Q2 2020 Earnings Call

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And I like the hand, the conference your speaker today, Phil Terpolilli director of Investor Relations. Please go ahead Sir.

Thank you operator, good morning, everyone just joined us today.

On the called me around the Bharti, our chairman President and CEO , Chris Sacco our CFO .

On today's call, we're gonna come to the highlights and review the results of our fiscal 2022nd quarter discuss our full year fiscal year outlook and then take questions from analysts.

We have a slide presentation, which accompanies today's call can be accessed by visiting for speech consumer health care Dot com.

Looking on the investors link and then on today's webcast presentation.

Reconciliations between adjusted and reported financial measures are included in todays earnings release and slide presentation.

During today's call management will make forward looking statements around risks and uncertainties. We detailed these in a complete safe harbor disclosure on page two of the slide presentation, which accompanies the call.

Additional information concerning risk factors and cautionary statements are available in our most recent SEC filings and most recent company Tuncay.

Well not handed over to our CEO , Ron Lombardi to walk through the highlights of our second quarter performance Ron.

Thanks, Phil and good morning, everyone, let's begin on slide five.

We're pleased with Q2 results, which followed a solid first quarter performance.

Starting with the topline revenue of 238 million was essentially flat to the prior year on inorganic basis in the quarter slightly ahead of our expectations offered back in August .

Sales benefited from strong topline results in our international segment, which experienced growth of approximately 8% after adjusting for FX.

Strong performance was led by consumption gains in Australia, and the timing of distributor orders in other countries.

In North America, we experienced strengthened our gee I and skin cancer care categories, each benefiting from a prudent long term brand building strategy.

Offsetting this was a retail inventory reductions and changes at shelf in the oral care category previously discussed as well as the impact from a retail level, we call a certain eye care products produced by a previous supplier.

The impact of this recall was contained to the second quarter sourcing from this supplier had largely stop about two years ago.

Consumption trends for portfolio increased 2% in Q2, and we continue to expect consumption growth for the full year to be around this level.

Total company adjusted gross margin in the quarter came in at 58% ahead of 57.4% in Q2, a year ago, mostly driven by product mix.

Adjusted EPS of 68 cents was up 5% versus the prior year.

Free cash flow was 47 million in the quarter and continues to benefit from other industry, leading EBITDA margin.

<unk> capital spending and low cash tax rate.

Adhering to our disciplined capital allocation strategy focused on enhancing shareholder value. We use the cash flow in Q2 to Opportunistically complete our authorized share repurchase program as well as to reduce that during the quarter.

Now, let's turn to slide six and discuss here to date results.

Our fiscal year to date performance include stable revenue and profitability, which gives us continued confidence in our full year outlook.

Revenues in the first half were impacted by the anticipated inventory reductions occurring in the drug channel.

Great. That's our consumption trends remain solid and we feel good about the positioning of our portfolio of leading brands.

Adjusted EPS of $1.33 was anticipated with higher EPS expected in the second half of fiscal 20 due to the timing of A.M.P. investment.

Free cash flow was 98 million year to date.

Stable and strong profit trends continue to enable the successful execution of the first and third components of our three pillar strategy investing for growth and capital allocation Optionality.

We did this again in the first half of fiscal 20 investing at A.M.P. behind our leading brands repurchasing 50 million in shares opportunistically and reducing our debt level.

In summary, we are executing our proven strategy and these first half results are a testament to our efforts.

Let's turn to slide seven and discuss the keep in helping drive results Summer's Eve.

Summer's Eve was acquired in January of 17 in is our largest brand one of five power core brands, which make up about half of our sales Summer's Eve is well positioned for long term success through its strategic positioning and our brand building efforts.

As a starting point the brand holds a commanding number one leadership position in the category at retail holding over a 50% share that as well over two times larger than the next branded competitor.

This positioning allows us to concentrate our efforts around consumer insights that are focused on increasing category adoption, which drives long term brand growth rather than competitive share swaps in a crowded category.

It's also fosters a stronger relationship with our retail partners as we grow the category.

This strategy is underpinned by solid white space opportunity based on our consumer insight analysis roughly half of all women are open to using products in the feminine hygiene category, you had only about 15% or doing so today.

This knowledge in mind, we are continuously working towards growing category usage over time, a win for both retailers and the brand.

We're doing this by executing our brand building playbook and if you look at the right side of the slide you will see several examples first we execute proven marketing efforts for Summer's Eve. This often means iconic and creative marketing campaigns. Most recently with the launch of the creative elephant in the shower marketing.

Campaign, which has accelerated sales and increased engagement and platforms like you too.

