Q3 2020 Earnings Call
Ladies and gentlemen, today's.
And just scheduled to begin shortly please continue to standby thing keeping patients.
[music].
And welcome to the prestigious consumer health care third quarter 2020 earnings Conference call.
At this time, all participants I know listen only mode.
After the speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised.
After this conference is being recorded.
If you acquire any further assistance please press star zero.
I'd now like to hand, the call offense your speaker today, Phil Terpolilli director of Investor Relations. Please go ahead Sir.
Thank you operator, and good morning, everyone has joined us today.
Calling me around.
On the body or chairman, President and CEO and Christine cycle, our CFO.
On today's call will cover the highlights it results in fiscal 2023rd quarter fiscal full year outlook, and then take questions from analysts.
There's a slide presentation, which accompanies today's call it can be accessed by visiting prestige consumer health care Dot com.
Looking on the industry's link and then on today's webcast presentation.
Please remember so many information contained in the presentation today include non-GAAP financial measures.
Reconciliations between adjusted and reported financial measures are included in todays earnings release in slide presentation.
During our call today.
Management will make forward looking statements around risks and uncertainties, which we detailed a complete safe harbor disclosure on page two of the slide presentation companies the call.
Further information concerning risk factors, a cautionary statements are available in our most recent SEC filings and most recent company and cat.
Although handed over to see around the body.
To walk through the highlights of the fiscal third quarter Ron.
Thanks, Phil and good morning, everyone.
We're pleased with Q3 results, which are outlined on slide five.
Starting with the topline revenue of approximately 242 million in Q3 was up versus the prior year on inorganic.
Basis. It was slightly ahead of our expectations offered back in October.
Fortunately.
Consumption for portfolio was up approximately 2% in Q3 compared to the prior year.
We continue to expect consumption trends for the full year to be around this level attributable to the ongoing so.
So about a long term brand building indefinitely.
Net sales benefited from strong results in our international segment, which experienced growth of approximately 12% after adjusting for FX.
The strong Q3 performance was led by consumption gains in Australia as a.
Country headed into summer.
We'll discuss our strong year to date international performance and positioning in more detail later on.
In North America, No sales were led by continued strength in our Gi and skin care categories.
This strength was offset by ongoing retailer inventory reductions.
Changes that shelf in oral care and women's health previously discussed and weakness in sore throat incident levels impacting our comparable portfolio.
Total company adjusted gross margin in the quarter came in at 58% 30 basis points ahead of the prior year and it's consistent.
With year to date performance.
Adjusted gross margin excludes costs related to our transition to a new third party logistics provider that Chris will provide an update on later.
Adjusted EPS of 81 cents was up approximately 11% versus the prior year.
The strong.
This was driven by our leading and consistent financial profile, which drove free cash flow in Q3, a $56 million.
Our cash flow continues to benefit from our industry, leading EBITDA margins.
Fishing business model and low cash tax rate.
We use the cash flow in Q3.
We need to reduce debt, which enables future capital allocation optionality that we'll continue to drive value for our shareholders.
Now, let's turn to slide six to review our year to date highlights.
Our revenue of $712 million through nine months was essentially flat organically.
We versus the prior year and strong consumption growth of approximately 2% was largely offset by anticipated inventory reductions occurring largely in the drug channel.
We continue to feel good with the positioning of our leading brands and our ability to create value in this environment.
Year to date adjusted EPS of $2 in 14 cents was up 4% versus a year ago with the prior year, including approximately four cents of contribution from the divested household cleaning business.
Yes benefited from a stable financial profile that also resulted in 100.
$55 million, a free cash flow generated year to date.
Cash flow unable to about $100 million in debt reduction in $50 million in opportunistic share repurchases year to date.
In summary, we feel good about a year to date performance of our business.
Okay, and the execution of our proven three pillar strategy, which has enabled us to raise our EPS outlook for the full year.
Let's now turn to slide seven and discuss one of the drivers of the solid year to date results our international segment.
As you can see on the left.
All right up to fly our international business makes up about 10% of our sales.
It's highly concentrated with over 50% of international sales in Australia, primarily from three well positioned brands that we have there.
Hydralyte.
Nasal sprays and your I mean I care.
That's all.
All told under the care Farmer banner, which has experienced impressive growth since we acquired it in 2013.
