Q4 2024 Prestige Consumer Healthcare Inc Earnings Call
Thank you for standing by my name is remaining and that would be a conference operator today at this time I would like to welcome everyone to Q4, I think you quantified prestige consumer healthcare incorporated earnings conference call. All lines have been placed on mute to prevent any background nice after the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question during this time simply press.
Star followed by the number one on your telephone keypad, if you would like to withdraw your question Press Star one again.
I'd now like to turn the call over to shelter poorly Vice President of Investor Relations and Treasury. Please go head.
Thanks, operator, and thank you to everyone who has joined today on the call here, Ron Lombardi, our chairman, President and CEO and Christine Sacco our CFO.
On today's call I'll review, our fiscal 2024 results.
Our outlook for 25, and then take questions from analysts.
A slide presentation accompanies today's call and can be accessed by visiting prestige consumer healthcare dot com.
Looking on the investors link and then on today's webcast and presentation.
Remember some of the information contained in the presentation today includes non-GAAP financial measures.
Reconciliations to the nearest GAAP financial measure are included in our earnings release and slide presentation.
On today's call management 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 supply chain constraints high inflation and geopolitical events, which have numerous potential impact. This means results could change at any time and the forecasted impact of risk consideration to the best estimate based on the information available as of today.
Okay.
Further information concerning risk factors and cautionary statements are available on our most recent SEC filings and most recent companies in Canada was released this morning.
I'll now hand, it over to our CEO, Ron Lombardi Ross.
Thanks, Joe Good morning, everyone and now let's begin on slide five.
Speaker Change: Our fiscal 'twenty four results for revenue and adjusted EPS were approximately flat to the prior year due to our fourth quarter results.
We were disappointed with this fourth quarter performance, which did not meet the anticipated growth objectives with <unk>.
Okay.
Strong consumption growth for the year in excess of our long term, 2% to 3% target was not reflected in organic sales due to supply chain pressures late in the fourth quarter that prevented our ability to fulfill retailer orders.
Discuss this in greater detail in a moment.
The results of this abrupt pressure in supply also affected both gross margin and EBITDA due to the lower than expected sales.
Even against these Q4 headwinds for the full year, we were still able to generate approximately $240 million in free cash flow.
Speaker Change: Anticipated.
This performance enabled significant deleveraging to two eight times below our long term objective and the lowest year end leverage ratio in the company's history.
This allows us to further assess our capital deployment opportunities that enhance shareholder value, which Chris will touch on later.
In summary, although we were disappointed by the finish to the year and near term supply chain pressures, we're facing do not sway us from our proven business strategy or long term brand building capabilities that have driven shareholder value.
Now, let's turn to page six for a discussion of supply chain and the recent constraints.
Okay.
To begin we remind everyone that managing a large network of suppliers is an element of our business model and nothing new for us with a broad range of product forms the diversity of our products themselves results in a diversity of suppliers.
Speaker Change: Having this diverse supply chain enables flexibility to identify and source from the most optimal partners for me.
10 years, we've operated with over 103rd party suppliers, which includes long term contracts and deep relationships with critical suppliers to ensure we receive quality product on time.
S strategy benefited us during the highly disruptive COVID-19 supply chain environment for example.
Unfortunately in the second half of March we experienced significant disruptions in supply primarily from a shortfall in the ear and eye category, where both of our clear eyes supplier space simultaneous business interruption related to maintenance and quality improvements we.
These near term production limits to continue into first half of the upcoming fiscal year, but ultimately benefit our long term demand and quality.
Longer term, we have been working behind the scenes executing our supply chain continuity strategy that features efforts. We believe are right for ensuring future readiness and supply.
First we look to partner with multiple suppliers on critical products to ensure essential supply. This includes validating secondary and prospective suppliers in the event they are needed.
Second for key or critical products, we are open to internal production if optimal.
Recently, following a multiyear transfer process, we've begun commercial production of certain monistat products in our Virginia manufacturing site. During Q4, we also acquired one of care pharma suppliers in Australia to ensure a long term supply of certain hydrolyte and SaaS.
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Third we continue to take a long term partnership approach with our third parties when necessary, we have a history of periodic investment with our third parties to help limit business impact from various events.
We believe these steps and active management of our supply chain are the right steps to a positive long term outlook and our ability to supply a strong product demand for many years to come.
With that let's turn to slide seven to review our proven long term business also deals.
Yes.
Our proven business attributes that drive shareholder value are unchanged delivering strong long term results and positioning us well moving forward.