Second we utilize influencers and leverage their platforms to help engage consumers. One example would be a recent feature on the Doctor on TV show last week, where summer's Eve washes were discussed as a beneficial part of a woman daily care team.

Lastly, innovation is another one of the key areas of this playbook.

Recently introduced items include Summer's Eve fragrance free.

Sunset Oasis and first cycle, each designed to fill unique unfilled set of consumer needs.

In summary, this playbook is driving increased usage rates to grow both her sales dollars any overall category with consumption growth since our ownership averaging in the mid single digits inline with our long term objective.

Now, let's turn to slide eight for an update on e-commerce .

Online sales continue to be a fast growing opportunity for prestige with first half growth of nearly 50% versus the prior year. We expect this solid growth to continue and anticipate online sales, reaching nearly 5% about total sales by yearend.

Over the last several years, we've been proactive in this emerging channel investing behind digital content and distribution to ensure that our trusted brands are easily available for purchase as customers research and shop for their health care needs online.

This strategy has paid off and the result is a well positioned portfolio with many of our brands actually are ahead of their share in brick and mortar.

One example, this is boudreau, but paced part of the fleet acquisition in 2017, who drove the diaper rational treatment that is currently tied for a number three share in brick and mortar. However, our proactive investments in E. Commerce have allowed the brand to experienced tremendous success, achieving a number two market share.

Our position on Amazon, we're now over 50% of Boudreau sales okay.

In this example, our investments include consumer education through to the boot droves web site.

Funny, and engaging website interactive ads and connecting with moms as they prepare baby shallow registries online.

Our success in E Commerce continues to be driven by proactive strategies across each of our brands with Boudreau is being just one of many examples we are well positioned for continued E. Commerce sales growth that remains an opportunity for our business.

With that I'll turn it over to Chris to walk through detailed Q2 financing.

Thank you Ron good morning, everyone.

I'll walk through our second quarter financial results in greater detail and offers must be did contacts around or expectations for fiscal 2000.

As a reminder, the information today's presentation includes adjusted results that are reconciled to the closest GAAP measure in our earnings release.

On Slide 10, you can see our high level second quarter results, which include flat organic revenue of approximately $238 million.

Adjusted EPS increase of three cents per share versus the prior year.

First half adjusted EPS of $1.33 cents per share was flat and adjusted EBITDA decline versus prior year, both impacted by the divestiture of household cleaning.

As a reminder, we fully lapped the comparison impacts of household cleaning beginning in Q2.

Now, let's turn to slide 11, well I'll discuss consolidated second quarter results.

For the second quarter fiscal 20, our net revenues decreased 50 basis points to $238.1 million, but were essentially flat after excluding the impact of foreign currency.

As expected our topline was impacted by retailer inventory reduction.

Adjusted gross margin, which excluded transition costs associated with our new logistics provider was 58% for the second quarter up 60 basis points versus the prior year due mostly to product mix.

In terms of JMP, we came in at 16.2% of revenue in Q2, as we continue to invest behind long time brand building opportunity.

Our DNA spending was 9.5% of total revenues in the second quarter up year over year attributable mostly to timing.

First half DNA spend was up slightly in dollars versus the prior year.

We reported adjusted earnings per share in Q2, 68 cents, representing an increase of 5% versus the prior year driven by the effects of debt reduction and share repurchase.

Now, let's let's turn to slide 12 to discuss our second quarter cash flow.

For Q2, we generated approximately $47 million in free cash flow.

In the quarter, we utilized $21 million to complete the 50 million dollar share repurchasing program authorized back in May repurchasing approximately 700000 shares.

As anticipated the remainder of cash flow went to debt reduction.

Our net debt at September Thirtyth was approximately $1.7 billion equating to a leverage ratio of five times.

We still anticipate leverage of approximately 4.7 times by our fiscal yearend.

Lastly, I'd like to remind everyone of our transition to a new third party logistics provider announced in August .

We incurred $1.4 million and onetime costs related to this project in Q2, and we still expect to incur approximately $10 million of onetime costs in fiscal 2000.

Although early we're on track to our plan and continue to expect completion of the transition in Q1 fiscal 21.

I'll now turn it back to Ron for a discussion surrounding our fiscal 20 outlook and some closing remarks.

Thanks, Chris let's wrap up on slide 14.

We are on pace to our original expectations for organic growth adjusted EPS and cash flow through the year driven by the continued success of our strategy.

Net sales, we expect fiscal 20 to be in the range of approximately 947 million to 957 million. This range is down slightly from our previous expectation due entirely to foreign currency expectation.

