Q2 2024 Prestige Consumer Healthcare Inc Earnings Call
Good day and thank you for standing by welcome to the Q2 'twenty 'twenty four prestige consumer healthcare earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question answer session.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today Jill.
Filter for Lilly please.
Please go ahead.
Thanks, operator, and thank you to everyone who has joined today.
With me are Ron Lombardi, our chairman, President and CEO and Christine Sacco our CFO.
On today's call I'll review, our second quarter fiscal 'twenty four 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 investors link.
Webcast and presentation.
Remember some of the information contained in the presentation today.
Financial measures.
Reconciliations to the nearest GAAP financial measures are included in our earnings release and slide presentation.
On today's call management.
We'll 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 due to high inflation geopolitical events and supply chain constraints as well as the other various numerous potential impacts. This means results could change at any time and the forecasted impact of risk consideration.
The 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 now hand, it over to our CEO Robin body Rob.
So let's begin on slide five.
Our Q2 results largely aligned to our expectations and built on our strong Q1 results.
Net sales were 286 million in the second quarter, which were the second highest level of quarterly sales in company history and slightly ahead of what we anticipated back in August.
We were pleased with this performance given we faced a challenging comparison from the prior year record results.
Our portfolio diversity continues to be a strength with strong sales in certain U S brands and our international business, mostly offsetting this tough comparison as well as the strategic exit of the private label business. We've previously discussed.
Revenue translated into strong earnings and cash flow, we generated $1 70 earnings up 5% versus the prior year, while experiencing sequential and year over year improvement in gross margin as well as our consistent EBITDA margin.
Strong free cash flow enabled the pay down of $55 million of debt and we finished the quarter at three times leverage we will continue to reduce debt, while assessing other strategic capital deployment opportunities.
So in summary, halfway through the year, we are on track to achieve our full year forecast delivering strong revenue and earnings thanks to the execution of our proven business strategy.
Now, let's turn to page six to discuss one example of brand building that's driving our success.
Our goody's headache powders defined the form and have a long 100, plus year history of helping consumers treat headaches and other elements largely in the southeastern United States.
After acquiring the brand over 10 years ago, we went to work leveraging the learnings from consumers to drive increased usage of the brand.
Use these and expanded with new forms and flavors as well as with targeted offerings like goody's hangover that solved on the go pain relief with great taste most.
Most recently, we leveraged these highly successful products with distinct marketing.
And to attract new customers, while deepening connections with existing ones.
We've done this in two distinct ways.
First we've had wide ranging media emphasizing the concept of make the day count for consumers that has driven important brand visibility.
Second we've had successful national exposure on Thursday night football, where the brands get to good marketing ads are driving increased interest and goodies online.
These recent marketing tactics are successfully leveraging our brand building tool kit to drive share with consumers and retailers and the results are clear.
In the fiscal year to date, we've grown goody's headache powders over three times faster than the overall analgesic category now.
Now, let's turn to slide seven for an update on e-commerce.
Alongside these brand building efforts is our emphasis and aligning investments with channels that are important to consumers.
As consumer shopping habits shift our end goal is to be readily available and prominent to consumers wherever they shop.
E Commerce continues to be the key example of this.
As shown on the left side of the page, we experienced a strong 6% consumption growth in the first half of the fiscal year.
Equally important is that we've achieved strong performance across all of our E Commerce partners and with a consistent profit growth.
Our success is driven by effective strategies, including targeted content effectively managing our product assortment and making broad investments with each of our E Commerce partners to better connect with consumers.
Two recent examples are shown on the right side of the page.
On the top.
A few examples of online brand story pages, which help upgrade the user experience of learning about an overall brand while shopping actively for a specific product on.
On the bottom is a reminder of investments around content, we continually refreshed online content for each of our brands to help drive traffic and ultimately purchases as consumers seek solutions for their healthcare needs.
