Prestige Consumer Healthcare Inc

NYSE:PBH

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2019 Prestige Brands Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode to prevent background noise. We will have a question-and-answer session later, and the instructions will be given at that time. And as a reminder, this conference is being recorded.

Now, it's my pleasure to turn the call to Phil Terpolilli, Director of Investor Relations.

[Phil Terpolilli, Prestige Brands Holdings, Inc.]

Thank you, operator, and good morning to everyone on the phone. Joining me on the call today are Ron Lombardi, our Chairman, President and CEO; and Christine Sacco, our CFO. On today's call, we will cover the highlights of our fiscal 2019 first quarter and recent divestiture, review the financial results, provide an update to our fiscal 2019 outlook, and then take questions from analysts. We have a slide presentation, which accompanies today's call that can accessed by visiting prestigebrands.com, clicking on the Investors link, and then on today's Webcast and Presentation.

Please remember some of the information contained in the presentation today includes non-GAAP financial measures. The reconciliations between adjusted and reported financial measures are included in today's earnings release and slide presentation. During today's call, management will make forward-looking statements around risks and uncertainties, which we detailed on a complete Safe Harbor disclosure on page 2 of the slide presentation accompanying the call. Additional information concerning risk factors and cautionary statements are available on our most recent SEC filings and the most recent Prestige Brands' 10-K.

I'll now hand it over to our CEO, Ron Lombardi, to walk through the highlights of our first quarter performance.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Thanks, Phil, and good morning, everyone. Let's begin on page 5. We are pleased with our start to the year, and results that were in line with the outlook we presented back in May.

We achieved our top line performance expectations and most importantly, consumption trends for our leading portfolio remains favorable, and we continue to expect 2% to 3% consumption growth for the full year. We also delivered 3% EPS growth in Q1 as well as approximately $54 million in free cash flow. This continued trend of consistent cash generation enables a wide range of capital allocation alternatives, and allowed us to buy back $50 million worth of shares in the quarter.

At the beginning of July, we divested our Household Cleaning segment. The transaction is accumulation of many strategic actions we've taken over the last seven years towards becoming a focused and leading consumer healthcare company. And today, we announced our plans to change our corporate name to Prestige Consumer Healthcare to better reflect this evolution.

Turning to slide 6, we have more detail on our Q1 results. Our net sales were $254 million, down 1% versus the prior year. Although our consumption trends remained healthy, the quarter, as expected, was impacted by shipment timing associated with the new BC and Goody's packaging launch as well as a change in accounting policies around revenue recognition.

Total company gross margin in Q1 came in at 55.4%, a continuation of the sequential improvement that we began to see in Q4. We are continuing to make solid progress against the higher freight and warehousing costs discussed last year, which Chris will walk through in greater detail. Adjusted free cash flow was $53.6 million in Q1, and continues to benefit from our industry-leading EBITDA margins, minimal capital spending needs, and low cash tax rate.

Finally, as part of our ongoing strategy to enhance shareholder value, we divested our Household Cleaning segment on July 2, which further positions the company to drive long-term value. The divestiture enhances our financial profile and further concentrates our efforts in our leading and growing consumer healthcare platform, which we'll talk about in detail later. The net proceeds were used for debt paydown, which enables future capital allocation optionality.

Now, let's turn to slide 7 for an update on BC and Goody's packaging launch. As we discussed on our call last quarter, a key objective in fiscal 2019 is the successful launch of our new easier to use packaging for both the BC and Goody's brands. The launch was a great example of our ongoing commitment to broad based brand building efforts, where we utilize consumer insights and feedback to continually improve product offerings across our portfolio.

As a reminder, the launch will take place over the fiscal year as we transition to the new packaging at retail. I am pleased to report that the launch activity today is proceeding on plan. During the quarter, we began building inventory of the new product and made initial shipments to a number of customers. In Q2, additional shipments will occur, including multiple top retail partners, and the product will also begin to arrive on shelves. In the second half of fiscal 2019, we anticipate shipment conversion for our remaining customers. Once conversion is largely complete, we will begin key marketing initiatives designed to enhance brand equity and awareness around the new packaging. We continue to be excited about the transition and look forward to continued progress in coming quarters.