Our international business also includes products sold throughout southeast Asia, and certain other geographies, including our largest bran Summer's Eve.
As well as fleet.
And others.
We also have a small business in Europe, which is concentrated in the UK under the Dentek marine and old trucks for aseptic brands.
Each of these markets has a scalable infrastructure that can support added brands overtime as we saw with the Hydralyte.
And like here.
Over the long term, we would expect our total international business to grow at 5% or more and in fiscal 20, we're having a great year that as well above this target.
Similar to North America, we are winning by focusing on leading and well positioned brand that can grow both the.
Category and our share of overtime.
Let's review, our fastest growing in or international brand on slide eight hydralyte.
Hydralyte is our largest brand in Australia, and a big driver to recent segment growth. It's an excellent example of our brand building strategy that drives long term success.
The Hydralyte brand is synonymous with oral hydration for Australians representing over 90% of the category even.
Even with this number one market share.
<unk> continues to drive total category growth with solid execution of our long term strategy growing its sales in fiscal 20 year to date in excess of.
20%.
We've redefined oral hydration over the last last five years by extending usage occasions to targeted messaging expanding from vomiting, and diarrhea into heat exhaustion sports an exercise and many other occasions.
Backed up this effort with.
As marketing tactics, including expanding from traditional TV media digital ad spend.
Ongoing new product development and expanded distribution.
Going forward, we see continued runway for growth of Hydralyte by continuing to increase household penetration and driving awareness.
For the brand.
Finally, we're constantly looking for ways to get back to our consumers and the communities we serve and we encourage our employees to do the same with that we'd like to express our concerns for those affected by the Bushfires had if you have impacted large parts of Australia, it's a tragedy for the.
It is across the country and we've been engaged with local relief services to help with donations and other efforts.
I'd like to now turn it over to Chris to walk through detailed Q3 financials.
Thank you Ron good morning, everyone.
I'll walk through our third quarter financial results in greater detail an offer some updated.
It's around our expectations for physical 20.
As a reminder, the information in 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 third quarter results, which included organic revenue growth over half a point to about $242 million.
<unk> as well as an approximate to an 11% increase to EBITDA and EPS, respectively versus the prior year.
Year to date, adjusted EBITDA declined slightly versus prior year <unk> EPS of $2.14 per share was up nearly 4%.
Both results were impacted by.
The divestiture of household cleaning, which as a reminder, we fully lapped the comparisons of in Q2 of this year.
Now, let's turn to slide 11 for a bit more detail around consolidated results.
As I mentioned on the prior flied third quarter fiscal 20, net revenues increased 50 basis point to 200.
<unk> $41.6 million, which excludes the impact of foreign currency.
Year to date revenues of $711.8 million were up slightly on an organic basis versus the prior year.
Both the Q3 and year to date result, whereas an anticipated with consumption growth offsetting the impact of retailer inventory.
A reduction primarily in the drug channel.
Adjusted gross margin, which excludes transition costs associated with our new logistics provider was 58% for the third quarter up 30 basis points versus the prior year and flat sequentially.
In terms of AMC, we came in at 13.9% of.
Revenue in Q3, and 15% year to date with a lower level of spend in the second half as we expected.
We anticipate continued investment behind brand building to drive long term success in our core brands.
Our DNA spending was around 9% of total revenues in the first nine months up slightly in dollars.
Year over year.
Finally, we reported adjusted earnings per share in Q3 of 81 cents, representing an increase of 11% versus the prior year, driven primarily by the effects of debt pay down and share repurchases.
For the full year, we now anticipate net interest expense just under $98 million.
Beautiful to the effects of debt reduction and lower interest rate.
Now, let's turn to slide 12 to discuss our third quarter cash flow.
For Q3, we generated approximately $56 million in free cash flow, which went primarily for debt reduction.
Our net debt at the end of Q3 was $1.7 billion.
Equating to a leverage ratio a 4.9 times.
We still anticipate leverage of approximately 4.7 times by our fiscal year end.
With our leading and consistent cash flows disciplined capital deployment and focus on debt reduction we continue to maintain strong credit ratings and relationships in the debt community.
As a result, we were able to issue $400 million of new senior notes in December which replaced prior notes that were due in fiscal 2002.
The transaction both extended a key debt maturity and resulted in annual interest savings of about a million dollars.
