Q2 2023 Prestige Consumer Healthcare Inc Earnings Call

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Good day, and thank you for standing by welcome to the prestige consumer healthcare second quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session Jack.

Quick question. During this session you will need to press star one one on your telephone.

We'll then hear an automated message advising you that your hand is race.

Please be advised that this call is being recorded.

I will now turn it over to Phil Triple Lilly Vice President of Investor Relations and Treasury. Please go ahead.

Thanks, operator, and thank you to everyone who's joining us.

On the call with me are Ron Lombardi, our chairman President.

Christine Sacco our CFO .

On today's call.

First quarter fiscal 2023 results discuss our full year outlook and then take questions.

A slide presentation accompanies today's call can be accessed.

Consumer healthcare dot com clicking on the investor.

Webcast presentation.

Remember some of the information contained in this presentation today includes non-GAAP financial metrics.

Filiation for U S. GAAP financial measures are included in the earnings release and slide presentation.

On today's call management will make forward looking statements around risks and uncertainties, which are detailed.

Safe Harbor disclosure on page two of the slide presentation, which accompanies.

These are important to review and contemplate.

This environment uncertainty remains heightened due to COVID-19 supply chain constraints high inflation, various geopolitical factors, which have numerous potential impact.

It means results could change at any time in the forecasted impact of reconsidered.

That estimate based on the information available as of today's date.

Further information concerning risk factors cautionary statements are available in our most recent SEC filings and most recent company 10-K.

And I'll hand, it over to our CEO , Ron Lombardi Rob.

Thanks, Bill, let's begin on slide five.

We are encouraged by our second quarter results, which continued Q1's solid start to fiscal 'twenty three that we discussed back in August revenues of $289 million in Q2 grew over 5% organically versus the prior year.

Our leading portfolio of consumer healthcare brands remains well positioned as consumers continue to seek alpha trusted brand in today's dynamic environment.

This trend underpinned our ongoing brand building, which generated Q2's record revenue performance and was the highest in company history for the second quarter in a row.

The strong sales performance was led by our international segment and the hydraulic brand along with other areas of strength across numerous brands and categories.

Solid sales continue to translate into strong profitability generating $1 two in diluted EPS and $55 million in free cash flow in Q2.

Left our consistent cash flow profile continues to enable our disciplined long term capital allocation strategy and.

In Q2, we completed our previously authorized $50 million share repurchase program.

It's still finishing the quarter with lower leverage at three seven times.

So in summary, more than halfway through the year, we are off to a solid start building off of a record fiscal 'twenty two thanks to consistent execution of our time tested business strategy.

Now, let's turn to page six and discuss Dramamine, which is an excellent example of the long term brand building that's driven our results.

<unk> continued success driven.

Driven in large part by our principal marketing objective to never stop brand building.

Even for our brands that are synonymous with their category like Dramamine, we look to leverage consumer insights to continue to meet ever evolving healthcare needs and look for opportunities to grow the brand.

Since acquiring the brand in 2011, we have.

Candid, our leading number one market position and be a meaningful brand building and innovation in order to deepen consumers' connection to the franchise.

Our early success was driven in large part by expanding with new forms and flavors.

Launching products like less drowsy, non drowsy, and chewable chewable offerings that help match consumer needs and increased usage occasions.

But we didn't stop there and our insight work. We also heard from consumers who are treating the symptoms of motion sickness with nausea products to meet this need and fiscal 19, we began addressing the distinctive nausea market with new Dramamine nausea offerings.

Most recently with digital marketing, we've highlighted the launch of Dramamine, Ginger choose which feature a clinical dosage of ginger for great tasting non drowsy relief.

The results of these efforts is continued success for the brand.

Over the last five years Dramamine grew sales about 10% annually driving growth across both categories and winning with both consumers and retailers.

[noise] ailments like work treatment and Houston sections.

But our investments investments around messaging stretched beyond these categories shown in the lower right of the slide Goody's headache powders utilize engaging digital marketing to help explain the benefits of fast pain relief to consumers.

Meanwhile, a benefit of e-commerce is product assortment in availability, where consumers can typically find the widest assortment of products from their trusted brands.

Shown on the upper right of the slide you can see our 10 Tec content, where we have reminders around the broadest sort of offerings that can be used as part of a daily oral care routine.

Left we are making investments across all partners in e-commerce in brick and mortar, which positions us well for whatever consumers shop.

So in summary, we continue to win with consumers across E Commerce, who are investments in online content and digital advertising and are well positioned for further growth.

No I'll pass it to Chris to walk through the financial.

Thanks, Brian Good morning, everyone, Let's turn to slide nine review, our second quarter of fiscal twenty-three financial results.

As a reminder, information in today's presentation includes certain non-GAAP information is reconciled to the closest gap measure and our earnings.

Due to revenue of $289.3 million increased 4.7% versus the prior year, an increase to 5.5% excluding the effects of foreign currency.

North America revenues, where approximately flat versus prior year is.

