Q3 2023 Prestige Consumer Healthcare Inc Earnings Call

February 2, 2023

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Yeah.

Good day and thank you for standing by welcome to the Q3 2023 prestige Consumer Healthcare, Inc earnings Conference call.

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Please be advised that today's conference is being recorded I would now like to handle conference over to your speaker today, Mr. Phil Triple Italy.

Sir you may begin.

Thanks, operator, and thank you everyone, who has joined today on the call me around the body, our chairman President and CEO and Christine Sacco our CFO .

In today's call to review, our third quarter fiscal 'twenty three results discuss our full year outlook and then take questions from analysts.

A slide presentation accompanies today's call can be accessed by visiting prestige consumer healthcare dot com clicking on the investors link and then on today's webcast and presentation.

Remember some of the information contained in the presentation today include non-GAAP financial measures.

Conciliations to the nearest GAAP financial measure included in the earnings release, and our 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 two of the slide presentation that accompanies the call.

These are important to review and contemplate.

Business environment uncertainty remains heightened tejas supply chain constraints high inflation, various geopolitical factors, which have numerous potential impact.

This means results could change at any time and the forecasted impact of risk considerations is our best estimate based on the information available as of today's date.

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

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

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

We are pleased with our third quarter results, which built on our first half momentum and what continues to be a dynamic supply chain and retail environment.

Revenues of $276 million in Q3 grew about 2% organically versus the prior year, thanks to our diverse portfolio of trusted brands.

Q3 revenues were driven by a continued rebound in cough cold, which I'll discuss in greater detail on the next page the Gi tract.

<unk> Dramamine brand as well as a strong international segment performance.

Solid revenue continues to translate into strong profitability generating $1 four in diluted EPS and over $50 million and free cash flow in Q3.

Even with almost $20 million and inventory investment in the quarter to support service levels and future growth.

Our consistent cash flow profile continues to enable our disciplined capital deployment strategy.

These efforts resulted in a Q3 leverage ratio of three five times, our lowest level of leverage in over a decade.

We continue to anticipate gradually lower levels of leverage overtime.

Which further enables future capital allocation optionality.

Now, let's turn to page six and discuss the cough cold category, which is experiencing extraordinary demand this fiscal year.

Our cough and cold portfolio is comprised largely of two iconic brands.

Septic and lose each with their own distinct heritage for sore throat treatment.

Chloraseptic has a heritage and efficacious sore throat sprays in Los Angeles that began in the <unk>.

Lootens goes back even further with the brand created in late 2005, hundreds today consumers continue to associate the product with its iconic great tasting cherry flavored throat drop.

This long standing history with consumers has allowed us to benefit benefit from the extraordinary demand thats driven the category this fiscal year.

Year to date, the category has grown well beyond our start of the year expectations due to illnesses throughout the year consumers being more proactive around health treatments and a low level of inventory at stores due to the supply chain environment.

The combination of these factors have enabled strong growth for both <unk> and Chloraseptic beyond what we typically expect.

As shown on the right of the page each brand has grown over 20% year to date with the potential for additional growth hindered by supply chain limitations that have capped upside for us and others in the category.

We have a clear opportunity to sell additional volume and we've taken strategic actions like adding new suppliers to keep up with this demand and we felt retailers depleted stocks.

Looking forward, although the category is smaller as a percent of total company sales, we anticipate a strong demand to continue through the balance of the year and these strategic actions helping to position. These brands for long term growth.

With that I'll pass it to Chris to walk through the financials.

Ron Good morning, everyone.

Let's turn to slide eight and review our third quarter fiscal 'twenty three financial results.

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

Q3 revenue of $275 $5 million increased 40 basis points versus the prior year and increased one 8% excluding the effects of foreign currency.

North America revenues were down approximately 1% versus prior year, excluding currency with sharp increases in the cough and cold and gastrointestinal category offset by declines in the women's health and I in air care category.

Our international segment revenues of $38 $6 million were up over 25% in Q3, excluding FX the.

The performance included broad based strength across regions and product categories.

EBITDA and EPS were up 4% and 5% in Q3, respectively from the prior year with inflationary pressures and higher interest costs more than offset by higher revenues and lower marketing spend.

Let's turn to slide nine for more detail around year to date consolidated results.

For the first nine months fiscal 'twenty, three revenues increased 2% versus the prior year on an organic basis.

The performance drivers were largely similar to what we experienced in Q3 with the largest benefits coming from our international segment performance.

A dramamine and robust cough and cold category growth.

We also continued to experience solid year over year growth in the ecommerce channel continuing the long term trend of higher online purchasing.

Total company gross margin of 56% in the first nine months declined 170 basis points versus last year's adjusted gross margin of 57, 7%.

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

For Q4, we anticipate a gross margin of approximately 54, 5%.

Advertising and marketing came in at 13, 6% for the first nine months down versus 14, 7% in the prior year as a percentage of revenue.

As a reminder, we anticipate the spend for the year of about 13% of revenue, owing primarily to the timing of initiatives and reduced spending around certain categories due to strong consumer demand.

G&A expenses were nine 5% of revenue for the first nine months, we still anticipate full year G&A dollars to approximate prior year at around 9% of revenue.

Finally diluted EPS of $3 14, compared to $3 15 in the prior year as higher revenues were more than offset by the gross margin compression just discussed.

Our year to date tax rate of 23% was slightly favorable to prior periods due to the timing of certain discrete tax items.

We still anticipate a Q4 and long term normalized tax rate of approximately 24%.

Now, let's turn to slide 10, and discuss cash flow.

In the first nine months, we generated $165 5 million and free cash flow down versus the prior year.

Although quarterly variations can be affected by the timing of working capital beyond. This we have strategically invested behind the inventory in light of the current supply chain environment, finding opportunities, where we can increase inventory to better support targeted service levels.