However, we continue to anticipate organic revenue to be approximately flat versus the prior year.

For Q3, we also expect organic revenues to be approximately flat to the prior year as we typically experienced the highest level of retail inventory level fluctuations and order patterns in the December holiday timeframe.

We continue to accept fiscal 20 adjusted EPS in the range of Twoseventy six to 283.

And we in and we still anticipate being at the higher end of our outlook range.

Regarding cash flow, we continue to expect full year adjusted free cash flow of 200 million or more.

To recap we are now halfway through the year and remain comfortable with our outlook and growth prospects. A topline is as anticipated with solid consumption trends, we've delivered strong and consistent financial metrics and cash flow to date, which continues to enable our efficient capital allocation efforts.

With that I'd like to turn it over to the operator for questions.

Thank you, ladies and gentlemen until that's the question you will need to press star one on your telephone to withdraw your question. Please press the pound key.

Please standby all the compiled acuity roster.

My first question comes from the line of Jon Andersen with William Blair. Your line is open.

Hi, good morning, everybody.

Good morning, John .

Can you talk a little bit more about consumption.

What did you see in aggregate.

Across the business in the quarter.

And if there's any way to pursue a little bit.

What you saw.

Secondly, you you ESRD or North America.

And what you experienced from consumption standpoint in your international markets.

Sure John So first of all the consumption trends, we realized in the second quarter have been fairly consistent over the last handful of quarters at about 2%.

The international business in Canada is a bit above the average in North America was a bit excuse me you asked was a bit below that.

We had some particularly strong performance in G.I. in skin within the U.S. and during the quarter, we had some tough comps.

With Monistat in particular in the womens.

Health care segment.

That offsets offset that a bit but you know in summary consumption continues to be pretty steady and generally in line with the expectations. We had started the year.

Okay, and can you remind remind us what the.

The tough comp with with modest out was.

Related to.

Sure we had some changes of product offering at shelf for a couple of retailers versus.

A year ago is one of the drivers in the second is we had particularly strong.

Shipments during the second quarter in that segment last year, just due to timing. So it's kinda those two two factors John .

Okay.

And then I know that that.

Some of the changes in the oral care business.

We've also been impacting consumption.

When do you layout.

The I think the shelf set.

Reset.

By a large customer.

Was one of the one other things you're kind of working through there when do you anniversary or lap left out in it you might actually accurate insane.

Point.

Back to better.

Oh.

Growth out of the oral care piece of the business Dentek.

Yes, so we're going to have those headwinds in terms of year over year comp through the rest of this fiscal year.

At this point.

Okay.

How about just bigger picture comment on.

Pricing.

The pricing environment for your products and.

Flat up down and then also you did make a comment that you.

I think the majority of your core ROTC brands gained market share.

Can you talk a little bit about.

No you seen any changes with respect to pipe private label penetration either offline or online I'm, just kind of how the brands in aggregate are holding up.

Relative to other national brand competition in private label. Thanks.

So pricing has essentially been flat for us it it's still it's a tough pricing environment, although with leading many leading brands with a 50% share we tend to be well positioned to put them in place if needed. So pricing again has tended to be pretty flat in terms.

The market share.

Versus private label, we continue to gain share in win in general as we have for a very long period of time again it's.

Whether its private label or any competitor that competitor that we may happen to have we come to work every day focused on how we continued to grow our share and grow the category, whether it's through innovative new products.

For a new marketing and brand building campaigns, whether it's being other dr. Oz show.

Dramamine and for new product as an example, the new fragrances launch for Summer's Eve.

In the list goes on and on John So again, we don't focus specifically on private label, we just focus on the competitive landscape and worry about winning with with the consumer.

Makes sense, if I can squeeze one more in just on the retailer inventory reduction I guess in the in the quarter.

And maybe year to date.

Has that kind of has it gotten better has it gotten worse is it.

In line with your expectations and and how are you thinking.

Thinking about the potential for additional.

Stock over the next several quarters is this winding down are we still kind of in the middle innings.

Yes. So first first of all the retailer inventory reductions are in line with what we anticipated at the beginning of the here you know, we we thought going into the year that was kind of be a slow drip as a number of retailers talked about inventory reduction initiatives.

So we thought it would kind of just hit us each quarter in a fairly.

Predictable level, which is done so far.

And we're kind of I guess in the middle middle innings at least in terms of this year, we expected to continue.

In the third quarter.

As well as our fourth quarter and then in the third quarter in particular I called out today that we expect our sales to be flat or so even with the the lower comp last year, because we have seen historically that the holiday period is a time that many retailers use as a way to.