Our portfolio remains resilient and well positioned benefiting from a broad range of leading brands across many categories.
This enables flexibility and identifying opportunities for investment while I'm, helping mute the impact of any short term category changes.
These opportunities are fueled by our long term brand building strategy, our strong financial profile gives us ample ability to invest in efficient marketing and innovation that allows us to drive long term growth for our leading brands.
Finally, the business attribute we operate with provide robust free cash flow, which enabled strategic capital allocation that further amplifies shareholder returns over time. This has enabled substantial leverage reduction over the last five years and has helped as a multiplier to our financial performance.
The result is clear over the last three years, even with the challenges exhibited in March we've grown revenue and adjusted EPS at a CAGR rate of approximately six 9% respectively.
Now, let's turn to the next session and review some of the brand building factors that drive this performance.
On slide nine you can see a reminder of the key highlights of our proven brand building playbook.
We continue to operate with leading established brands that are well positioned to leverage these tactics for our long term category growth.
And gold is long term success across channels and growth of the categories to which we are stewards.
To start we leverage learnings from consumer insights to identify where opportunities are then provide consumer solutions that solve identified issues.
Next we remain agile marketers investing and timely messaging to raise awareness of product efficacy and brand knowledge around our proven consumer solutions.
Speaker Change: We also operate with a multi year new product development pipeline to ensure we continue to match the needs of consumers.
Finally, we aligned our investments and product offerings with channels that are important to consumers, most notably with the fast growing E. Commerce channel. This broad distribution strategy reinforces each of these marketing tactics.
With that let's turn to slide 10, and discuss a few category highlights of fiscal 'twenty four.
Looking across our product categories. The three shown here Gi skin and ear and eye care exhibited the strongest performance in fiscal 'twenty four.
And ear and eye care, we continue to maintain strong brand equity across our portfolio, which includes clear eyes, Thera tears and sky eye drops as well as Seabrook's ear care over time, we've done this via proven marketing tactics across TV and digital content.
As well as strategic new product introductions.
In skincare mix continues to drive overall category growth as the market leader benefiting from improving waste treatments as well as the fiscal 'twenty four launch of mix treat and prevent which continues to help grow the overall life's treatment category.
Lastly in Gi Gaviscon in Canada is experiencing nice growth, while our leading Dramamine franchise continues to leverage iconic media campaigns. Most recently with its drama Lama campaign.
In summary, we continue to utilize a wide range of marketing and innovation tactics, which are driving nice consumption growth and leave us well positioned in each of these categories going forward.
Now, let's turn to slide 11 to discuss the women's health product category.
Our women's health franchise is represented by two distinct brands Summer's Eve and Monistat each brand leads their respective subcategories with a dominant number one share and a long term connection with consumers.
As discussed over the last year, the category space disruptive pressure post COVID-19 as consumer behavior shifted while we continue to face challenges most notably in the Summer's Eve on the go offerings. We are optimistic about the long term opportunities for each brand and are beginning to see improving trends.
In both businesses.
For Summer's Eve, our latest media campaign highlights and reemphasize its key consumer benefit of odor protection. This is leveraged by the recent launch of Summer's Eve Ultimate odor protection, which utilizes patented odor, reducing ingredients and a ph balanced formula.
Speaker Change: Although early the product is off to a nice start receiving positive consumer feedback as well as earning a number one new release slide on Amazon.
With Monistat, we've launched a digital first media campaign, titled Monistat that which reminds consumers of the brand's efficacious heritage and treating Eastern section. In addition, we continued to expand Monistat use cases with Monistat maintain which is.
<unk> its heritage and east into overall, vaginal health and maintaining a healthy ph balance.
These actions are taking hold and Monistat has returned to growth in the last 12 week consumption period.
So in summary, we are making progress heading into fiscal 'twenty five and continue to feel good about the long term growth opportunities for our womens health brands.
Now, let's discuss our international segment strength on the next page.
Shown on the left of Slide 12 is a breakdown of our international business, which includes numerous products sold throughout the world.
The majority of our business is still largely concentrated in Australia, where our business is focused around three major areas Hydrolyte and oral hydration best nasal sprays and eye care under the Marine this added in and clear eyes brands.
We have experienced solid growth over time throughout all geographies.
We had another strong year in fiscal 'twenty for achieving impressive 10% organic revenue growth against a tough prior year comparison over the longer term, we've experienced over 20% sales growth annually on a three year basis the.