This is the primary driver to our updated free cash flow guidance for the year of $220 million.

Our stable EBIT margins enable consistent and strong free cash flow generation and as a result, we have the ability to invest behind our brands to support increased levels of customer service through working capital investments without derailing deleveraging efforts and target.

We anticipate Q4 free cash flow of about $55 million and year end leverage below three five times, reflecting our disciplined capital deployment strategy that includes debt pay down.

Looking beyond this inventory step up and related cash flow timing, we anticipate a more normalized free cash flow profile in fiscal 'twenty, four and we'll provide a full outlook in may.

At December 31, our net debt was approximately $1 4 billion and we maintained a covenant defined leverage ratio of three five times.

We now anticipate interest expense of $69 million for the year, owing to the timing of debt Paydown.

With that I'll turn it back to Ron.

Thanks, Chris, Let's turn to slide 12 to wrap up.

With just one quarter to go in the year, we are refining our outlook, our proven business strategy and leading consumer health care portfolio are enabling us to grow within our original outlook range for the year, even in the current supply chain and inflationary environment, we and others are facing.

Fiscal 'twenty three we anticipate revenue growth of approximately 3% on both a reported and organic basis consistent with our long term target.

Q4 revenues are anticipated to be approximately 278 million to $280 million translating into growth of mid single digits versus the prior year.

We anticipate EPS of $4 18 for fiscal 'twenty, three which implies Q4 EPS of $1 four.

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

Lastly, we now anticipate free cash flow of $220 million or more reflecting the strategic increases in inventory investments that Chris just discussed.

So in summary, our business strategy is working with one quarter to go we anticipate solid fiscal 'twenty three growth with record revenue and earnings that builds on our strong fiscal 'twenty two despite a dynamic market backdrop.

Also expect this momentum to result in continued growth in fiscal 'twenty, four which will provide our full outlook on in may.

We remain confident in our business attributes and that our strategy is set up to reward our stakeholders over the long term.

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

Thank you.

As a reminder to ask a question. Please press star one on your phone and wait for your name to be announced to withdraw. Your question. Please press star one again standby as we compile the Q&A roster.

One moment, please our first question.

And our first question will come from Susan Anderson of Canaccord Genuity. Your line is open.

Hi, nice job on the quarter. Thanks for taking my question.

I was wondering if you can just to follow up on the supply chain. Obviously, there was some really strong sell throughs and constant cold I'm curious.

Are you guys seeing still.

<unk> demand imbalances in the store do you guys feel like I guess, maybe if you could talk about by category too.

That the in stocks are getting better in the out of stocks fewer as we kind of look forward through the rest of the year.

Sure. Thanks, Susan good morning.

The supply chain, we've been talking about that topic I think on just about every one of these calls for a good year now.

I think the positive thing is as we've been able to keep up with record demand.

For our business through last year and through the through this year, so far but we are seeing certain categories that are challenged to keep up.

With demand and cough cold is a clear example of that situation for us and quite frankly for many other players in the cough cold category and you can see that shelf.

Retail.

We mentioned.

In the prepared remarks that we brought on some additional liquid illiquid supplier to help with capacity there going forward, but it's clearly a category where we see limitations.

The other thing I'll call out during the third quarter was our eye care category was another example, where despite good continuity of supply so far through the year, the third quarter actually saw slowdown.

And impacted our shipments there and something we're expecting into the into the fourth quarter. So I think the important note here on the supply chain is that we continue to operate in a challenged environment.

We've been trying to add to inventory for a good year now we made some progress in Q4 really is the way to add buffered too.

Categories that are doing well and get ourselves.

In a good position to support continued growth next year and improve our service levels.

Great. That's really helpful. And then maybe if I could just add one more on the international business. So another strong quarter there maybe.

Maybe if you could just talk about kind of the trends youre seeing there, particularly hydro light and how you're expecting that to play out the rest of the year.

Yes. Good morning, Susan This is Chris So Youre right International had another really strong performance coming off of a record year last year right and so <unk>.

A little bit.

With illnesses.

But we saw strong performance across all regions not just Australia in the third quarter. So we feel good about hydro and are up to about 10% household penetration on hydro light, which is a few points over the last couple of years, which is quite good but obviously at 10% household penetration still plenty of room to go. So we've continued to feel good about the growth.

Aspects internationally, and we target remember our long term growth rate of about 5% internationally.

We feel pretty confident about that going forward.

Great that sounds good. Thanks, so much I'll, let someone else jump and good luck the rest of the year.

Thank you.

One moment please for our next question.

And our next question will come from <unk> Party.

Oppenheimer <unk> company your line is open.

Good morning, and thanks for taking my question. So I just wanted to go back to the full year guidance. If you can just give more color in terms of the sales reduction to the lower end of the range in terms of what drove that and then also for EPS. It looks like higher interest expense may have had an impact on the EPS range. Thank you.

Yes, Hi, Rick peso the guide.

Reported guide going from 4% growth to 3% growth is really FX driven we've seen some currency headwinds as a reminder for us that.

In particular, the Australian and Canadian dollar there has been a lot of movement, particularly in the third quarter and the Australian dollar in particular so from.

From an EPS perspective, as we just talked about right. We narrowed our original sales guide to the lower end of the range.

There is some currency headwinds sitting in the P&L. That's in other expense related to the currency headwinds I just discussed and then interest got called out just about $1 million for Q4, just given the timing of some of the rate hikes and the pay down. So those are the main drivers of the EPS, calling down to the lower end of the range, but still within the targeted range.

Okay, Great and then just in terms of the categories that you guys called out as weaker women's health and iron ore care. When do you expect those categories to improve is that something Q4 next year, maybe just some thoughts there.

So let's talk about those both individually starting with with eye care eye and ear.