Adjust down inventory in our categories. So we're anticipating that and as a result flat flat for Q3.

Okay. Thanks, a lot of get back on the Q.

Okay.

And our next question is from Steph Wissink with Jefferies. Your line is open.

Yes, sure so for international as we've said before that the distributor business right. So it tends to be a bit lumpy I would look at the first half in total for the international business. We had strong hydraulic sales in the second quarter that would impact the mix favorably.

Down 20, Bips year over year remember, we talked about the clear eyed recall during the quarter and that was probably the biggest married rather than mix.

Okay. That's very helpful. And then on N. P. I think you mentioned right around 16% in the quarter, which is a bit above your full year target can you talk a little bit about what you had in the quarter that you were supporting and as we look into the back half year, where are you may be able to pull back a bit to latter lights out at your full year guidance.

Or staging a few well so so during the quarter, we had a number of summer's Eve.

Digital or other areas that we make investments and so.

Behind some of those long term brand initiatives that you.

You would balance out in the back half to kind of maintain your full year.

Okay, and then last question for us the other thing to.

Just on AMC you know if we do find some gross margin opportunity. If it ends up being higher than we think we would look to invest that in higher levels of MP a in the second half as well.

Okay. That's helpful unless an inventory levels, a nice improvement sequentially in the rate of growth, but wanted to just talk about your expectations for the back half in terms of your own inventory carry and now as any of that lift in inventory year over year related to the DC that comes online in the first quarter.

I've 20.

Yeah definitely be the inventory increase from from your end is entirely related to the the warehouse transition we began to ramp early in the second quarter. We expect those levels to elevate the highest point will be likely Q3, and then they'll start to come down although elevated over year end as we enter our fiscal year.

And then again, obviously as we complete the transition in early 21.

Okay. That's great. Thank you very much.

Our next question comes from the line of Joe Altobello with Raymond James Your line itself.

How you ranking M&A debt reduction share repos at this point, then and maybe maybe whats the M&A market looking like at this point in time.

Sure. So our capital allocation priority is you know one to continue to de lever.

Over time.

Second would be opportunistic stock buyback right. This was the second year in a row, where we felt taking a quarter of our cash flow $50 million in buying back stock.

At attractive price and a high yields for the shareholders was the best use of that $50 million.

We continue to expect opportunities to come out of the big pharma and other CPG companies as they rationalize their portfolios and emerge.

So the important thing for US is just to stay with our strategy of looking for niche brands with leading positions that would provide long term brand building opportunities.

So no change in that capital allocation approach.

Great. That's helpful. And then I just kind of was curious you touched on Canada briefly but I was curious maybe how big you guys. Thank you could get perhaps as a percent of total sales and then that's it for me.

Yeah, We think Canada will probably grow slightly ahead of of the U.S.

And slightly behind the international markets.

Overall overtime, we've got a couple of great leading brands up their galvus gone in particular has been growing.

Very well for us for a long period of time, we acquired that back in 2012.

So we think we've got a long runway with that brand.

In a couple of other brands up there as well.

Great. Thanks, Ron I appreciate it guys.

Okay. Thank you Adam.

Yes, Hi, So you had talked a little bit about North American no Tc gross margin and why it was down because of the recall is do you expect that gross margin to be able to be up year over year in the future is there any secular issue with certain brands that are growing faster than ever.

Lower gross margin or higher gross margin or would that gross margin beam be stable overtime or is just kind of long term what do you thinking about that gross margin. Thanks.

Yeah. So generally speaking we would expect the margin to be stable overtime. There are no secular issues that we think about today you know, we obviously have cost saving measures in place the warehouse transition being one of them that we've talked about although you know kind of a secondary byproduct of why we need we're making the transition.

So we do expect again as Ron said earlier any potential increases or improvements in gross margin to be reinvested back into <unk> to maintain army our EBITDA margin.

Have you thought about I was a little surprised that you highlighted the blue drugs, but pace brand because I thought when you first acquired that it might be considered something that would be a divestiture candidates have you considered any divestitures to be able to more rapidly de leverage.

You know some of your brands that are either smaller non strategic or underperforming.

Have you considered those that any divestitures. Thanks.

Sure. So so first of all obviously, we spend a lot of time talking about our power core brands the big five that make up.

50% of our revenue we've got another dozen or so core brands and really and another small list of brands that are in the tail that have good long term growth opportunities and into drugs that.

With interest in certain brands that we have and the evaluation ends up being.

Disciplined one where we look at what the value we have by keeping it in terms of earnings and cash flow and if someone would be interested in meeting or beating that we would be open to it.