The markets continue to grow nicely on a multiyear basis and today represents approximately 15% of total company sales.
Moving forward, we continue to focus on our leading and well positioned brands that can grow category and share over time, such as Hydrolyte.
Although we expect growth to moderate against increasingly difficult comparisons we continue to anticipate a 5% or more annual growth for the segment based on our strategy.
Speaker Change: Now, let's finish up on slide 13.
Our brand building efforts are complemented by aligning investments with channels that are important to consumers.
E Commerce continues to be the key example of this with an increasing portion of consumer shopping habits and our early investments have helped US drive continued strong performance across E. Commerce partners. We grew e-commerce, approximately 8% in the fiscal year and it now represents approximately 15.
Speaker Change: <unk> of our sales.
Our success is driven by effective strategies, we've touched on before including targeted content and marketing effectively managing our product assortment and making broad investments with each of our E Commerce partners to better connect with consumers.
Moving forward, we continue to expect strong e-commerce growth through these investments and long term strategy.
With that I'll turn it over to Chris for a review of financials and an update on capital deployment.
Thanks, Ron Good morning, everyone, Let's turn to slide 15, and review, our fourth quarter and fiscal 2000 and for financial results.
As a reminder, the information in today's presentation includes certain non-GAAP information is reconciled to the closest GAAP measure in our earnings release.
Q4 revenue of $277 million compared to $285 9 million in the prior year and was down two 9% on an organic basis.
Strong consumption trends and strong organic international segment growth of 7% were more than offset by supply chain pressures late in the fourth quarter that inhibited our ability to meet order demand as well as continued women's health category weakness and the strategic exit of the private label business.
Due to the lower revenue, we experienced a lower EBIT margin and diluted EPS from the prior year, which was only partially offset by lower interest expense.
Let's turn to slide 16 for more detail on full year 'twenty four consolidated results.
For full year fiscal 'twenty four revenues were approximately flat at $1 billion $125 million and grew 20 basis points versus the prior year when excluding FX.
By segment, excluding FX North American segment revenues were down one 5%, while the international segment increased approximately 11% versus the prior year.
In North America, the largest category growth drivers were strong ear and eye care Gi and dermatological category sales, which helped partially offset the Q4 supply chain challenges declines in women's health and the strategic exit of the private label business.
Our strong digital performance continued and we finished the year with high single digit year over year E Commerce growth.
The international segment performed above our long term expectations, thanks to strong performance across numerous brands and geographies.
Speaker Change: Total company gross margin of 55, 5% for fiscal 'twenty four was up slightly versus prior year as anticipated despite poor supply chain constraints and the resulting reduced fixed cost absorption for.
For fiscal 'twenty, five we anticipate gross margin of 56% or more with improvements from pricing actions and cost savings more than offsetting continued inflationary cost headwinds.
Q1 gross margin is estimated to be approximately 55, 5%.
As expected advertising and marketing for fiscal 'twenty four was up in both dollars and on a percentage of sales basis versus the prior year.
For fiscal 'twenty, five we anticipate an A&M rate of greater than 14% of sales as we continue to identify long term marketing opportunities consistent with our long term objectives.
We would also anticipate this higher year over year rate of spend in the first quarter.
Fiscal 2004, G&A expenses of nine 4% of sales was largely consistent to the prior year.
In fiscal 'twenty, five we anticipate G&A of approximately nine 5% with about $28 million of spend in Q1.
Speaker Change: Adjusted diluted EPS of $4 21 was flat to the prior year with the benefit of our debt reduction efforts and share repurchases offset by the lower Q4 revenues and associated cost headwinds.
Our normalized Q4 tax rate was 23, 6%.
For fiscal 'twenty, five we expect a tax rate of just under 24% and interest expense of approximately $52 million down materially from the prior year.
Speaker Change: Now, let's turn to slide 17, and recap cash flow.
For the full year fiscal 'twenty, four we generated approximately $240 million in free cash flow up nicely versus the prior year as expected.
Our stable EBIT margins and strong cash flow enabled us to invest behind our brands, while continuing to reduce debt, finishing the year at two eight times leverage and net debt of $1 1 billion at March 31.
Approximately 90% of our debt is fixed and there are no maturities until 2028.
For fiscal 'twenty, five we anticipate a similar free cash flow profile of at least $240 million.
Speaker Change: As shown on the right side of the page. This cash generation is underpinned by our leading attributes that enable our financial profile.