We actually continue to have great momentum in that category consumption is good sales are good as I mentioned to response to Susan's question. The issue in the third quarter for US is really all about supply chain impact and we expect a bit of that into the fourth quarter as well.

And then on women's health, we've actually seen a decline in the total category again, we continue to see.

Consumer changes.

As a result of Covid and everything else that's been going on in particular.

Women going back to the Doctor's office impacting the <unk>.

East infection category and continued impact on the on the go.

Portion of the Summer's Eve business so.

Again, it's easy to forget, but we're really in year three of three years of destruct disrupted.

Factors on the business.

In some cases, it's comps versus a funny number last year in some cases, it's the continuation of a change in consumer habits happen habits or.

Continuing to chase supply to keep up with with demand.

Great and then maybe one just one last question. So I know you're not ready to provide FY 'twenty for guidance, but I'm. Just curious is there any puts and takes you can share at this point and I am curious just on A&M I know this year. It went down to 13% of sales do you expect that to be a larger percentage of sales next year. Thank you.

So let me start I guess with a comment on overall momentum of the business I think I said on our prepared remarks today, we continue to feel good about the positioning of the business.

The consumption trends behind many of many of our brands.

We feel that we're positioned for continued growth in fiscal 'twenty four after.

Two record years top and bottom line in a row.

And I'll, let Chris comment on A&M for next year sure. So obviously more details to come in May <unk>, but we always talk about our A&M plant is being built up from the bottom with our marketing teams right we talked about.

More to come next year on A&M spend is always driven by the timing of initiatives and new product launches and a whole bunch of variables, but we'll give you more details in a few months here.

Great. Thank you I'll pass it along.

Great. Thanks, Chris.

One moment. Please next question.

And our next question will come from Jon Andersen of William Blair. Your line is open.

Thank you and good morning, everybody.

Good morning, John .

I guess on the inventory.

Step up the strategic investment in inventory.

Is that.

Really.

Kind of a short term remedy for.

Some of the supply chain disruption or constraints I should say.

You are experiencing.

Juxtaposed against the strong demand for things like cough cold.

Or is there also a.

Longer term element to it in terms of retailers looking for.

Higher order fill rates or.

Tighter delivery windows I'm, just trying to understand the.

Kind of the reasoning behind it.

Yes.

The first driver is to better align ourselves to meet our retail customers.

Service requirements.

Part of it is that it's really short term in nature John .

As I said earlier, we've been looking to try to build inventory to give us a better buffer for the next hiccup in the supply chain and supply chains out there in general continue to be impacted by Covid impacting workforces.

Not only at their own facilities, but if theyre at our supplier suppliers, whether it's cardboard or an API or whatever it is all it takes is one missing.

Thing in the supply chain to disrupt finished goods, whether it's a labor pilot or an API. So we've been focused on trying to give ourselves a better buffer.

For the next shoe to drop that that we don't know about as.

As we get into fiscal 'twenty, four and we begin to learn more about.

How.

How things are stabilizing we'll adjust inventory back down.

Over time, but right now, it's all about getting that buffer in and being better positioned not only to meet service requirements, but to take advantage of those growth opportunities and as I mentioned with the cough cold we brought on a second chloraseptic Luton supplier actually got the first shipments I think the last week or two of <unk>.

<unk>, so we're chasing things out there John .

Okay. That's helpful.

Gross margin.

Sure.

Stepped down a little bit sequentially again.

In the quarter and I think Chris you mentioned.

The gross margin you expect for the fourth quarter is kind of similar to what you just experienced in the third quarter.

And I understand the math driving this I think is the cost increases juxtaposed again against the price increases.

But do.

Do you think we've kind of leveled off at this point.

In terms of gross margin performance and.

Is there.

Potential for some recovery.

As you look to 2024, and 2025 I'm not sure what would drive that recovery per se, but.

Any thoughts around that would be helpful.

Yes, John I would just say gross margin is largely coming in in line with our with our expectations right and you are right Q4 being consistent with what we saw here in Q3.

I think of so if I start with about a 56% gross margin as the base rate will continue excuse me, we'll continue to look for opportunities to take pricing actions that can also come in the form of new product development as it has historically.

Which is a big focus for our company as you know.

In addition to continued multi year cost savings projects that we have going on so we've talked about in this environment going forward are you looking at things a little bit differently than we've been operating for the last few years.

That cost savings will come in many different forms going forward.

Certainly we've talked about not having a structural issue with our gross margin. So we'll be looking to increase our gross margin over time and reinvest those dollars into into A&M to maintain our EBIT margin as we always say.

Great. Thanks.

One follow up.

I think rod round, starting this year, you think you talked about the possibility of.

Perhaps shipping a bit ahead of consumption.

In fiscal 'twenty three.

There is still a need to.

Establish a better in stock levels.

Maybe across certain categories coming out of the pandemic it kind of feels like you might be in that same.

Situation right now as you kind of look to 2024, it is 2024 year, where.

Net net you think it's possible that you might there might be a little bit of a benefit from restocking.

Given given where you sit today thanks.

Yes, we started 23.

We were focused on trying to to recover and improve some of the out of stocks and service levels.

We didn't make the progress that we would've liked to hence the focus on continuing to build that inventory buffer as we head into <unk> into 'twenty. Four we think that will likely be the case again, where there is more opportunity for inventory recoveries or builds at retail then going the other way.

Thanks, so much congrats on the quarter.

Sure. Thanks, John .

Thank you.

One moment for our next question.

And it looks like our next question will come from Mitchell Pinheiro of Durbin dividend and company. Your line is open.

Hey, good morning.

Just a couple of questions here.

Did that Alex stocks affect you in any of your categories.

Yes.

Cold.

And in certain Skus in the ear and eye category or the big big cost for us as well as Gaviscon up in Canada as well.

Okay.

In terms of.

Having an impact on your revenue was it was it significant was it just a couple of percent or any way to.

To put a number on that.