Well I'd like to provide an update on our transition to a.
New third party logistics provider.
We incurred two and a half million dollars and onetime costs related to this project in Q3, we still expect to incur approximately $10 million of onetime costs for the project.
Through January we have transitioned more than half of our revenues to the new warehouse and are on track to complete the.
Position in the first quarter of fiscal 21.
I'll now turn it back around for an update on our fiscal 20 outlook and some closing remarks.
Thanks, Chris, Let's now ramp up on slide 14.
For fiscal 20, we are in line to achieve our original expectations for organic sales growth and cash flow.
And now we anticipate a higher level of EPS for the year, all driven by solid consumption trends and strong cash flow.
I'd also like to know fiscal 20 gross margin, which has trended to the higher end of our original expectation for the year has enabled us to reinvest in higher levels of S&P.
This means.
Investment of gross margins savings is consistent with our long term objective of investing in a impede to drive higher levels of sales growth overtime.
For net sales, we still expect fiscal 20 organic revenue to be approximately flat versus the prior year for Q4 organic revenues are.
Expected to be down slightly organically versus a year ago as we're comping a strong performance from the prior year.
<unk> Yeah, we now anticipate fiscal 20 adjusted EPS in the range of $2, an 85 cents to $2 in 87 cents.
Up from $2 and 70.
Makes sense to $2, an 83 cents driven by the strong Q3 performance.
Our cash flow outlook is unchanged and we continue to expect full year adjusted free cash flow of $200 million or more.
To recap.
As we look across our business and.
We remain confident in our outlook and growth prospects. Our top line continues to be driven by solid consumption trends that are a direct result of our long term focus on brand building.
Strong and consistent financial metrics and cash flows to date continue to enable our efficient capital allocation effort.
In total these efforts leave us well positioned as we approach the end of our fiscal year and we remain focused on driving value for all of our stakeholders.
With that I'd like to turn it over to the operator for questions.
Thank you.
A reminder to ask a question you'll need to press star one on your telephone.
To withdraw your question past the punky. Please standby Bobby compiled the kind of roster. Our first question comes from Jon Andersen with William Blair. Your line is now open.
Oh.
Good morning, everybody. Thanks for the question.
Morning.
HM.
Okay, I'm trying to say.
Where to start.
Maybe an update on.
Since consumption growth for that for the portfolio has been solid at 2%.
And the organic 'cause kind of come in.
Oh somewhat less than that can you talk about what you're seeing.
Right now.
Just talking front is that.
Very much in line with your expectations are there any signs of.
Any let up.
You know either.
Soon or you know over the next several quarters, just an update there would be helpful.
Sure. So in terms of of de stocking John the trends that we've seen year to date have largely been inline with what we anticipated at the beginning of the year and again the inventory reductions at the retailers are taking our in response to business challenges and objective.
They have for for their businesses and you know so far we haven't seen any change in the factors that are causing them to do that so although difficult to predict we still anticipate inventory reductions to be a drag in the in the meat medium term, particularly in the drug channel as I just just.
I'd now we'll give a further update on this in may when we talk about our fiscal 2001, but so far it continues to be inline with what we thought likely to continue are likely to continue but just as importantly.
You know the consumption in the winning with consumers has us well.
And to continue to be successful in this environment.
Sure Okay.
That's helpful.
Maybe a <unk> it would be helpful to me that have a little bit more color around some of the.
Some of the platforms, which performed well in the.
Quarter and it and in some that that maybe fell a bit short so you called out G skincare.
As a growth areas and then some shelf changes in oral care and women's health.
As it was.
Maybe a adversely impacting sales can you talk a little bit more.
Maybe maybe brand level.
On the though what you're seeing happening in Gi skincare, that's positive and then whether there's any you know what we might lap some of the shelf issues a in the other two areas. Thanks.
Sure. So in terms of G.I. Dramamine continues to to do well.
We continue to grow the category, there and that that's not a a recent trend thats been happening since we acquired the brand all the way back in 2011.
Yeah, that's gone.
Up in Canada.
As is having a particularly good year in it and has had good performance for a while.
In terms of skin care.
Oh compound W has had a couple of new products over the last couple of years that have helped them continue to grow I hope that brand continue to grow at share.
So those are the brands that are that are doing well in terms of then tech and monistat.