Our business model, where the majority of revenue remains externally manufactured results in low capital expenditures of 1% to 2% of sales annually. We are anticipating capex of just over 1% of sales in fiscal 'twenty five.
Our products have strong margins, thanks to the characteristics of the categories, we participate in their importance to consumers health and the regulated nature of OTC that creates high barriers to competitive entry.
We have meaningful tax benefit from past acquisitions that result in a cash tax rate in the high teens and.
And we remain focused on profitability with continuous cost saving efforts that helped us maintain our strong mid <unk> EBIT margin profile.
The result of this model is clear we generate best in class sustainable free cash flow and our free cash flow conversion remained strong.
This attractive profile gives us the ability to continue to deploy capital in multiple ways as shown on page 18.
Our strong financial profile, and resulting free cash flow makes management of capital deployment, a critical pillar in ensuring our success.
With approximately $1 billion of free cash flow anticipated over the next four years.
We anticipate disciplined cash deployment against the various options of investing in our brand M&A share repurchases and deleveraging.
The number one priority continues to remain investing in our strategic brands to ensure long term success.
From there we continue to pursue strategic M&A and continue to see an active marketplace.
We have ample capacity to acquire additive businesses and our scale and long term expertise in consumer health care gives us a long term advantage in identifying acquiring and successfully integrating transactions.
<unk> share repurchases.
By achieving meaningful leverage reduction over the last several years and demonstrating our long term sustainable and growing free cash flow profile, we believe our multiyear share repurchase program affords us the flexibility to offset dilution.
Speaker Change: Turn capital to shareholders in an opportunistic way and still remain flexible to pursue M&A and other deployment options.
The announced approval of up to $300 million in share repurchases is a testament to this outlook and our confidence in our long term profitable growth of our company.
Finally, although we anticipate reducing debt and leverage in fiscal 'twenty, five a reduced leverage and attractive debt profile leaves us best positioned to prioritize the deployment options that I just walked through with that I'll turn it back to Ron.
Thanks, Chris, Let's turn to slide 20 to discuss our outlook.
Speaker Change: In fiscal 'twenty five we anticipate continued solid consumption growth of our leading portfolio. Thanks to our proven brand building strategy.
It said in the near term, we anticipate certain supply chain headwinds, particularly in eyecare to continue in the first half of fiscal 'twenty five before recovering in the second half. This leaves our revenue and EPS outlook for the full year below our long term expectations entirely due to this first half.
Forecast.
For full year fiscal 'twenty, five we anticipate revenue of $1 billion $1 $25 billion to $1 billion 140 <unk>.
And organic revenue growth of approximately 1%, where we continue to anticipate a slight FX headwind.
Q1 revenues are anticipated to be approximately $260 million, reflecting a continuation of the supply chain challenges experienced late in Q4.
Although it's very early to forecast. We currently expect Q2 revenues to decline slightly year over year, but we'll provide a full update in August.
We anticipate EPS of $4 40.
The $4 46 for.
For fiscal 'twenty, five or approximately 5% to 6% growth versus the prior year, driven by gross margin expansion and lower interest expense.
To our strong cash generation.
We expect Q1 EPS of approximately 86.
Lastly, we expect solid free cash flow of $240 million or more in fiscal 'twenty five the stable profile to the prior year gives ample support to a multi year $300 million share repurchase program and continued disciplined capital deployment Optionality at Max.
<unk> long term shareholder value now.
Now, let's turn to slide 21 to wrap things up.
Speaker Change: This page is a reminder, that our diverse portfolio of leading healthcare brands provide a great starting point that supports long term top line organic growth of 2% to 3% annually.
While we are certainly disappointed with our Q4 performance and anticipated fiscal 'twenty five first first half weakness from these near term supply challenges, we remain fully committed to our proven business strategy and long term business outlook.
Continue to focus on brand building that is the key enabler to our long term success.
Our superior financial profile has generated consistent and increasing cash flow over the long term that leaves us increased accretive capital deployment optionality of over $1 billion in free cash flow in the next four years that Chris discussed previously.
We remain confident in the big picture that our business attribute support our proven formula of solid organic growth, leading free cash flow generation and a proven capital deployment strategy that will unlock shareholder value.
With that I'll open it up for questions operator.
Thank you we will now begin the question and answer session.
And we would like to ask a question. Please press star one on your telephone keypad to reach your hat and join the queue. We would like to withdraw your question simply press Star one again.
If you are called upon to ask a question and I listening via let's be clear on your device.