So in summary, we continue to win with consumers across e-commerce through our investments in online content and digital advertising and are well positioned for further growth.
Now I'll pass it to Chris to walk through the financials.
Thanks, Ron and good morning, everyone, let's turn to slide nine and review our second quarter fiscal 'twenty four 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.
Q2 revenue of $286 $3 million were largely as expected and decreased 70 basis points from the prior year after excluding the effects of foreign currency.
As Ron highlighted earlier Q2 faced the most difficult comparison to the prior year and also includes about a one point headwind related to the strategic exit of the private label business.
EBITDA and EPS, both increased four 2% and five 4% respectively. In Q2 from the prior year largely attributable to the timing of spend.
EBITDA margin in the quarter remained consistent with our long term expectations.
Let's turn to slide 10 for more detail around consolidated results for the first half.
For the first six months of fiscal 'twenty four revenues were approximately flat at $566 million.
By segment, excluding FX North America segment revenues declined while the international segment increased eight 5% versus the prior year.
In North America, the largest category growth drivers in the first half were strong dermatological and eye and ear care sales, which helped partially.
Partially offset declines in women's health.
Our international segment performed slightly above our long term expectations. Thanks to strong performance across numerous brands.
We continue to experience solid mid single digit year over year growth in the E Commerce channel as Ron highlighted.
Total company gross margin of 55, 6% in the first six months was down slightly versus the prior year, owing to challenging comparisons in Q1.
This gross margin was as we expected and attributable to cost increases, partially offset by pricing actions and cost savings across our portfolio, which offset the dollar amount of inflationary cost headwinds.
For the full fiscal year, we continue to anticipate gross margin flat to up slightly versus fiscal 'twenty three with Q3 estimated to be flat with Q2.
As a percent of sales advertising and marketing came in at 13, 5% for the first six months for.
For fiscal 'twenty, four we still anticipate an A&M rate of just over 13% of sales and up in dollars versus prior year with approximately 14% of spend in Q3.
G&A expenses were nine 5% of sales in the first six months consistent with the prior year.
Finally diluted EPS of $2 13 was up slightly versus $2 11.
Despite a headwind related to the timing impact of cost increases and higher interest rates.
For the balance of fiscal 'twenty four we still anticipate an interest expense of approximately $67 million with lower sequential interest expense in Q3.
Finally, our Q2 tax rate was 23, 9% and we still anticipate a tax rate of approximately 24% for the remaining quarters of fiscal 'twenty four.
Now, let's turn to slide 11, and discuss cash flow.
For the first half, we generated $106 1 million and free cash flow down mid single digits versus the prior year due to the timing of working capital.
We continue to maintain industry, leading free cash flow and are maintaining our outlook for the full year of $240 million or more.
At September 30, our net debt was approximately $1 $2 billion 1 billion of which is fixed and we achieved a covenant defined leverage ratio of three times.
We still anticipate being below three times leverage by fiscal year and absent other strategic uses of cash flow.
This is consistent with our objective of targeting to operate below three times leverage over the long term with that I'll turn it back to Ron.
Thanks, Chris, Let's turn to slide 13 to wrap up.
More than halfway through the year, we have solid business momentum, thanks to our proven business strategy and leading consumer health care portfolio.
We are reaffirming our full year outlook, thanks to our diverse portfolio of brands.
For fiscal 'twenty four we continue to anticipate revenues of a $1 billion $1 $35 billion to $1 billion $1 40.
Organic revenue growth of approximately 1% to 2% versus fiscal 'twenty, three organic revenue growth of 2% to 3% after excluding the exit of the non core private label business.
For Q3, we anticipate revenue of $280 million a year over year increase consistent with the full year growth expectation.
As a reminder, our fiscal Q3 is typically the most difficult quarter of the year to forecast given the holiday season, and the potential lumpiness of retailer order patterns. During this period.
For EPS, we continue to anticipate diluted EPS of $4 27 to.