Now, let's turn to slide 8 and review the household divestiture in more detail. On July 2, we announced the sale of our Household Cleaning portfolio of brands for $69 million. We used $50 million of net proceeds to reduce debt and most importantly allow us to strategically allocate capital towards our consumer healthcare business over the long term.

There are a number of strategic benefits which results from this transition. First, we continue to enhance focus against our leading consumer healthcare portfolio, which is expected to grow over time, driven by our brand building playbook as well as structural consumer interest around self-treatment. In contrast, the Household Cleaning business was positioned in a highly concentrated, competitive and declining category at the store.

Second, the divestiture enhances our financial profile. The Household Cleaning margin structure was dilutive to our company average with historical gross margins in the 20% to 25% range. In total, company resources can now be fully dedicated towards the growing consumer healthcare platform and its superior financial profile.

Third, and most importantly, we are able to reallocate shareholder capital that was being used against the declining Household Cleaning business. Consistent with the third pillar of our strategy around capital allocation, we will continue to be disciplined capital allocators to drive long-term value for shareholders.

In summary, it is important to think about the household transaction as a real allocation of capital to our strategic consumer healthcare business rather than as the sale of the Household Cleaning portfolio.

Now let's turn to slide 9. The divestiture represents a notable milestone for the company. We have evolved over the last decade to become a focused consumer healthcare company. Today, we are positioned as a $1 billion, 100% consumer healthcare platform. We are comprised of strong leading brands spanning various consumer healthcare categories as shown on the right side of slide 9.

Over 50% of our sales are in five leading brands, while the majority of our total portfolio holds a leading number one market share, oftentimes with no meaningful number two competitor.

Given the positive changes the company has undergone in the shift towards a focused platform, we believe a name change, as shown on slide 10, better reflects where our business stands today.

As I mentioned earlier, we are in the process of changing our name to Prestige Consumer Healthcare to reflect this evolution. It's a subtle shift, but an important one to remind ourselves, investors and customers what our business strategy focuses on.

With that, I'll turn it over to Chris to walk through Q1 financials in greater detail.

[Christine Sacco, Prestige Brands Holdings, Inc.]

Thank you, Ron, and good morning, everyone. As Ron reviewed in brief earlier, I'd like to walk through our first quarter results in greater detail, and offer some updated context around our expectations for fiscal 2019 by line item. As a reminder, the information in today's presentation includes adjusted results that are reconciled in our earnings release.

On slide 12, you can see our high level first quarter results, which include a slight revenue decline of 1% to $254 million, and EPS growth of 3% versus the prior year. As noted on our Q4 call, we anticipated the revenue decline in Q1, due to the launch of BC and Goody's packaging, a change in accounting policies around revenue recognition and the timing of related expenses, and a challenging comparison in the prior year.

Adjusted EBITDA declined versus prior year due to the revenue decline along with expected higher G&A cost in the first half due to the timing of certain spending and a lower gross margin from freight and warehousing costs previously discussed.

Now let's turn to slide 13, where I'll discuss consolidated fiscal year results and provide an updated fiscal 2019 outlook by item to reflect the divestiture of the Household Cleaning segment.

For the first quarter of fiscal 2019, our net revenues decreased 1% to approximately $254 million. Our performance was impacted by the anticipated factors, which I discussed on the previous slide. We continue to expect revenue growth for fiscal 2019 to be concentrated in the second half.

Adjusted gross margin came in at 55.4% for the first quarter, up 20 basis points sequentially, as we continue to make progress against higher freight and warehousing costs experienced in the second half of last year.