Up your handset and ensure that your phone is on mute.
When asking a question again press star one to join the queue and your first question comes from the line of.
<unk> with Oppenheimer. Please go ahead.
Good morning, and thanks for taking my question, So just going back to the supply chain commentary for your questions here. So first what's the confidence in resolving some of the challenges by the second half and then from a guidance perspective is there a way to quantify what percentage point headwind. It is to your top line growth and the implied guide.
Okay.
Good morning so.
Your first question I guess the level of confidence that we have is.
There is a plan in place for both of the clear eyes supplier to get back to historic levels.
And at this point, they're in line with expectations at this point. So we expect in the quarter ended June that we will see increasing recovery.
To begin beginnings of things stabilizing in the second half and then a recovery excuse me second quarter, and then a recovery in the second half.
And then refresh youre asking about quantifying the impact of the supply chain disruptions to the revenue guidance, Yes, Thats right.
So for the year, that's about a point of headwind right and as Ron just commented we would expect the impact to be.
Greater than the first half certainly first quarter with some recovery as we move throughout the year, we do expect some modest piping in the back half of the year. So when I put that altogether I'm at about a one point headwind for the year.
Great and then maybe just my follow up question. So Chris just on the guide I'm not sure how the clarity clarity you can provide but as we think about your EPS guidance any any any how should we think about what's the viper debt.
Paydowns and buybacks at this juncture.
Yes. So at this point, we would normally in our guidance assume all of the free cash flow is going to debt pay down.
Obviously with $135 million.
Variable debt as we begin this fiscal.
That would imply we are building cash on the balance sheet and I commented on the.
The attractive long term fixed debt that we have about $1 billion of notes that don't have a maturity until 2028. So the guide right now is contemplating essentially no share buybacks.
Okay. So essentially if the cash bills should we just model interest income is the way to think about it.
Yep.
Great. Thank you I'll pass it along.
Okay.
Your next question comes from the line of Susan Anderson with Canaccord Genuity. Please go ahead.
Hi, Good morning, Thanks for taking my questions I guess, maybe just a follow up on the supply chain issues as it relates to the eyecare I guess I'm curious if your competitors are also having some of the same issues with supply or is it just your brands not sure if they use the same supplier or not.
And then I think there was an issue with quality at one of your suppliers a couple of years ago. So I'm just curious kind of how do you gain confidence that the supplier has 60 days issues. Thanks.
Susan: Yes, good morning, Susan So first of all the two suppliers that we have for the clear eyes brand are primarily exclusive.
To our to our brands.
So others that compete in the industry have their own supply chain will be subject to different different factors.
Speaker Change: So that's the first part of it the second part of it the quality, we had a recall a couple of years ago and it was actually related to a former supplier.
We left because we had quality concerns about and we got caught up in the very tail end of that so that.
That was actually.
A number of years ago.
Minimal impact on US I think this is also a good point.
Comment on how we think about managing our our sterile eyecare.
We've partnered with two quality suppliers, who have been partners with us for very long periods of time.
Our eye care business has been growing nicely for for quite a while now and we've been in catch up mode trying to keep up with demand and we've actually worked with both of them to expand capacity and one of those suppliers.
Did some upgrades.
In calendar 'twenty three in early into calendar 'twenty four is in the process of recovering from those maintenance upgrades and on a path back to having what.
What we believe are going to be higher levels of output later in the year and the second supplier, who we've worked with again for quite a while.
They had an extended break as they did some quality upgrades than what we initially thought might be a one week shutdown turned into something longer and they're just getting back up into production levels as we speak here. So.
I've been with the company for about 14 years and I've never seen <unk>.
Speaker Change: Disruption like this in our eye care before where both of the suppliers, where we have been working with them making investments in.
I had a simultaneous disruption.
So very much unexpected and very unusual highly unusual.
Okay, great. Thanks for the color there that was really helpful.
Speaker Change: And then I was just curious is this just impacting the North America business or is that also.
Back in the international markets or is that a different supplier and then I.
Speaker Change: You mentioned that you purchased maybe a small plant in Australia.
Help with production I guess, just curious it doesn't sound like it is this changing maybe our capital light strategy, usually using mostly third party suppliers or is it just.
A little bit is leaning into some protection on your own. Thanks.
So the first question about the international Eyecare supply there is a small amount that comes from the two north American supplier suppliers.
Speaker Change: The vast majority of their product offer international Eyecare comes from other other suppliers, so there's a little bit of impact, but nothing material.
