

Hi, thanks. This is Trevor on for John. Just one question for me. Kind of scanning through the 10Q here and looking at some of the categories and the category performance, Would love to hear just a little bit of an overview. Looking at some of these, eye and ear care is up and outperforming.

Speaker 10

A lot of the other ones are performing quite as well. I think we've walked through a couple of them, but from a high level, what are you seeing broadly across the rest of the portfolio that are leading to some of these declines, if these are long term impacts or kind of short term that you're lapping? Just kind of any other detail you could provide over some of the segment and category information in the quarter?

Speaker 2

Good morning, Trevor. So first of all, I think I'll start with we generally feel good about the overall consumption trends for our brands and our portfolio. We talked about a few of them already this morning. And as you just mentioned, we've got some funny comp stuff going on. Oral Care and coughcold for different reasons, but we've got some funny comp things that were the big drivers behind the declines year over year for those categories.

Speaker 2

We do have the supply chain challenges in Clear Eyes, but it's really being way more than offset by very strong performance in TheraTears, Dbrox and STY, which is the majority of the driver and performance in the ear and eye category to call out. And then as Chris mentioned earlier, the international business at 5% continues to have good performance. So a lot of noise this quarter when you look at the category performance, which is why I would encourage to encourage you to continue to listen around our full year guidance of plus 1% or so with the offset of the ClearEye supply chain. So again, we feel good with lots going on here.

Speaker 10

Thanks, Ron. That's helpful.

Speaker 2

Okay. Thank you.

Operator

I'm showing no further questions at this time. So I would now like to turn the call back over to CEO, Ron Lombardi for closing comments.

Speaker 2

Thank you, operator, and thanks to everyone for joining us this morning, and we look forward to providing another update after Q2. Have a great day.

Operator

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

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Prestige Consumer Healthcare Q1 2025
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