As a reminder, we continue to face lumpy comparisons in the prior year, when we experience higher sales as consumers habits shifted most notably in travel with increased vaccination rates.

Or international segment revenues of 37.2 million dollar rough over 60 per cent in situ excluding effects.

The performance included a timing shifted certain international orders from history.

As a reminder, we experienced these quarterly timing variations in orders and shifting patterns due to the distributor nature of our international.

The remaining strength was driven by the hydro like brand strength, Ron highlighted earlier as well as strong growth for our best friends driven by higher rates of coughing called category.

G P S and EBITDA was flat and down slightly in Q2, respectively in the prior year with higher revenues, largely offsetting inflationary pressures higher interest costs.

Let's turn to fly 10 for more detail around to consolidated results.

For the first six months physical twenty-three revenues increased 2.2% versus the prior year on an organic thing.

The performance drivers were largely similar what we experienced in Q1, but the largest benefits coming from our international segment performance as well as the strength of Dramamine and robust cough and cold category.

We also continue to experienced double digit year over year growth E Commerce channel continuing the long term trend of higher online Christian.

Total company gross margin of $56 seven per cent and the first person to find 170 basis points versus last year adjusted gross margin of 58.4 per cent.

The gross margin change was anticipated and attributable to cost increases, partially offset by pricing actions across our portfolio offset the dollar amount of inflationary costs.

Continued to anticipate an approximate gross margin of 56% for fiscal twenty-three, including gross margin of just under 55% in Q3.

We continue to expect to institute additional pricing actions across our portfolio offset the dollar amount of inflationary headwinds.

Advertising and marketing came in at 14.8% for the first six months approximately flat for the prior year on a percentage of sales faces.

For fiscal twenty-three, we know anticipate and Ain't Emery closer to 13% of sales, reflecting spend at a lower percentage of sales in the second half owing to the timing of certain initiatives and reduce spending around certain categories too strong consumer demand.

TNA expenses were 9.4% of sales in the first pet.

Still anticipate full year G&A dollars to approximate prior year at around 9% of the state.

Finally diluted EPS of $2.11 compared to $2.16 in the prior year down slightly higher revenues were more than offset by the gross margin compression.

Our first half tax rate of 22.7% slightly favorable to prior period due to the timing of certain discrete tax items.

The remaining quarter, you still anticipate a tax rate of approximately 24%.

Now, let's turn to slide 11 and discuss Castro.

The first pet we generated $112.4 million in free cash flow down versus the prior year due to the timing of working capital.

Continued to maintain industry, leading free cash flow and are maintaining our outlook for the year.

That's September 30th our net debt was approximately 1.4 million dollar we maintained our covenant to find leverage ratio 3.7 times.

Do you still anticipate being below three and a half times leverage by fiscal year, and and now anticipating interest expense just over $68 million for the year.

Finally during Q2, we completed the previously authorized 50 million dollar share repurchase program in total repurchasing approximately 900000 shares the first half with that I'll turn it back to them.

Thanks, Chris, Let's turn to slide 13 to wrap up.

More than halfway through the year, we have a solid business momentum thanks to our proven business strategy and leading consumer health care portfolio.

We are reaffirming our full year, physical twenty-three outlook, which anticipates solid growth even in the current supply chain and inflationary environment for.

[noise] physical twenty-three, we continue to anticipate revenue growth of approximately 3% to 4%.

Including organic revenue growth of 2% to 3% consistent with our long term target shoot.

Two three revenues are anticipated to be approximately 271 to 274 million and approximately slap to the prior year excluding effects.

We also continued to anticipate G. P. S. A $4, an 18 cents to $4.23 for physical twenty-three for.

For Q3 G. P. S is expected to be between a dollar and a dollar too.

Slight increase versus the prior year.

Ah discipline pricing actions and cost management are helping to upset inflationary headwinds while the benefits of our strong free cash flow continues to help offset the impact of higher interest rate.

Lastly, we continued to anticipate anticipate free cash flow of 260 million or more we also still expect being below 3.5 times leverage by fiscal year N. As we continued to execute our discipline capital deployment strategy that includes that pay down.

So in summary, we remain confident we have the right business attribute and strategy to deliver results that reward our stakeholders across business environments.

With that I'll open it up for questions operator.

Thank you at this time, we will conduct a question and answer session.

As a reminder to ask a question you'll need to press star one one on your telephone and wait for your name to be announced please.

Please stand by while we compile Q&A roster.

Our first question comes from <unk> with open Highway and co. Your line is open.

Good morning, Thanks for taking my question and congrats on the corner, So I guess.

The American over the counter growth you guys had minimal growth. This quarter was there anything holding back the performance or is it just a reflection of a difficult prepare lobster.

Hey, good morning, repetitive, Chris So you hit it right. There really was the comparison when I look back this quarter was the highest level of sales that we've ever had so far North American segment. So feel good about the performance. There you know excluding at that Greg candidates in there. The second was actually up slightly you over a year.

When you when you think about the growth rate it really wasn't that prior year constantly passing it right that was the quarter everyone's got vaccinated.