Now to your question about the acquisition of the care pharma supplier that closed in the fourth quarter.
Speaker Change: So they've been a long term supplier of both Hydrolyte and SaaS powdered products family owned and win the founder.
Approached us and said that they were considering.
Selling the business, we stepped back and said I think the best thing for us to do is to own. This their primary business is making hydrolyte invest powder powdered products.
Primarily supporting the care pharma business.
And a lot of ways it made sense for us.
Continues to give us a competitive advantage.
Own that facility.
And make those products for ourselves so it's not unlike what we've got going on in the Lynchburg, Virginia facility.
Speaker Change: Both with the fleet and the Summer's Eve product that's been made there historically I've commented in the past how that gives us an advantage. There is some level of vertical integration and then as I also announced in the.
Earlier on the call today, we started commercial production of Monistat products there.
In recent months after a multiyear tech transfer and investment program, where we expanded manufacturing capacity to include Monistat cream products. So no change in our strategy Susan if it makes sense and gives us an advantage to have more control and investment over.
The product.
We'll continue to do that.
Susan This is Chris I would just piggyback on that by saying no change to the Capex that we contemplate where have been experiencing in the past few years or are we guided to fiscal 'twenty five at about 1% to 2% of sales.
Okay, great. Thanks, again very helpful. Good luck this year.
Speaker Change: Thank you.
Your next question comes from the line of <unk> <unk>. Please go ahead.
Everyone Chevron here for John Anderson This morning.
Two questions for Us first.
Could help kind of ballpark the quarter in the sales mess it looks like the sales Miss.
It was about $10 million, how much of that was related to the supply chain issues and how much was related to the issues or the challenges faced in the women's health categories.
Yes, hi, good morning. This is Chris so for Q4, the vast majority of the Miss related to eye care.
Speaker Change: You can see.
A decline in the category remember also that <unk> isn't the only brand within the category right.
We've been experiencing as Ron mentioned in his remarks considerable consumption gains.
Speaker Change: And demand for eye care, and so regarding the actual versus our expectation that was the vast majority of business.
However, if I can add to your question about the women's health.
Again, the two brands that I commented on earlier Monistat has largely been stabilized and we actually saw some growth in the fourth quarter.
For Monistat, we continue to feel good about the position of that brand and its growth opportunity for fiscal 'twenty five Summer's Eve continues on its journey of getting stabilized and getting positioned to return to growth consumption trends continued to improve.
We began the launch of some new products during the quarter and no rollout into.
Retail over the next handful of months here.
And it's really the on the go and the sprays portion of the category that continues to be disrupted by the changing consumer habits. So if you break up the summer's Eve category into Washington, Life's, we extra seeing consumption growth in the new products do well there and that's the continued.
Decline in the sprays portion that's dragging down the total brand.
Okay.
Got it got it thanks, Ron that actually answered my second question on women's health. So I'm all good thanks, great. Thank you Chuck.
Next question comes from the line of Mitchell Pinheiro, which the defense. Please go ahead.
Yes.
Just.
Back to the supply chain issues.
So it seems this came as it seems it came as a surprise to you was there any was there no like sort of four warning about.
Your suppliers.
Plans for maintenance and improvements and things like that or.
Can you talk a little bit about how that all came about.
Yes, it was unexpected really.
The intent or the size of the impact was unexpected.
I said, we've been working with both of the suppliers to expand capacity.
And.
The first supplier, who went down for maintenance upgrades earlier in the calendar year.
It was expected to come up at historic production levels, and then start to increase and we saw a matter of fact, the opposite of that they came out at lower levels and they have been working to recover back to historic levels before we expect them to see increases so.
It kind of unfolded as the quarter played out and then for the second supplier. It wasn't anticipated that they were going to be shutting down for some quality upgrades and that shutdown as it unfolded went from what was initially thought to be very short, maybe a week to a month or more.
For the shutdown and then the return back to commercial product released production. So yes. As you just said it was unexpected both in terms of timing the way it unfolded and the size of the impact on the business not only in the fourth quarter, but what we expect over the first half of fiscal 'twenty five.
Yes.
Okay.
<unk> and <unk>.
Speaker Change: <unk>.
Was there any.
Gross margin impact in the quarter as a result.
Realize that.
It's sort of variable cost, but I didn't know, perhaps if you were.
Spending extra money to secure product or something from somewhere else and having an impact on the cost of goods.