And looking to reinvest that capital back another high growth opportunity. So we don't sit with a defined list of things were looking to divest at this point because in general after you pay the cash taxes, you don't end up in a position to accelerate de levering.

Okay. Thanks very much.

Sure. Thank you Linda.

Yes, hi, good morning.

So just I just want to most of my questions have been.

What type of growth or lack thereof, do you see there and and is there any any particular inputs that you need to call out.

Yes, Hi, this is Chris I'm not unlike a lot of CPG companies that you hear from we're not really feeling the kind of inflationary pressure. Some folks have popped talked about not parents not material factor to us majority of our products are manufactured in the U.S.

Generally speaking the otcs LTC spaces excess capacity.

I'd like to begin we start from a little bit of a different place right. If we think about freight for example.

Around mid single digits as a percent of our revenue.

Not shipping laundry detergent as an example, so generally speaking we're not facing a material inflationary pressures as we look out.

How about on the logistics side, I mean, I know, you've you've got the new warehouse.

[laughter] provider, but is this.

Transportation costs are surely.

Pressuring a little bit.

Yes, a couple of things so in the near term the majority of our carriers are locked for the year or so.

I don't really get affected by more volatile spot market that you probably hearing about one of the byproduct some moving our AR facility is that.

We're going to actually be facing better lane or in the news in Indiana than we were in Missouri. So I'm looking ahead again, not not looking for for inflationary pressure on on the logistics front either.

Okay and then.

When I look good.

Do you guys track.

Revenue from.

New product innovation.

Over any period of time, I mean could you talk to how maybe your new products did this quarter versus a year ago Worthies the size of your new product efforts.

Sure we do track it we track it by brand but for us.

In our categories new products can be everything from we're doing a study to have new claims on a package and we update our packaging to have those claims to better connect with consumers.

To actual new technologies like compound W Light Trophy Reis or Nics, ultra, where we actually have new formulas and new product.

Whether its updated packaging or new new technology, so we'd rather manage it on that level niche then.

Total with a with a much narrower definition.

Okay Fair enough and then last just last question.

Any.

Early indication of any change in cold season.

So far this year.

Yeah. So first of all for us the the cough cold part of our business is relatively small.

Mid single digits rate, we're down to Lootens, and implore aseptic and success more or less it's very small part of our business. The second is if you go look at the most recent tractor that's out there.

Incidences are up about one of the half percent over last year, it's still very early fluids way up but all the other kind of similar symptoms.

Sore throat call congestion is our Wade.

Way down offsetting it to a low amount so.

At this 0.1, it wouldn't impact our business meaningfully and secondly, it's it's a bit early to tell.

Okay.

Our next question comes on line of Frank Camma with Sidoti Your line is open.

Hey, guys just one.

You know I see that de stocking in two ways. One is just sort of normal retailers tightening the belt, but the other is external factors would cause a consolidation. So can you just maybe speak specifically to the consolidation in the pharmacy channel and maybe where that portion of the de stocking would be.

In your view.

Yeah, so in the drug channel right. The there's two factors.

Impacting.

Destocking in the drug channel first is the consolidation that that took parents between Walgreens and rite aid in the store closures in the distribution center CLO closings that were in the middle of this year and then in addition to that the drug channels front to score and performance has right then you know <expletive> .

And our sales into the drug channel is down 2%.

So we've got like a five point swing, where we continue to gain share and we're helping the retailer with their performance in our categories. Because we're investing in brand building, we're investing in advertising, we're investing in new in new new product. So we're.

Not a problem for them in our categories were a help so you know we worry about the things that are within our control, which is winning with the consumer and if we work with the consumers that will help the retailers.

Sure.

In what we anticipate for the rest of the year thing. Okay. That's helpful. Thank you that's all I guess.

Sure. Thank you Frank.

Thank you and our next question is from Carla Casella with Jpmorgan. Your line is open.

Hi, Good morning. This is on for Carla.

He thought on refinancing yard tiny tiny one bonds.

Hey, guys aren't so I I as you're aware I take it.

Our our bonds will trade at par on December 15, So I'm sure. We're always looking for opportunities to take advantage of market conditions.

We have anything to announce as we've done in the past.

Got it thank you.

Thank you and I'm not showing any further questions I'll now turn the call back over the call back over to Mr. Lombardi for closing remarks.

Thank you operator, and thank you to everyone for taking time to join US today, we look forward to seeing many of you on the road at upcoming Investor conferences, and other events as well as sharing a business update again in February have a great Halloween.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.