Got out and returned to travel and things like that and we really benefited from that last year. So I I would say North America was really largely as we expected to the corner.

Okay, Great and then just just giving somebody can turns out the recession and concerns on a consumer any changes in consumer behavior that you guys are seeing whether you know trade down a privately right alright anything else of note this corner.

Good morning.

So far we're not seeing any meaningful change in consumer trends and at this point, we really aren't expecting any that would impact our business outside of what what we talked about today. So so far it seems to be a fairly consistent for us and our categories.

Right and then one one last question. So we've seen a number of players call out retailers have been aggressively adjusting inventory, especially in the mouth shuttle. Just curious if you guys are seeing any inventory destocking or any any similar dynamics or what other suppliers are calling up.

Yes, <unk> not in our categories and.

I mentioned this for the last couple of these earnings calls is that it seemed like an or categories. Everybody is looking for more inventory, whether it's the retailer's us or our suppliers.

As we continue to really operate in it and it challenged supply chain environment.

These days so in our categories no we're not seeing any reduction in inventory.

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

Thank you.

As a reminder to ask a question you'll need to dial star one one on your telephone.

Our next question comes from John Anderson with William Blair. John Your line is open.

Hey, good morning, everybody.

Good morning, John John .

I wanted to follow up to spare time, then quit around North America.

We externally look at you know consumption data and I noticed that can be dangerous at times and there are big disconnect perhaps between consumption shipments, particularly in any given quarter.

Just looked like a quarter, where that was the case.

<unk> you know it looked like consumption was down been single digits measured channels in the quarter, but Christmas you pointed out your your North American business, what's up no extra constant currency could you just talk a little bit more about.

You know what why that should concern us that that gap in the quarter I know you've talked a little bit about the difficult calm, but I think any anything else you could do there to kind of peel back that onions would be helpful. Thanks.

Yeah, Hi, good morning, John Chris though.

We've been saying I think every single quarter since the beginning of time that it's tricky to look at that data and there's a whole bunch of things that are excluded from that including some of our fastest growing channels and.

And geographies and so you know there can be fluctuation certainly quarter to quarter I guess, compiling on top of that lumpy period of the last couple of years right or all of the noise and movements around the Covid impacted brand. So unusual comparing since you know generally speaking.

Think we expect consumption to approximate sales on a full year basis. So that's the way we're thinking about it and how we plan for the rest of the first of the year.

Okay, and how much how much is e-commerce now as a percent of your overall business and.

Did that grow.

Kind of a mid teen raped and the third in the second quarter excuse me I know you you commented it grew at a mid teen Reagan the first half.

Hey, John Yeah. It did grow in the double digits in the second quarter and the business is about 15% of our sales now so rapid growth I think it was split with physical just a few years ago, 1% rate climbed to five during COVID-19 and doubled and that worried about 15, John and I didn't really.

Had some prepared remarks on that topic today and really the point was to emphasize we continued to do well in that channel we make investments around it we think there's an opportunity to continue to grow well in that channel.

What you're hearing from lots of other players about e-commerce.

Continues to be a great a great channel for us.

Okay.

And then just trade inventory levels around you kind of mentioned this I think in the response to the first question.

You're you're you're comfortable with retail trade inventory levels are you are you still playing catch up or are you kind of where you want to be in terms of in stocks at this point.

Yeah, both are Sir this levels and I think in stock at retail we'd like to see improve.

Over time, and we expect them to to kind of inch forward slowly again, we continue to operate in a challenging environment, even though no.

The height of Covid is behind us and a lot of ways.

[noise] supply chain is still catching up on on that so in general I think there's opportunity for improvement in stocks at retail and improvements in our service level.

Right what.

<unk>, one quick follow up well, maybe too so I'm the international business terrific quarter.

Chris you kind of address the fact that there were some tiny components to the growth.

Do you have a way for us to think about that you know how much was kind of organic demand for hydro lightning fast and how much might've been related to.

Distributor order tiny.

Yeah.

Excuse me I would say about half the beach was was timing related.

But still strong very strong performance from from the business right. As you mentioned this was a quarter where all of the previous Covid restrictions were lifted in Australia, hopefully got out and they got constant colds and so fast was up to preach drug advertising related.

Okay.

And the last one I'm pricing.

It sounds like you've taken pricing and you plan to take more pricing and my reading that right and kind of how much have you priced already and how much more do you anticipate needing.

Yeah. So at this point pricing was about half of our growth in the second quarter. We've we've been able to offset inflation dollar for dollar this quarter and we expect to for the full year. So a couple of rounds. The prices have been enacted will watch to see what we expect for our next fiscal year.

And then we feel confident that we'll be able on one dollar basis to offset inflation should we continue to see the trends are worth it.

Great. Thanks, so much congrats them Dakota.

Thanks, John .

Again task of question. Please.

Star one one on your telephone.

At this time I would now like to turn it back to wrap on body for closing remarks.

Thank you operator.

Thanks, again to everyone for joining us today, and we look forward to updating everyone again in February and have a great day.

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

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