Yeah, Hey, Matt it's Chris so for the fourth quarter. The impact was minimal right. We lose the leverage you can think of more fixed cost in nature, such as warehousing as an example that would impact margin when the topline misses like that but gross margin came in in line with our expectations largely and so not meaningful.
Okay and then.
You talked to Chris about the gross margin it sounds like you said 55.
I guess on a 10% is sort of your expectation for Q1. So is it just a gradual build through the year is there anything driving that other than just to your point about sort of losing a little bit of that fixed cost leverage in the first half.
Yes, certainly we will provide more color as we go through the year, Mitch, but there is a bit of a step up in the back half for things. We just talked about like leverage on the increased supply and also the timing of certain pricing actions, but really cost saving efforts that we expect to <unk>.
Inventory flows through on the P&L cost saving measures that may be in place in the first half, but really will flow through the P&L in the back half so a moderate step up as you work through the year.
Okay and then.
You just touched on.
My last question was just on pricing.
It was.
The issues in the fourth quarter was what was the pricing impact versus <unk>.
<unk>.
Yes. It was as expected we set this year out to say about half of our growth, we assumed would come from price and half from volume.
Improved from last year. If you remember we were two thirds price and Thats exactly what we experience to your point absent the last couple of weeks of the quarter there.
And then just thoughts on <unk>.
<unk> for fiscal 'twenty five minutes, which may have been your follow up question.
Opportunities think about the positioning of the brand where we have continued inflationary pressures, we think we have opportunity to take additional price.
And again for next year, we would anticipate that's about half of our growth.
Okay.
I guess one more question.
Any any any change any.
Do you anticipate any.
Change in retail channel.
Formats or is it going to be more of the same.
Drugstore Matt.
E Commerce is it going to be the same type of percentage distribution from in retail.
Yes, Mitch I think at this point for fiscal 'twenty five we would probably anticipate the same kind of trends that we've seen begin to stabilize over the last couple of quarters.
In terms of where consumers have shifted to shopping but I think again the important thing for US is it really doesn't matter our products are broadly distributed our margins are consistent across channel.
We look to support and invest behind all of our retail partners no matter what channel.
They are in.
So we kind of expect things to kind of stay where they are but for us it doesn't it doesn't really matter.
Okay. That's all from me thank you.
Thank you.
Your next question comes from the line of stand up pump on Weiser with D. A Davidson. Please go ahead.
Yes, hi.
Yes.
Firstly through the breakdown of your gross margin performance by international versus.
North America, the North American gross margin was actually still up really strongly year over year and it was the international gross margin that's been down for a couple down your year over year in a few quarters. So I guess my first question is.
Are you, saying the gross margin would've been even up more in North America, because it was already up really strongly and then secondly.
Why is the international gross margin trending down year over year.
Good morning, Linda This is Chris so as I mentioned to Mitch the gross margin impact for Q4 Im speaking speaking specifically for North America was a modest impact due to the sales Miss.
But yes, we have seen some nice improvements in the North American gross margin largely driven by cost savings and pricing actions that we've taken on the international front. It's really the number one driver there is mix mix of product mix in the region I think two hydrolyte as an example was a higher percentage of our sales, which is a larger gross margin than other.
Other products in the region and then not inflation internationally just as it is here in North America. So the.
The biggest driver of the international pieces is the mix.
Okay. Thanks, and then.
Justin just got one more question on the supply issue.
Like that second supplier you were describing that the shutdown will is because of quality related upgrades. So I mean that that actually sounds a little negative like it sounds like.
They had some whatever FCA crackdown or something on them. So I guess going forward are you thinking.
Thank you you are going to stay with that supplier or why wouldn't that be reason to again look for a different supplier.
Thanks, Yes, so yes, thanks, thanks Linda.
So the quality upgrades are proactive and looking to continue to grow.
Manufacturing environment to produce quality product.
Speaker Change: On time so.
We can we plan to continue to stay with them. We think there are a high quality supplier and are focused on quality product on time. So we think it's the right kind of thing to be proactive.
The shutdown and do things that are.
Ahead of a problem.
Okay, and then finally.
Yeah, I have some experience with like I follow Clorox, they had some supply issues.
Well Theres was due to a cyber attack different story, but still when you have supply issues youre going to lose maybe even some shelf space and you're certainly going to lose some market share and just and then in the near term and if the in a quarter or two so what are you figuring in in terms of expectations for that.
And then are you.