Yes, Mitch this is Chris I wouldn't say it was material to the quarter in terms of sales and what we're seeing largely as you know.

Our skew our brand goes out goes out of stocks, we've refill it it goes out of stack again, we refill. It now it's another brand. So this concept that Ron mentioned about us wanting to make sure we have enough inventory on hand to provide a more consistent level of supply for unanticipated disruptions in the supply chain.

Speaks to exactly what we're experiencing which is a bit of a game of whack a mole if you will but.

Despite that I guess I would still just highlight that we had strong sales for the quarter. So having the diversified portfolio has really.

Enabled that and helped us this year.

And then also on the revenue line.

Price increases accounted for for what percent of the growth.

Yes. So we're still we had originally guided pricing to be about two thirds of our growth for the year.

And we're still on target might be slightly above that in terms of pricing for the year. So, but that's the way to think about pricing for the period.

Okay and then.

Ron you had mentioned.

<unk>.

Hi.

You anticipate lower levels of leverage over time.

I don't understand.

Does that mean.

Does that mean that.

Acquisition growth slows a little bit.

Or is there anything implied bear with that.

Great.

No and I think a great example is what we did last year with the Acorn acquisition. So we were able to do $225 million acquisition in the year added to our eye care.

Platform and still reduce leverage by about a half a point last year. So.

I think really the message is that one as we get bigger.

And generate increased levels of cash flow and lower our debt over time. It gives us the ability to do transactions and not go back to the peak levels of leverage we saw historically as we were building building the business.

In terms of.

M&A if there is a compelling opportunity out there it is really our job to figure out how to get it done within the right leverage profile.

For for the company. So that's how we think about it it's not really describing any limiter for us Mitch.

Okay got it that's all I have thank you.

Thank you.

And one moment please for our next question.

Our next question will come from Anthony <unk>.

<unk> <unk> Sidoti <unk> Company LLC Your line is open.

Alright. Good morning. This is to farm Bureau, and for Anthony Alright, guys growing.

Good morning.

My first question is can you comment on the level of pricing actions.

During the quarter.

Sure. So we had announced pricing back at the beginning of the year really.

For some of our brands have gone through a second round of pricing.

Talked about two thirds of our growth. This year is expected to come from pricing, which is essentially.

Essentially with cost savings offsetting our inflationary pressures on a dollar for dollar basis for the year. So we talked about that being in the $15 million to $20 million range for the year, so the pricing that <unk>.

Through earlier in the year certainly helped in the quarter.

Thank you.

Second question is given the slower economy are you guys seeing any meaningful changes to consumer behavior.

Which categories.

Okay.

In our categories, what we've seen over time is that it tends to be the one of the last areas that might be impacted by a slowing economy or pinched.

Pinched wallets by the average consumer right with you wake up and somebody is sick in your household or you don't feel well it isn't something that you generally look.

<unk> phone or forget.

About <unk>.

Continues to be an opportunity where you look for that trusted brand to take care of your health. So.

It's something we continue to monitor and take a look at but at this point, we don't see it impacting our business.

Okay. Thank you.

Our module E Commerce now as a percentage of revenue and what was the growth rate in the quarter.

Yes E Com is now about 15% of our sales.

The growth has been continued to be strong in the high single digits.

Thank you.

And lastly, I'm not sure if you guys answered, but it looks like you guys adjusted guidance and I was just wondering why you guys.

While the company is adjusting the guidance with R&D group.

I don't know if I missed our department stores.

Yes, so sure.

Sure.

We did today as we narrow the original guide that we had to the lower end of the range on the topline we.

We talked about FX impacting the top line results a little worse than it worsened a bit this quarter from our previous expectations in the EPS guide at the lower end of the range really reflecting the topline we just talked about.

Alright. Thank you so much thank you for taking my questions.

Thanks.

Thank you.

One moment. Please our next question.

Okay.

And our next question will come from Linda Bolton Weiser of D. A Davidson your line is open.

Hi, good morning.

So on the question of innovation I was just curious what you consider to be a venue most significant innovation in FY2023.

For FY 'twenty for in General do you expect a similar level of innovation and drive revenue or higher or lower.

Good morning, Linda.

If you look across our portfolio, it's kind of hard to pick pick one right.

If you look at.

At our Dramamine business, we've had a string of great.

Great success expanding into nausea in 23, we saw a number of the nausea products continued to do really well.

As one example compound W. Is another example, where the recent launches of technology have done well there.

As a couple of examples.

We look to have a consistent pipeline of new products and innovation to come out every year.

So 24 will be no different than we've seen over the last few years with a steady pipeline and we generally don't talk about the things until they get out in the market for obvious reasons. So we continue to feel good about the efforts and the results in our NPD pie.

Pipeline.

Okay.

Then.

Yes.

And your business, we would rarely hear about being sort of supply chain glitches and hiccups on everything but of course now, it's becoming a little bit more of a frequent thing does that change your view on having more internal manufacturing and maybe you could update US do you still have that Lynchburg, Virginia facility and what wasn't.

Going on there what's manufactured there and what's the capacity like in that facility.

Yes.

We still think that our business model of <unk>.

Working and partnering with third party suppliers and.

Having the Lynchburg facility.

Is the right mix Lynchburg makes about 15% or so of our total revenue its a liquid mix infill focused facility.

And does a great job for us.

One thing that we have learned during COVID-19 is that as the supply chain environment has evolved and changed we've had to change the way that we that we partner with our suppliers. So over the last couple of years, we've done things like make investments at the suppliers for additional tooling.

Our additional lines to get dedicated capacity.

We've also look to add additional suppliers and I use that core septic liquid.

Supplier as an example, where in the past we were comfortable with one.

Main supplier on that on that Chloraseptic.

Product offering now we want to have to see.

So we're going to continue to think about different ways to partner.

