Prestige Consumer Healthcare Inc. (NYSE:PBH) Q2 2024 Earnings Call Transcript

Prestige Consumer Healthcare Inc. (NYSE:PBH) Q2 2024 Earnings Call Transcript November 4, 2023

Operator: Good day, and thank you for standing by. Welcome to the Q2 2024 Prestige Consumer Healthcare Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Philip Terpolilli. Please go ahead.

Phil Terpolilli: Thanks, operator, and thank you to everyone who’s joined today. On the call with me are Ron Lombardi, our Chairman, President and CEO; and Christine Sacco, our CFO. On today’s call, we’ll review our second quarter fiscal ’24 results, discuss our full year outlook and then take questions from analysts. A slide presentation accompanies today’s call can be accessed by visiting prestigeconsumerhealthcare.com, clicking 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 measures are included in our earnings release and 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 2 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 other various numerous potential impacts. This means results could change at any time, and the forecasted impact of risk considerations is the 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. Ron?

Ron Lombardi: Thanks, Phil. Let’s begin on Slide 5. Our Q2 results largely aligned to our expectations and built on a 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 $1.07 in earnings, up 5% versus the prior year while experiencing sequential and year-over-year improvement in gross margin as well as a consistent EBITDA margin. Strong free cash flow enabled to pay down of $55 million in debt, and we finished the quarter at 3x 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 6 to discuss one example of brand building that’s driving our success. Our Goody’s headache powders define 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 learnings from consumers to drive increased usage of the brand. We use these and expanded with new forms and flavors as well as with targeted offerings like Goody’s Hangover that solve on-the-go pain release with great taste. Most recently, we leveraged these highly successful products with distinct marketing designed 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 in Goody’s 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 3x faster than the overall analgesic category. Now let’s turn to Slide 7 for an update on e-commerce. Alongside these brand-building efforts is our emphasis in aligning investments with channels that are important to consumers. As consumer shopping habit 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 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 profile.

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, there are 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 the bottom, is a reminder of investments around content. We continually refresh online content for each of our brands to help drive traffic and ultimately purchases as consumers seek solutions for their health care 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.

Christine Sacco: Thanks, Ron. Good morning, everyone. Let’s turn to Slide 9 and review our second quarter fiscal ’24 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 1-point headwind related to the strategic exit of the private label business. EBITDA and EPS both increased 4.2% and 5.4%, respectively in Q2 from the prior year, largely attributable to the timing of A&M 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 6 months of fiscal ’24, revenues were approximately flat at $566 million. By segment, excluding FX, North America segment revenues declined while the International segment increased 8.5% 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 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 6 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 ’23 with Q3 estimated to be flat with Q2. As a percent of sales, advertising and marketing came in at 13.5% for the first 6 months. For fiscal ’24, 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 9.5% 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 ’24, 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 ’24. Now let’s turn to Slide 11 and discuss cash flow. For the first half, we generated $106.1 million in 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 3x. We still anticipate being below 3x leverage by fiscal year-end, absent other strategic uses of cash flow. This is consistent with our objective of targeting to operate below 3x leverage over the long term. With that, I’ll turn it back to Ron.

Ron Lombardi: 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 ’24, we continue to anticipate revenues of $1.135 billion to $1.140 billion, and organic revenue growth of approximately 1% to 2% versus fiscal ’23 or organic revenue growth of 2% to 3% after excluding the exit of the noncore 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 and 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 Q3, we anticipate EPS of $1.04, 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 3x 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?

Operator: [Operator Instructions]

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Q&A Session

Operator: Our first question comes from the line of Rupesh Parikh with Oppenheimer.

Rupesh Parikh: Good morning. And thanks for taking my question. So I guess I wanted to kick it off just with the Women’s Health segment. Just curious if you can just give us color in terms of how you’re thinking about the recovery. I think earlier year you expected it to improve later this year, but just curious the latest thinking on women’s health.

Ron Lombardi: I think as we talked about on the last quarterly call, the category 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 brand’s positioning and expect things to turn later in the year, early into next year.

Rupesh Parikh: Great. And then on the competitive front, just curious if you’re seeing any changes from private label competition or even other branded players.

Ron Lombardi: No. No real change in share or new entrance that’s disrupting anything, Rupesh. So it’s kind of just the overall category trends at this point.

Rupesh Parikh: Great. And then we’ve all seen, I guess, the bankruptcy of Rite Aid. So just curious as well if you’re seeing any shift between channels, just given changing consumer dynamics and just what’s happening with some of the challenges in the pharmacy channel.

Christine Sacco: Hey, it’s Chris. So 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, they’re not one of our top 10 customers globally. That said, we have seen some channel shift mainly into 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. And we’re well positioned, right? We’re channel-agnostic from a gross margin perspective. So we always say we want our products to be available to consumers wherever they shop. And so we wouldn’t anticipate a channel shift meaningfully impacting us.

Operator: This question comes from the line of Susan Anderson with Canaccord.

Susan Anderson: 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 a driver of your sales. I guess there’s been some mix commentary out there. Just curious how you’ve seen it start out and how you expect it to play out or how you’re modeling it for the season.

Ron Lombardi: So we’ve been talking about kind of 3 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 is 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 street factors continue to line up with what we thought about for the year. So we are anticipating cough cold for the year to be in line with last year. So as our supply is better this year, it’s 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.

Susan Anderson: 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 kind of 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 as we look forward?

Christine Sacco: Yes. So that’s exactly right. We’re still benefiting from certain pricing actions that will roll over largely in the second half of this year. So probably easier to talk first half in totality, right? We were 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.