At the beginning of the fiscal year, we had a number of retailers make some.
Changes in the number of skews.
That they offered and as a result, we've seen those businesses down year over year and as we get into fiscal two.
21, we expect those headwinds to a moderate and those businesses at least from a from a year over year perspective, we'll begin to stabilize so we began.
And to feel good about those businesses are heading into 21.
I think it's also important to note that summer's Eve continues to do well growing nearly 5% so.
The decline in the women's health.
Category is pretty much concentrated monistat.
Oh, that's that's.
That's really helpful.
On a.
As we look you know when you're not how many young on fiscal 2021 at the moment, but.
Could you talk about such as a key aspect of the story is is the high cash flow generation you know the conversion.
And it looks like you're on track to do more.
More than 200 billion no this fiscal year.
How should we think about that you know as you look if we look to fiscal 2021.
Do we maintained that strength is there any drop off given some of the amortization.
Schedules that would be helpful.
Hey, John This is Chris no as you can see from our.
Our historical results are cashless very consistent very stable financial profile on across the board and so there's no major cliff events coming in fiscal 21 as relates to to free cash flow. So I was expected to remain consistent with what you've seen this year.
Great and then I'm just last question.
No the timing of <unk> shelf resets in line reviews that you go through with various retailers I suspect there you know it it varies by retailer essentially category, but are there any.
Anything that.
You can comment on.
Related to distribution, maybe maybe.
Wins or maybe other adjustments I either the what's your dealt with Genentech in Monistat you know this fiscal year that we can you don't think about or should be aware of thanks.
Yep.
It's already the of the shelf changes kind of happened in our Q1 in in Q2 of our fiscal year and at this point, we feel good about what we expect for next year and we'll give a further update in may.
Okay. Thanks, a lot congrats on good quarter.
Thanks, John.
Thank you.
Our next question comes from Mitch Pinheiro with start event. Your line is now open.
Hey, Good morning can you hear me.
We can Mitch.
Okay, great. Thank you.
Have trouble with the mute button sometimes.
Getting back to want to John's questions, I mean, where.
Where.
Do you think I know you're talking about the destocking issue, but it seems to have a longer tail. Then that may be originally forecast a I'm I don't want towards your mouth, but just seems that way where we're.
When does this and.
I mean, it will be you know well they end up having nothing on this you know one item on the shelf with no no backup stock or is this like a a and just in time or.
When do you think the sense.
Yeah. It's.
First of all I would say if not.
Laughing.
Longer than we would've anticipated you know all point to that one large drugs.
Retailer, who a little bit over a year ago announced a three year program to save a billion and a half or more it seems to be increasing in cost. So this is going to play out over long period of time as as we again have and.
Dissipated is the first thing so you know when their businesses recover and they start to perform in line with their objective will be when the when the stops now the good news for US is is that our brands and our businesses are performing well in that channel our consumption in the drug channel year to date is about.
2%.
So we're not part of their problem were part of the solution of them turning their businesses around a sell in is down meaningfully.
Which is creating a big gap.
Yeah and impacting our sale that's the first part and again, it's not them right.
Do thing the numbers skews that they have in the store, it's them looking for ways and finding ways to be more efficient in their supply chain, whether its closing distribution centers, which we've seen them do with whether its closing underperforming stores, which we've seen them do we're just getting better at being able to.
A good fill rates at the show with lower inventory overall, so that's what we're seeing.
Okay.
Thank you again.
When you look and you may have talked about just the they've missed this but.
Which.
Which is the channel or which besides.
E Commerce, which is obviously going to have you know so obviously a strong growth but are there any channels that are that are showing stronger than expected consumption gross.
Anything weaker than expected to.
Yes, so online both Amazon and the the other retailers dot com.
Are performing very well very high levels of growth that at.
That is I just mentioned drug is 2%. So this is performing well there convenience tends to be a good channel for us over the long term a mass has been a little bit slower for us the this year and again.
Some of.
That's just due to the impact to the Dynetek and Monistat skew changing so we expect that to to change as we get into next year. So I think that's a little bit of an outline of what we're seeing.
Okay, and then I guess, that's my final question and.
Maybe if done the math wrong here, but just.
Based on the guidance the fourth quarter, you know is going to be flattish.
In an earnings per share basis is that it must seeing that correctly.