To add robustness in the supply chain as a result of the new world that we're operating in.

Okay. Thanks, a lot take care.

Hey, Thank you and good day.

Thank you.

Again to ask a question. Please press star one on your phone and wait for your name to be announced to.

Withdraw your question. Please press star one again.

Please go to our next question.

Our next question will come from Carla Casella of Jpmorgan. Your line is open.

Hi, This is Oliver <unk> on for Carla.

Just to piggyback off the prior question on the gross product profit margins that kind of sequential decline.

There are component of that was related to a tick up in promotions in any category.

<unk>.

Are you experiencing any retailer pushback on pricing.

Yes, so in our categories right not a lot of promotion to drive consumers because they are.

Linked linked to incidences. So the answer is no. The gross margin was not impacted by the timing or increased promotional activity.

I apologize.

Missed the second part of that question yes.

Margin really relates to the cost inflation that we've been talking about for the whole year. So thats, partially offset socs that dollar for dollar by pricing, but from a margin perspective, that's still lowers the overall percentage and that's really where we are in Q3 and Q4, yes.

Yes.

The second part with any pushback from retailers on pricing.

Yes, we haven't seen pushback from retailers on pricing I guess that the environment is such that everyone is facing inflationary pressures and everyone is going to to retailers with the pricing and quite frankly, they've got they've got.

Cost inflation on the labor side and such for themselves. So.

So far we have not seen significant pushback from the retailers now.

And just one more question do you have any.

Our initial thoughts on timing potentially on refinancing your 2014 months.

So the term loan goes straight through to 2027. So we will continue to kind of actively look at that if you are referring to our revolver ABL.

That is maturing at the end of 2024, and we will continue to kind of look at that.

Honestly, a much different structure than the term loan, but we'll be opportunistic on both.

Thank you very much.

Thank you.

And Im seeing no further questions in the queue I would now like to turn the conference back to Ron Lombardi for.

For closing remarks.

Thank you operator, and thanks to everyone for joining us today, and we look forward to providing an update in may on our finish to fiscal 'twenty, three and our outlook for fiscal 'twenty four thanks, again and have a good day.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

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[music].

Good day and thank you for standing by welcome to the Q3 2023 prestige Consumer Healthcare, Inc earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your phone.

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Please be advised that today's conference is being recorded I would now like to handle conference over to your speaker today, Mr. Phil Chipotle.

Sir you may begin.

Thanks, operator, and thank you to everyone who has joined today on the call with me are Ron Lombardi, Our chairman, President and CEO and Christine Sacco our CFO .

On today's call to review, our third quarter fiscal 'twenty three results discuss our full year outlook and then take questions from analysts.

A slide presentation accompanies today's call can be accessed by visiting prestige consumer healthcare dot com clicking on the investors link and then on today's webcast and presentation.

Remember some of the information contained in the presentation today include non-GAAP financial measures.

Conciliations to the nearest GAAP financial measure included in the earnings release, and our slide presentation.

These are important to review and contemplate.

Business environment uncertainty remains heightened tejas supply chain constraints high inflation, various geopolitical factors, which have numerous potential impact.

This means results could change at any time and the forecasted impact of risk considerations is our best estimate based on the information available as of today's date.

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

I'll now hand, it over to our CEO , Ron Lombardi Ross.

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

We are pleased with our third quarter results, which built on our first half momentum and what continues to be a dynamic supply chain and retail environment.

Revenues of $276 million in Q3 grew about 2% organically versus the prior year, thanks to our diverse portfolio of trusted brands.

Q3 revenues were driven by a continued rebound in cough cold, which I'll discuss in greater detail on the next page the Gi segments Dramamine brand as well as a strong international segment performance.

Solid revenue continues to translate into strong profitability generating $1, four and diluted EPS and over $50 million and free cash flow in Q3.

Even with almost $20 million and inventory investment in the quarter to support service levels and future growth.

Our consistent cash flow profile continues to enable our disciplined capital deployment strategy.

These efforts resulted in a Q3 leverage ratio of three five times, our lowest level of leverage in over a decade.

We continue to anticipate gradually lower levels of leverage over time.

Which further enables future capital allocation optionality.

Now, let's turn to page six and discuss the cough cold category, which is experiencing extra ordinary demand this fiscal year.

Our cough and cold portfolio is comprised largely of two iconic brands.

Aseptic and lose each with their own distinct heritage for sore throat treatment.

Chloraseptic has a heritage and efficacious sore throat sprays and lozenges that began in the <unk>.

Lootens goes back even further with a brand created in late <unk> hundred's today consumers continue to associate the product with us iconix, great tasting Cherry flavored throat drop.

This long standing history with consumers has allowed us to benefit benefit from the extraordinary demand that's driven the category this fiscal year.

The combination of these factors has enabled strong growth for both <unk> and Chloraseptic beyond what we typically expect.

We have a clear opportunity to sell additional volume and we've taken strategic actions like adding new suppliers to keep up with this demand and resell retailers depleted stocks.

Looking forward, although the category as small as a percent of total company sales, we anticipate strong demand to continue through the balance of the year and these strategic actions helping to position. These brands for long term growth.

With that I'll pass it to Chris to walk through the financials.

Ron Good morning, everyone.

Let's turn to slide eight and review our third quarter fiscal 'twenty three financial results.

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

Q3 revenue of $275 $5 million.

Increased 40 basis points versus the prior year and increased one 8% excluding the effects of foreign currency.

Our international segment revenues of $38 $6 million were up over 25% in Q3, excluding FX the performance.

<unk> included broad based strength across regions and product categories.

EBITDA and EPS were up four 5% in Q3, respectively from the prior year with inflationary pressures and higher interest costs more than offset by higher revenues and lower marketing spend.

Let's turn to slide nine for more detail around year to date consolidated results.

For the first nine months fiscal 'twenty, three revenues increased 2% versus the prior year on an organic basis.