To $4 32 for the full year, most likely at the higher end of the range. Thanks to the power of our cash flow for.
For Q3, we anticipate EPS of $1 four up slightly versus the prior year.
Lastly, we continue to anticipate free cash flow of $240 million or more and we still expect being below three times leverage by fiscal year end as we continue to execute our disciplined capital deployment strategy.
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 will need to press star one on your telephone and wait for your name to be announced to withdraw your question.
Star one again.
These standby, while we compile the Q&A roster.
Our first question comes from the alignment <unk> Parikh with Oppenheimer. Your line is now open.
Good morning, and thanks for taking my question. So I guess I wanted to kick it off with just with the women's Health segment. Just curious if you could just give us color in terms of how youre thinking about the recovery I think I think earlier you expected it to improve later this year, but just curious the latest thinking on women's health.
Good morning, <unk> I think as we've talked about on the last quarterly call.
<unk> is slowing down.
We continue to feel good about the summer's Eve positioning.
We've got some new products expected later in the year and we continue to focus on it. So continue to feel good about the brands positioning and expect things to turn later in the year early into next year.
Great and then.
On the competitive front, just curious if youre seeing any changes from private label competition or even other branded players.
No no real change in share or new entrants, that's disrupting anything who passed so it's.
Kind of just overall category trends at this point.
Great and then we've all seen there I guess the bankruptcy of Rite aid.
So just curious as well if youre seeing any shifts between channels, just given changing consumer dynamics and just what's happening with some of the challenges the pharmacy channel.
Hey, good morning, it's Chris So FERC.
First of all concerning Rite aid, specifically, we're not anticipating a disruption to our full year outlook as a result of the filing for context there.
Not one of our top 10 customers globally.
That said, we have seen some channel shift.
Liam to mass and e-commerce, but as we've talked about generally positive for US right. Our share online is generally higher than it is in brick and mortar.
We're well positioned we are channel agnostic from a gross margin perspective. So we always say, we want our product to be available to consumers wherever they shop, and so we wouldn't anticipate a channel shift meaningfully impacting them.
Great. Thank you for all the color are possible.
Okay.
Thank you.
One moment for our next question.
Next question comes from the line of Susan Anderson with Canaccord. Your line is now open.
Hi, good morning, nice job on the quarter.
I was wondering if maybe you could talk about the cold cough season. It sounds like it was the driver of yourselves I guess theres been some mixed commentary out there just curious how you've seen it start out and how you expect it to play out or how are you.
For the season.
Hey, good morning, Susan.
So we've been talking about kind of three factors to consider for the cough cold season for us and it's been consistent really since the beginning of the year. The first is for our business we've got expanded capacity.
Versus last year, so we're able to ship more because we can get more from the supply chain.
The second impact that we've considered as the change or changes in how the retailers are planning the season.
And what level of inventory they may keep on hand for cough cold and then of course, the third is the cough cold incident level. So.
As we sit here today those three factors continue to line up with what we thought about for the year. So we are anticipating the cough cold for the year to be in line with last year. So as our supply is better. This year. It is offset by an anticipated lower level of incident levels and likely lower.
Stocking for cough cold outside of the traditional season. So that's how we're viewing it at this point.
Okay, Great. That's helpful. And then maybe if you could talk about the dynamic in the quarter between pricing and unit growth and then I know in the past you talked about Ken volumes normalizing as we go into the back half I guess, how do you feel about that dynamic and would you expect then the growth there to be more equal and so we look forward.
Yes, good morning, Susan So that's exactly right, we're still benefiting from certain pricing actions that will rollover largely in the second half of this year, so probably easier to talk first half in totality right.
We're up slightly on an organic basis and that was largely driven by price in the second half, we anticipate that to reverse and therefore consistent with our original guide we still expect our growth to be about half price half volume for the year.
Okay, great. Thanks, and then if I could maybe just add one more on the capital allocation I guess, how are you thinking about youre at three times leverage so almost reaching your goal by the end of the year I guess, how are you thinking about beyond that balancing share repurchases and debt pay down and then also M&A.