Yeah, I mentioned at the midpoint of the range, it's about flat year over year.
<unk>.
Just remember worked hard.
Remember, we're calling for a top line to be slightly down right as we think about right facing a tough comp versus the prior year.
Right and then on a GAAP basis, a continued FX headwinds in Q4.
Okay and then.
The thing was just.
It is I'm looking at.
Good day, Gionee, obviously drop sequentially it was up a little higher.
Year over year.
It is are we going to see sort of similar level of gene a in the fourth quarter.
Yeah, how to help.
Sure I anticipate at a similar level in Q4 to Q3 remember Q2 is typically our highest quarter. When you saw Q3 drop off you know again.
Barry, but the timing of initiatives, but the Q4 it looks in line with Q3.
Okay.
All right well that's all have thank you.
Thank you meant.
Thank you.
Our next question comes from Linda Bolton Weiser with D.A. Davidson. Your line is now open.
Hi, I'm I was just curious about the long term viewpoint on EBITDA margin I know that you've always said that your margins are high and you don't expect.
Much.
And over the long term, but I'm wondering if that viewpoint is changing at all that's my first question. Thanks.
Yeah. So I guess first thing is we've said for a very long period of time that managing our EBITDA margin in the mid Thirtys 30, 435% is.
What we feel is the right.
Balance with long term growth objectives, so as we get gross margin gains or other other gains in the P. now we would look to invest them at higher level levels are they in p. as I called out in my prepared remarks today.
Okay.
And then.
I was just curious about monistat.
Given the SKU reductions at mass you are the brand the brand leader there you're the innovator.
It is that something that you've been focusing on in terms of having.
New skews come out new products are leading the innovation there and can you just talk about a few of the things. If you have done anything on the innovation front recently thanks.
Sure you know skew changes at retail is nothing new it's something that we deal with them every year retailers make changes for.
Lots of different reasons, they're looking to shrink or expand a category, bringing something new.
Yeah to help them grow sales over time, so these things ebb and flow overtime. So in terms of Monistat. We continue to have a long term playbook, where we.
Look to connect with consumer.
The digital campaigns and other other ways to connect with the consumer to grow overtime.
Okay and just finally, thanks for the overview of your international business I didn't catch a few said, but what percentage of all of international.
No it's done through disturbed distributors.
Almost all of it has done through distributors Linda.
Oh, Okay, great. Thank you very much.
Thank you Linda.
Thank you as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Joe.
Hello, with Raymond James Your line is open.
Hi, guys. This is actually Adam on for Joe and I didn't want to build the labor de stocking, but we were kind of curious.
As you look as you look ahead to fiscal 21, <unk> would you expect the de stocking continues to impact shipments at the same rate or would it.
Roughly defer or just kind of any color on there would be helpful.
You know it it's tough to predict and again I'll go back to the comments I had earlier, which is we haven't seen any meaningful changes in the factors that are causing the retailers to take these actions. So at this point, we would anticipate.
The pace of the level to be fairly similar next year as to what we've realized this year and again, we'll given an update me on that.
Perfect. Thanks, Ron that's helpful. And then I just want asked to two smart questions. You guys have alluded to these in the past and you also mentioned a little bit earlier, but in terms of the online business could you guys.
I just mentioned again, how much the channel is up fiscal year to date through nine months here and and do you still expect to reach that 5% of total sales goal by the end of the fiscal year and a and then just revisiting capital allocation I was curious obviously guys are centered on debt, but just curious if theres anything additional there. Thank you.
Hi, Adam This is Chris How're you doing so.
Yes, I answer the online we still anticipate approaching 5% as we exit the year online continues to grow a high double digits for us and we were experiencing that thus far this year.
From a capital allocation perspective in Q4 at this point, we expect all of our free cash flow or all of our.
Occasion to go to debt or debt pay down in Q4, obviously, we're always looking opportunistically at the potential for share repurchase, but as we sit here today debt reduction will be are number one priority for Q4.
Awesome. Thanks, Chris that's all for me.
Thank you I'm not showing any further questions at this time I would now like to tend to call back.
Oh, that's our on them body for any closing remarks.
Okay.
Thanks, operator, and thank you everyone for joining us on todays call. We look forward to speaking with you again in may for our yearend results.
Good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Correct.
[music].