The performance drivers were largely similar to what we experienced in Q3 with the largest benefits coming from our international segment performance.

A dramamine and robust cough and cold category growth.

We also continued to experience solid year over year growth in the ecommerce channel continuing a long term trend of higher online purchasing.

Total company gross margin of 56% in the first nine months declined 170 basis points versus last year's adjusted gross margin of 57, 7%.

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

For Q4, we anticipate a gross margin of approximately 54, 5%.

Advertising and marketing came in at 13, 6% for the first nine months down versus 14, 7% in the prior year as a percentage of revenue.

As a reminder, we anticipate spend for the year of about 13% of revenue, owing primarily to the timing of initiatives and reduced spending around certain categories due to strong consumer demand.

G&A expenses were nine 5% of revenue for the first nine months, we still anticipate full year G&A dollars to approximate prior year at around 9% of revenue.

Finally diluted EPS of $3 14, compared to $3 15 in the prior year as higher revenues were more than offset by the gross margin compression just discussed.

Our year to date tax rate of 23% was slightly favorable to prior periods due to the timing of certain discrete tax items.

We still anticipate a Q4 and long term normalized tax rate of approximately 24%.

Now, let's turn to slide 10, and discuss cash flow.

In the first nine months, we generated $165 5 million and free cash flow down versus the prior year.

This is the primary driver to our updated free cash flow guidance for the year of $220 million.

Our stable EBIT margins enable consistent and strong free cash flow generation and as a result, we have the ability to invest behind our brands to support increased levels of customer service through working capital investment without derailing deleveraging efforts and target.

We anticipate Q4 free cash flow of about $55 million and year end leverage below three five times, reflecting our disciplined capital deployment strategy that includes debt paydown.

Looking beyond this inventory step up and related cash flow timing, we anticipate a more normalized free cash flow profile in fiscal 'twenty, four and we'll provide a full outlook in may.

At December 31, our net debt was approximately $1 4 billion.

And we maintained a covenant defined leverage ratio of three five times.

We now anticipate interest expense of $69 million for the year, owing to the timing of debt Paydown.

With that I'll turn it back to Ron.

Thanks, Chris, Let's turn to slide 12 to wrap up.

For fiscal 'twenty, three we anticipate revenue growth of approximately 3% on both a reported and organic basis consistent with our long term target.

Q4 revenues are anticipated to be approximately 278 million to $280 million translating into growth of mid single digits versus the prior year.

We anticipate EPS of $4 18 for fiscal 'twenty, three which implies Q4 EPS of $1 four.

Lastly, we now anticipate free cash flow of $220 million or more reflecting the strategic increases in inventory investments that Chris just discussed.

Fiscal 'twenty, four which will provide our full outlook on in May.

We remain confident in our business attribute and that our strategy is set up to reward our stakeholders over the long term.

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

Thank you.

One moment, please our first question.

And our first question will come from Susan Anderson of Canaccord Genuity. Your line is open.

Hi, nice job on the quarter. Thanks for taking my question.

I was wondering if you just to follow up on the supply chain. Obviously, there were some really strong sell throughs and constant cold I'm curious.

Are you guys seeing still.

<unk> demand imbalances in the store do you guys feel like I guess, maybe if you could talk about by category too.

And that the in stocks are getting better in the out of stocks fewer as we kind of look forward through the rest of the year.

Sure. Thanks, Susan good morning.

The supply chain, we've been talking about that topic I think on just about every one of these calls for a good year now.

I think the positive thing is as we've been able to keep up with record demand.

For our business through last year and through the through this year, so far but we are seeing certain categories that are challenged to keep up.

With demand and cough cold is a clear example of that situation for us and quite frankly for many other players in the cough cold category and you can see that shelf when you go to retail.

We mentioned.

In the prepared remarks that we brought on some additional liquid illiquid supplier to help with capacity there going forward, but it's clearly a category where we see limitations.

We've been trying to add to inventory for a good year now we made some progress in Q4 really is a way to add buffer to the categories that are doing well and get ourselves in a good position to support continued growth next year and improve our service levels.

Great. That's really helpful. And then maybe if I could just add one more on the international business. So another strong quarter there.

Maybe if you could just talk about kind of the trends youre seeing there, particularly hydro lie and how you're expecting that to play out the rest of the year.

Yes. Good morning, Susan This is Chris. So you are right International had another really strong performance coming off of a record year last year, right and so helped a little bit with illnesses.

Opex internationally, and we target remember our long term growth rate of about 5% internationally.

We feel pretty confident about that going forward.

Great that sounds good. Thanks, so much I'll, let someone else Kathryn good luck the rest of the year.

Thank you.

One moment please for our next question.

And our next question will come from <unk> <unk> of Oppenheimer <unk> Company. Your line is open.

Yeah, Hi, <unk> so the guide.

Reported guide going from 4% growth to 3% growth is really FX driven.

<unk> seen some currency headwinds as a reminder for us that.

In particular, the Australian and Canadian dollar there has been a lot of movement, particularly in the third quarter and the Australian dollar in particular, so from an EPS perspective, as we just talked about right. We narrowed our original sales guide to the lower end of the range.

So let's talk about those both individually starting with with Eyecare eye and ear.

And then on women's health, we've actually seen a.

Decline in the total category again, we continue to see.

Consumer changes.

As a result of Covid and everything else that's been going on in particular.

Women going back to the Doctor's office impacting the east infection category and continued impact on the on the go.

A portion of the Summer's Eve business so.

Again.

It's easy to forget, but we're really in year three of three years of disrupt disrupted.

Factors on the business and.

In some cases, it's comps versus a funny number last year in some cases, it's the continuation of <unk>.

The change in consumer habits happen habits or.

Continuing to chase supply to keep up with demand.