Opportunities as we look forward.
So really it's no different than it's been for the last few years, Susan which is we'll continue to evaluate any M&A opportunities that come up.
Look at stock buyback as a way to offset dilution of shares each year.
And then longer longer term, we'll consider a dividend, but again our leverage target is to is below three which is that next phase and we will get there.
Anticipating getting there at the end of March so continue to feel good about the capital allocation optionality that we have going forward.
Great. Thanks, so much good luck the rest of the year. Thank.
Thank you Susan.
Thank you.
Our next question.
This question comes from the line of Jon Andersen with William Blair. Your line is now open.
Hi, good morning, everybody.
Good morning, John.
During the first half of the year your sales are essentially flat.
But you've reaffirmed.
Our full year outlook for 1% to 2% growth.
Which means we're going to expect to see an acceleration.
In sales growth in the second half of the year could you talk about your.
Your visibility to that and what.
Some of the underlying drivers are of that.
Improvement on a year over year basis that you're expecting in the second half.
Sure. So the first place I will start with John as comps and as I mentioned during the prepared remarks today is for the second quarter in particular, we comped the highest level of quarterly sales ever in the company's history.
As a reminder, last year, we were still in.
I have a funny ramp up and return to normal activities.
And catch up in supply chain and a number of other factors last year that kind of drove drove the comps. So as we get into the second half of our year. We begin to return to I think more of a.
Normal level of comps to help drive year over year gains.
That's really the big factor.
Okay.
<unk>.
You mentioned.
Ron It and your response.
A question on cough cold.
<unk>.
One of the factors there you are considering as changes in retailers.
Planned inventory levels.
I guess thinking they might hold less inventory this year than last year.
Is that comment specific to cough cold or is there a broader trend now.
Now with things normalizing from a supply chain standpoint.
Where retailers are looking to just kind of hold less inventory in aggregate and could that affect your shipments.
So, particularly the cough cold last year.
Apply chain of many suppliers for Costco over trying to catch up so retailers are trying to carry as much inventory as they could because of that uncertainty in the supply chain and then just as importantly last year cough cold incident levels were happening all year long, so retailers where care.
Being a different level of inventory to support it.
Year round cold incident level, rather than the historical seasonal and I think as we get into this year, we're starting to see signs that returned to seasonal peaks.
Valleys, so it's really a different inventory profile held by the retailers rather than lower levels.
If you.
Find difference there and then yes right. We're hearing a lot of the same things you are from other CPG companies that their businesses are being impacted by retailers thinking about carrying lower levels of inventory.
So much in our categories and specifically our sub sections of our categories right.
<unk>.
So at this point really no major impact that we would expect.
And our outlook for the year I think is supporting the levels, we would expect going forward.
Okay. That's helpful.
Last one for me on gross gross margin.
Improved I think a little bit sequentially.
And.
Is that is that the.
I guess the first question on that is it.
Was that seasonal or are you seeing.
Early signs of.
Some of your efforts to I guess restore gross margins after.
A couple of years of gross margin erosion, which was largely I think are solely due to just kind of the.
The price cost dynamic.
Are you starting to feel like you've got some traction.
Such that we could see.
Ongoing gross margin improvement from here. Thanks.
Yeah, Hi, John it's Chris So.
The latter gross margin coming up coming in this quarter for Q2 as expected.
Compared to the outlook we gave in May.
Q3, we said should approximate Q Q2, right and we're still calling the year to be flat to up slightly so.
We are starting to see some relief on certain cost sequentially like like logistics costs freight that youre hearing from people, but it's a little bit more marginal for us just given the magnitude of freight as a percent of our sales that we've talked about in the in the mid single digit range. So we're seeing a little bit of a recovery there in some of our cost saving efforts are starting to pay off.
No reason to think we can't continue to March back to more normalized levels.