Concerning freight, as planned, we've continued to shift away from higher cost broker usage. Regarding warehousing costs, we are experiencing gradual efficiency improvements and the warehouse is largely stabilized as an expanded local workforce was hired. Partially offsetting these improvements were the impact of the BC and Goody's packaging transition as well as accounting policy changes around revenue recognition.

Looking ahead, we now expect full year fiscal 2019 gross margin of approximately 57% with no change to our previous underlying assumptions, but a benefit from the divestiture of the low margin Household Cleaning business. Please note, there are certain allocated costs within cost of sales that will remain with our business following the divestiture. For Q2 modeling, we anticipate a gross margin lower than that of the second half. Gradual improvements surrounding freight and warehousing costs are expected to be largely offset by transitory costs related to our BC and Goody's packaging update, which are expected to impact both net sales and gross margin as the newly launched SKUs replace the legacy product.

In terms of adjusted A&P, we came in at 14.6% of revenue for Q1, which grew both in dollars and as a percent of sales as we continued to invest behind our core brands. For fiscal 2019, we now expect A&P of approximately 14.5% of sales, following the divestiture of the Household segment. As a reminder, we continue to expect A&P in the first half to be above second half due to the timing of marketing initiatives.

Over the long term, we will continually look to grow absolute A&P dollars on a year-over-year basis as we actively seek opportunities for long-term brand building to drive top line growth. Our adjusted G&A spending came in at just under 9% of total revenues in the first quarter fiscal 2019, including certain timing-related costs. For the full year, we now expect G&A of approximately 8.5% of sales due to the divestiture of Household Cleaning.

For fiscal 2019, our depreciation and amortization expense not included in cost of goods sold is now expected to be just over $28 million. Last, we reported adjusted earnings per share in Q1 of $0.68, representing low-single digit growth versus the prior year, as a favorable tax rate associated with the Tax Cuts and Jobs Act more than offset the operating income shift resulting from the impact of accounting timing, and BC and Goody's packaging discussed earlier. As these timing factors will continue into Q2, we expect a similar EPS growth rate in Q2 on a year-over-year basis.

Now, let's turn to slide 14 to discuss our first quarter 2019 cash flow. In Q1, we generated $53.6 million in adjusted free cash flow during the quarter, and now expect $205 million or more for fiscal 2019 following the divestiture of Household Cleaning. In the quarter, we executed the share repurchasing program put in place in May, repurchasing approximately 1.4 million shares for a total purchase price of $50 million.

Our net debt at June 30, therefore, was effectively unchanged from the prior quarter at approximately $2 billion. Given the expected year-over-year revenue and profitability shift, our leverage ratio increased slightly on a sequential basis to 5.4 times net debt to EBITDA. Following our Household divestiture, we now anticipate leverage of approximately 4.9 times by our fiscal year-end.

I'd like to now turn it back to Ron for a discussion surrounding our broad fiscal 2019 outlook, and some closing remarks.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Thanks, Chris. Let's continue on slide 16. We are off to a solid start to the fiscal year driven by the continued success of our strategy. For net sales, we now anticipate fiscal 2019 to be in the range of approximately $985 million to $995 million for the year to reflect the divestiture of the Household Cleaning business for the remainder of fiscal 2019. We continue to anticipate organic revenue growth of plus 0.5% to plus 1.5%. And with the divestiture of the declining Household business, we now expect to be at the higher end of this range for the fiscal year.

As Chris highlighted earlier, revenue growth for fiscal 2019 will be concentrated in the second half of the year. First half organic revenue growth is expected to be approximately flat due to the previously described accounting time changes and the BC and Goody's packaging launch.

For profitability, we anticipate EPS to be in the range of $2.84 to $2.92 or plus 10% to plus 13% year-over-year. Similar to the top line, we expect EPS growth to be largely concentrated in the second half of fiscal 2019 as we invest behind our brand efforts, including the BC and Goody's packaging transition. Again, this is driven by the timing factors we discussed earlier. Regarding cash flow, we now expect full year cash flow of $205 million or more.