Great and then maybe one just one last question. So I know you're not ready to provide FY 'twenty for guidance, but I'm. Just curious is there any puts and takes you can share at this point and I am curious just on A&M I know this year I went down to 13% of sales. If you expect that to be a larger percentage of sales next year. Thank you.

Yes, So let me start I guess with a comment on overall momentum of the business I think I said on our prepared remarks today, we continue to feel good about the positioning of the business.

The consumption trends behind many of many of our brands and we feel that we're positioned for continued growth in fiscal 'twenty four after too.

Two record years top and bottom line in a row.

I'll, let Chris comment on A&M for next year sure. So obviously more details to come in <unk>, but we always talk about our A&M plant is being built up from the bottom with our marketing teams right we talked about.

Additional A&M support being pulled a little bit this year really related to categories, where we have strong demand regardless of our investment and I would couple that with our ability to provide supply in this environment that we're talking about so more to come next year on A&M spend is always driven by the timing of initiatives and new product launches and a whole bunch.

Variables, but we'll give you more details in a few months here.

Great. Thank you I'll pass it along.

Great. Thanks, Chris.

Thank you.

One moment. Please next question.

And our next question will come from Jon Andersen of William Blair. Your line is open.

Thank you and good morning, everybody.

Good morning, John .

I guess on the inventory.

Step up the strategic investment in inventory.

Is that.

Really.

Kind of a short term remedy for.

Some of the supply chain disruptions or constraints I should say.

You are experiencing.

Juxtaposed against the strong demand for things like cough cold.

Or is there also a.

Longer term element to it in terms of retailers looking for.

Higher order fill rates or.

Tighter delivery windows I'm, just trying to understand the.

Kind of the reasoning behind it.

Yes.

The first driver is to better align ourselves to meet our retail customers.

Service requirements.

Part of it is that it's really short term in nature John .

Not only at their own facilities, but they are at our supplier suppliers, whether it's cardboard or an API or whatever it is all it takes is one missing.

Thing in the supply chain to disrupt finished goods, whether it's a label a pallet or an API. So we've been focused on trying to give ourselves a better buffer.

For the next shoe to drop that that we don't know about as.

As we get into fiscal 'twenty, four and we begin to learn more about.

How things are stabilizing we'll adjust inventory back down.

Over time, but right now, it's all about getting that buffer in and being better positioned not only to meet service requirements, but to take advantage of those growth opportunities and as I mentioned with the cough cold we brought on a second chloraseptic gluten supplier actually got the first shipments I think last week or two of.

<unk>, so we're chasing things out there John .

Okay. That's helpful.

Gross margin.

Sure.

Stepped down a little bit sequentially again in the quarter and.

I think Chris you mentioned the gross margin you expect for the fourth quarter is kind of similar to what you just experienced in the third quarter.

And I understand the math.

Driving this I think.

Cost increases juxtaposed again against the price increases.

Bob.

But.

Do you think we've kind of leveled off at this point.

In terms of gross margin performance and.

Is there.

Potential for some recovery.

As you look to 2024, and 2025 I'm not sure what would drive that recovery per se, but.

Any thoughts around that would be helpful.

Yes, John I would just say gross margin is largely coming in in line with our with our expectations right and you are right Q4 being consistent with what we saw here in Q3.

Which is a big focus for our company as you know.

That cost savings will come in many different forms going forward.

Alright. Thanks.

One follow up.

I think rod Rod it starting this year, you think you talked about the possibility of.

Perhaps shipping a bit ahead of consumption.

In fiscal 'twenty three.

There is still a need to.

Establish a better in stock levels.

Maybe across certain categories coming out of the pandemic it kind of feels like you might be in that same.

Situation right now as you kind of look to 2024, it is 2024 year, where.

Net net you think it's possible that you might there might be a little bit of a benefit from restocking.

Given given where you sit today.

Yes, we started 23.

We were focused on trying to to recover and improve some of the out of stocks and service levels.

Thanks, so much congrats on the quarter.

Sure. Thanks, John .

Thank you.

One moment for our next question.

And it looks like our next question will come from Mitchell Pinheiro of Durbin dividend <unk> Company. Your line is open.

Hey, good morning.

From there just a couple of questions here.

Did that donlin stocks affect you in any of your categories.

Yes.

Cold.

And in certain Skus in the ear and eye category are the big big cost for us as well as Gaviscon up in Canada as well.

Okay.

In terms of.

Having an impact on your revenue was it was it significant was it just a couple of percent or any way to.

To put a number on that.

Yes, Mitch this is Chris I wouldn't say it was material to the quarter in terms of sales and what we're seeing largely as you know.

Our skew our brand goes out of goes out of stocks, we have refill. It it goes out of stack again, we refill. It now it's another brand. So this concept that Ron mentioned about wanting to make sure we have enough inventory on hand to provide a more consistent level of supply for unanticipated disruptions in the supply chain.

Speak to exactly what we're experiencing which is a bit of a game of whack a mole if you will but.

Despite that I guess I would still just highlight that we had strong sales for the quarter. So having the diversified portfolio has really.

Enabled that and helped us this year.

And then also on the revenue line.

Price increases accounted for for what percent of the growth.

Yes. So we're still we had originally guided pricing to be about two thirds of our growth for the year.

And we're still on target might be slightly above that in terms of pricing for the year. So, but that's the way to think about pricing for the period.

Okay and then.

Ron you had mentioned.

<unk>.

Hi.

You anticipate lower levels of leverage over time.

I don't understand.

Does that mean.

Does that mean that you know.

Acquisition growth slows a little bit.

Or is there anything implied bear with that.

Got it.

No and I think a great example is what we did last year with the Acorn acquisition. So we were able to do $225 million acquisition in the year added to our eye care.

Platform and still reduce leverage by about a half a point last year. So.

I think really the message is that one as we get bigger.

In terms of.