And then maybe I will squeeze one more in on.
Is the <unk>.
Comments on capital allocation excuse me on leverage.
Wanting to operate below three times long term.
Is that is that fairly new.
I guess I missed that I hadn't heard that before and then.
Does that kind of.
Maybe limit your willingness to.
Engage in M&A in Perm as you as you work to achieve that goal. Thanks.
Yes, so John I think we announced that back on the May call at the start of the fiscal year that it was our our new phase.
Prior to that I think we are between four to happen three or something like that.
So it really I think is just.
Re emphasizing.
Our focus on operating at lower levels of leverage over time.
And cost us in terms of Optionality and it's our job if an M&A opportunity.
Shows up that we think is compelling for the shareholders to figure out how to get it done and we would rise above three.
For a period of time, if it makes sense so.
It's not meant to.
Put a ceiling on things, but rather just emphasize the importance of operating at lower levels of leverage going forward.
Great. Thanks, so much good luck going forward sure. Thanks, Brian.
Thank you.
One moment for our last question.
This question comes from the line of Tony Kim with Morningstar. Your line is now open.
Hey, good morning, and congrats on the solid quarter.
You guys have identified product innovation I was wondering if your key priorities and talked about launching drama and nausea category as an example.
Great to see that when shares in that space over the few quarters and so I guess looking at your other portfolio, what other brands or which product categories. Do you kind of view that you can do a similar thing with.
Yes. So good morning. Thanks for the question, so, yes, new product development and innovation is an important marketing element of how we think about long term brand building and if you look over time.
At our brands, you've seen that we've pulsed in new products and innovation in refreshments to the product offering really across the broad portfolio.
Everything from brands that we don't talk about like Sky, where we launched a new style drop a few years ago and it quickly rose to one of the better selling skus within the <unk> category.
To Summer's Eve, where we've launched spa products over the last couple of years, it's our largest brand. So it is an important element across the portfolio and is a big driver.
Not only share in sales, but growing the categories for our retail partners. So going forward, you'll continue to see.
That element of long term brand building show up across our portfolio.
Great that's helpful.
And as more large pharma kind of spin out their consumer division as J&J did with tend to be this year and Santa will be kind of planning to do the same thing by next year. Do you think you will feel more competitive pressures in the industry or do you expect the landscape to be more or less same as usual.
Yes, we would expect it to be more of the same.
Whether these.
Big consumer healthcare companies are embedded in our big Global CPG company or independent like we've seen can view on Eliot lately, they're focused on different things and we are they are looking for move the needle opportunities, which are big brands big categories different regions than we can.
<unk>.
As part of their business objectives. So we're going to continue to focus on.
Those niche smaller categories that we can be successful and can define the categories and we will likely look for opportunities to acquire brands that they may shed as they further focus on those bigger opportunity. So.
Nothing new there that's been the case for.
The last 10 to 20 years, so more of the same.
Got it that's helpful and just one last question from me.
The FDA cracking down on products across different categories, such as the oral decongestants Pilsen Eyedrops do you feel pretty strongly about your portfolio or are there any threats than maybe we should be thinking about thank you.
Yes, so quality is the starting point for everything we do here right, we need to deliver and sell quality product that delivers against.
What the consumer expects out of it so we start there.
The recent announcements around recalls of sterile eyecare products that has been sourced out of outside of North America and from suppliers that arent necessarily.
Yes.
Proven over the long term is just a reminder of the importance of it and just something that we continue to focus on.
Got it that's really helpful. Thanks, guys.
Great. Thank you.
Thank you.
I'm showing no further questions at this time and would now like to turn it back to Ron Lombardi, President and CEO for closing remarks.
Thank you operator, and thanks to everyone, who has joined US on the call today and we look forward to updating you on our next quarterly call have a great day.
Thank you. This does conclude the program and you may now disconnect.
Okay.
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Okay.
Okay.
Yes.
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