So, in summary, one quarter into the year, we continue to feel good about our short and long-term prospects. In Q1, top line performance of the business was in line with our expectation, and we continue to make progress on freight and warehousing costs experienced in fiscal 2018. We divested our Household business, which is positive to our financial profile and further enhances our focus around our leading consumer healthcare brands. It also allows for future capital reallocation opportunities.

And finally, we continue to have confidence in our long-term three-pillar strategy. Our business continues to grow, and we are generating consistent free cash flow that can be reinvested to enhance shareholder value.

With that, I'd like to turn it over to the operator for questions.

[Operator]

Thank you. And our first question is from Joe Altobello with Raymond James. Your line is open.

[Joseph N. Altobello, Raymond James & Associates, Inc.]

Thanks. Hey, guys. Good morning. So I guess, the first question for you, Ron, you mentioned earlier that the sale of Household does allow you guys to focus a little bit more on the OTC business. Given that, what is the long term – sort of long-term growth algorithm you guys now expect for Prestige Brands with that sale in terms of top line and bottom line growth?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Good morning, Joe. Thanks.

[Joseph N. Altobello, Raymond James & Associates, Inc.]

Morning.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

So in terms of top line growth, we continue to feel good about our long-term outlook of 2% to 3% organic growth. With the Household business being only about 8% of sales, it was only about a 30 bp headwind to the business. So it still keeps us within that 2% to 3% top line growth.

And then same thing for the bottom line. We had said mid to high single digit long-term growth, and again, we continue to feel good about that long-term outlook.

[Joseph N. Altobello, Raymond James & Associates, Inc.]

Okay. Great. And then on international, it looked like sales were down a little bit this quarter, but gross margin was up significantly. Was just curious what the dynamics were there?

[Christine Sacco, Prestige Brands Holdings, Inc.]

Yeah, Joe, so as you know – this is Chris – the International business is largely distributor based, and so the top line was really impacted just timing of distributor orders and shipments for the quarter. Still feel good about the full year for International expected to be up on a year-over-year basis on the top line. The gross margin impact to International was product mix.

[Joseph N. Altobello, Raymond James & Associates, Inc.]

Okay. Great. And just one last one, if I could, on working capital. Receivables were up pretty significantly I think about 12% year-over-year, and payables were up significantly as well. Should we expect working capital to be a major contributor to cash flow this year either one way or the other?

[Christine Sacco, Prestige Brands Holdings, Inc.]

Yeah. Joe, working capital really is timing related, right? We haven't had any change in our terms with customers or vendors. And so we will see variability from quarter to quarter. But no, I generally would expect our working capital to grow in line with our top line.

[Joseph N. Altobello, Raymond James & Associates, Inc.]

Okay. Perfect. Thank you, guys.

[Operator]

Thank you. Our next question comes from Jon Andersen with William Blair. Your line is open.

[Jon R. Andersen, William Blair & Co. LLC]

Hey. Good morning, everybody.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Morning, Jon.

[Christine Sacco, Prestige Brands Holdings, Inc.]

Morning, Jon.

[Jon R. Andersen, William Blair & Co. LLC]

Hey, Ron, I think you mentioned that consumption trends have been solid I think, but I didn't see any detail in the presentation or the press release. I may have missed it. I apologize, if I did.

Could you talk a little bit more broadly about what you're seeing in terms of consumption trends in your business? Obviously, the OTC side right now with Household being divested. And some of the dynamics that you're still experiencing or may not be experiencing anymore with the retail trade and trade inventory adjustments?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Sure. So first of all, we continue to feel good about our outlook for the year of 2% to 3% consumption growth. We saw continued strong performance across our portfolio during the first quarter. During the first quarter, we also continued to feel some headwinds from inventory destocking, although it wasn't significant in any manner. So consumption trends continue to be good for the business.