M&A, if there is a compelling opportunity out there, it's really our job to figure out how to get it done within the right leverage profile.

For for the company. So that's how we think about it it's not really describing any limiter for us Mitch.

Okay got it alright, that's all I have thank you.

Thank you.

One moment please for our next question.

Our next question will come from Anthony <unk>.

<unk>.

Adobe <unk> company LLC Your line is open.

Alright. Good morning. This is to farm Bureau in for Anthony.

Are you guys growing.

Good morning, Hi.

My first question is can you comment on the level of pricing actions.

During the quarter.

Sure. So we had announced pricing back at the beginning of the year really for some of our brands have gone through a second round of pricing.

<unk> talked about two thirds of our growth. This year is expected to come from pricing which is.

Rolled through earlier in the year.

Helped in the quarter.

Thank you.

Second question is given the slower economy are you guys seeing any meaningful changes to consumer behavior.

Which categories.

Okay.

In our categories, what we've seen over time is that it tends to be the one of the last areas that might be impacted by a slowing economy or pinch.

Pinched wallets by the average consumer right with you wake up and somebody is sick in your household you don't feel well it isn't something that you would generally look to pull.

<unk> pone or forget.

About <unk>.

Continues to be an opportunity where you look for that trusted brand to take care of your health.

It's something we continue to monitor and take a look at but at this point, we don't see it impacting our business.

Alright, thank you.

Our module e-commerce as a percentage of revenue and what was the growth rate in the quarter.

Yes E Commerce is now about 15% of our sales.

The growth has been continued to be strong in the high single digits.

Thank you.

And lastly, I'm not sure if you guys answered it looks like you guys with Joseph guidance and I was just wondering why are you guys.

While the company is adjusting the guidance with <unk>.

I don't know if I missed I apologize.

Yes.

Sure. So what we did today as we narrow the original guide that we had to the lower end of the range on the top line.

We talked about FX impacting the top line results of little worsened it worsened a bit this quarter from our previous expectations in the EPS guide at the lower end of the range really reflecting the topline we just talked about.

Alright. Thank you so much thank you for taking my questions.

Thanks.

Thank you.

One moment. Please our next question.

Okay.

And our next question will come from Linda Bolton Weiser of D. A Davidson your line is open.

Hi, good morning.

So on the question of innovation I was just curious what you consider to be a venue most significant innovation in FY2023 and then for FY 'twenty for in General do you expect a similar level of innovation and drive revenue or higher or lower.

Good morning, Linda.

If you look across our portfolio, it's kind of hard to pick pick one right.

If you'd look at.

At our Dramamine business, we've had a string of great.

Access expanding into nausea in 23, we saw a number of the nausea products continued to do really well.

As one example compound W. Is another example, where the recent launches of technology have done well there.

As a couple of examples.

We look to have a consistent pipeline of new products and innovation to come out every year.

Pipeline.

Okay and then.

Yes.

And your business, we would rarely hear about being sort of supply chain glitches and hiccups and everything but of course now, it's becoming a little bit more of a frequent thing does that change your view on having more internal manufacturing and maybe you could update US do you still have that Lynchburg, Virginia facility and what wasn't.

Going on there what's manufactured there and what's the capacity like in that facility.

Yes.

We still think that our business model of <unk>.

Working and partnering with third party suppliers and.

Having the Lynchburg facility.

Is the right mix Lynchburg makes about 15% or so of our total revenue its a liquid mix and fill focused facility.

And does a great job for us.

One thing that we have learned during COVID-19 is that as the supply chain environment has evolved and changed we've had to change the way that we've that we partner with our suppliers. So over the last couple of years, we've done things like make investments at the suppliers for additional tooling.

Our additional lines to get dedicated capacity.

We've also look to add additional suppliers and I use that chloraseptic liquid.

Supplier as an example, where in the past we were comfortable with one.

Main supplier on that on that Chloraseptic.

Product offering now we want to have to see.

So we're going to continue to think about different ways to partner.

Hi.

Add robustness in the supply chain as a result of the new world that we're operating in.

Okay. Thanks, a lot take care.

Great. Thank you Linda good day.

Thank you.

Again to ask a question. Please press star one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment please for our next question.

Our next.

Will come from Carla Casella of Jpmorgan. Your line is open.

Hi, This is Oliver <unk> on for Carla.

Just to piggyback off the prior question on the gross profit margins that kind of sequential decline.

Is there a component of that that was related to a tick up in promotions in any category.

And are.

Are you experiencing any retailer pushback on pricing.

Yes, so in our categories right not a lot of promotion to drive consumers because they are.

Linked linked to incidences. So the answer is no. The gross margin was not impacted by the timing or increased promotional activity.

I apologize.

Missed the second part of that question yes.

Yes.

The second part was any pushback from retailers on pricing.

Yes, we haven't seen pushback from retailers on pricing I guess the environment is such that everyone is facing inflationary pressures and everyone is going to to retailers with the pricing and quite frankly, they've got they've got.

Cost inflation on the labor side and such for themselves. So.

So far we have not seen significant pushback from the retailers now.

And just one more question do you have any thoughts or initial thoughts on timing potentially on refinancing your 2014 months.

Okay.

The term loan goes through I believe 2027, so we will continue to kind of actively look at that if you are referring to our revolver ABL.

That is maturing at the end of 2024, and we will continue to kind of look at that.

Honestly, a much different structure than the term loan will be opportunistic on both.

Thank you very much.

Okay.

Thank you.

And I'm seeing no further questions in the queue I would now like to turn the conference back to Ron Lombardi for.

For closing remarks.

Thank you operator, and thanks to.

Everyone for joining us today, and we look forward to providing an update in may on our finish to fiscal 'twenty, three and our outlook for fiscal 'twenty four thanks, again and have a good day.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

Q3 2023 Prestige Consumer Healthcare Inc Earnings Call

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