Are you, specifically figuring an extra advertising and promo or extra merchandising spend in order to get back that market share that you are inevitably going to lose.
Yes, so first of all I don't.
We're not of the opinion that the expected recovery here.
<unk> supply chain is going to result in us losing share. We don't think we're going to be out at shelf in any significant way that's going to cause consumers to start reaching for a brand that they've never used and don't have a history of trust with rate.
The difference between OTC products and other consumer categories like household cleaning right and we were big in that category for a long time is right the trust associated with putting drops into your eyes.
<unk> is a pretty significant barrier, which is why <unk> has one of the lowest levels of <unk>.
Private label penetration.
In OTC. So at this point, we don't expect the loss of distribution or loss.
Shelf.
To lose share.
Speaker Change: And how many weeks of inventory do you think retailers in general have on hand.
These products.
Yes, it's really it's really all over the place depending on the retailer.
Best in class.
Class retailers with a great supply chain carry maybe eight weeks something like that and other business model models may may carry two or more.
<unk> that amount depending on.
There are business setup again, I think the other thing Thats important to note for clear eyes right. If you go to the shelf and look we have a very broad offering of assortment. So think about our redness treatment, we have Max red.
The original strength redness, we have one ounce we have half ounce and then we have other products that have redness relief in addition to others.
Efficacy treatment. So when you go to the shelf youre looking for clear eyes, there's going to be options out there. So if you usually by the one ounce Max read you May go may reach for the half down Smack Sweat as example.
Okay and then.
Alright, just one last one for me.
On the capital allocation.
Like do you think that just to make sure. These issues get worked through and everything are you maybe just pulling back a little on your thoughts about doing some M&A I know you're in a position to do something balance sheet wise, but do you think there's delays that just to get things moved over and then on the share.
Speaker Change: Purchase three.
300 million I mean, if you do $50 million a year that six years. So are you.
<unk> <unk> for the $300 million and then why wouldn't there be any in figured in for FY 'twenty five.
So let me let me start on the topic in general and I'll, let Chris answer a couple of the specifics.
Speaker Change: I'm glad you brought this topic up.
I think one of the things Thats important that doesn't get lost in our fourth quarter and fiscal 'twenty four performance is our continued.
Strong cash flow generation and the success that we've had and the progress we made in deleveraging.
To your point when we are sitting now with lots of different optionality around capital allocation our board.
Speaker Change: Proved a $300 million multi multi year stock buyback, which Chris will talk about.
In a second.
With leverage at two eight times, we expect it to likely to continue to go lower and have the continued ability to think about M&A, we're in a position to.
Evaluate opportunities as they show up so.
This lever capital allocation as a meaningful value creator shouldnt be lost in the hiccup of of what happened late in the first quarter and the recovery in the first half of fiscal 'twenty five so thanks for bringing the topic I'll, let Chris comment on some of the particulars, Yeah, Hi, Linda so so.
Maybe just to use your example of a $300 million program with $50 million a year I'll remind you that over the next.
Our 75 million excuse me over the next four years, we expect to generate.
About $1 billion of free cash flow.
So I think we have ample capacity as we sit here today to do more than one thing right.
Ron's, referring to right. This is the lowest level of leverage of the company has experienced and that enables increased optionality and so why nothing in for fiscal 'twenty five it's going to be fluid as we said our number one priority will remain to invest in our business. Our number two priority is now to execute on disciplined M&A.
To answer that question, specifically, our third priority now is our share repo program right.
The fourth being deleveraging so as I think to fiscal 'twenty five specifically.
Our first objective on the share repo program is going to be to offset share dilution similar to what we've done the last couple of years.
Further buybacks will be opportunistic now and in the future because there'll be balanced against the M&A landscape and the opportunities that we see there for fiscal 'twenty, five specifically with $135 million left of variable debt.
We would look to continue to delever as we work through likely paying that off.
As we exit fiscal 'twenty five so I think the message here is a multi year program to provide optimal flexibility we have the stable and consistent cash flows and now appropriate level leverage levels to be able to do more than one thing and that's what I think our message was for today.
Great. Thank you very much.
Susan.
Hi, Linda.
Okay.
That concludes our Q&A session I will now turn the conference back over to Ron Lombardi CEO for closing remarks.
Thank you operator, and thanks to everyone for joining us today, and we look forward to providing an update on our next call have a good morning.
Ladies and gentlemen.
It concludes today's call. Thank you all for joining you may now disconnect.
Okay.
[music].
Yes.