The one other thing that I'll add is that the reporting that's out there, the generic reporting that comes out monthly, continues to be very disconnected from our business. It doesn't include the fast-growing online business, which doubled last year and doubled again in the first quarter for us. And we've also noticed a particularly large and growing disconnect on our Analgesic business, the BC/Goody's, as another example. We're not exactly sure why.

But – so I don't know if that answers your question, but we continue to feel good about the underlying consumption performance of the portfolio.

[Jon R. Andersen, William Blair & Co. LLC]

Yeah. That's really helpful. And given the fact – I know it's a small part of your business at this point, but given the fact that the online portion is growing so rapidly, can you just remind us, in general, how are your brands? How do they stack up online in terms of market share versus their performance offline? And is there any kind of tradeoff you have to make in terms of profitability when you sell something online versus through a physical retail store?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Yeah. So, for our business, where we compete online, profitability structure is similar to what we have with our brick-and-mortar partners, so there's no big difference there. In terms of positioning, generally, we have a leading position online where we have that same position in brick-and-mortar and, in some cases, it's even stronger than it is at retail. The one thing that we do benefit from online is the tail brands that we have, which may have spotty distribution at retail, these are the small tail brands that we have, tend to do very well online as consumers go out and look for those trusted brands and find them online. So, that's probably the one big difference is that we seem to have better opportunities with that smaller tail brands – group of tail brands that we have.

[Jon R. Andersen, William Blair & Co. LLC]

Interesting. Okay. And how would you characterize the pricing structure across your portfolio in the quarter and for the year? Are you expecting stability in pricing?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

We are, with some small upside in the latter part of the year for some price increases. I think it's important to note, Jon, that there is a lot of comments being made by CPG companies about expected price increases later in the year.

[Jon R. Andersen, William Blair & Co. LLC]

Yes.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

And that, in my opinion, is response to the environment that they're competing in, both from a price competitive environment, where there is two or three large players competing for share, or they're being subject to commodity price inflation pressures, and we're avoiding a lot of those headwinds. So, we're not faced with the same situation that many other CPG companies are today. And again, we've talked about this a number of times in the past about the space in our leading position allows us to avoid a lot of these headwinds.

[Jon R. Andersen, William Blair & Co. LLC]

Okay. Last one for me. You've executed your first share repurchase, I think, as a public company, and did it quite rapidly. I'm wondering if there was any tie in between that and the sale of the Household Cleaning business, which generated funds to help support that. And would you consider maintaining kind of a broader capital allocation options going forward, i.e. more share repurchase activity, if it makes sense.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

There really wasn't any tie-in between the sale of the Household and the announcement of our planned repurchase back in May. The timing just happened to be coincidental. I think it's important to note that, with our industry-leading free cash flow, it allows us to have flexibility around capital allocation. Again in the past, it's primarily been lined up with M&A opportunities, and paying down debt. And then more recently, with our stock price where it was, we did have an opportunity to go out and buy back stock at a price that we felt made a lot of sense for value creation.

[Jon R. Andersen, William Blair & Co. LLC]

Thanks so much. Good luck going forward.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Thanks, Jon.

[Operator]

Thank you. Our next question is from Steph Wissink with Jefferies. Your line is open.

[Stephanie Wissink, Jefferies LLC]

Thanks. Good morning, everyone. Three really quick ones, if we could, Ron and Chris. The first, it looks like, based on your organic growth guidance for the year leaning into the upper end, you're starting to close that gap with consumption. I'm wondering if you can talk a little bit about just the timeline of moving that organic growth into line with the overall consumption that you see in your brands.

And then, secondly, I wanted to just ask on the timing of the BC and Goody's rollout. You gave us some good detail in your prepared remarks, but I want to make sure we understand the timing, the cadence? So, I think you mentioned, Ron, a small bit of sales in Q1, but most of it is going to be shipments in Q2. One was the A&P step-up to support that distribution. Is that Q3 or Q4?

And then, last one, I just want to follow up on an earlier question regarding working capital. First is, did I understand you right that it was largely timing related? So, should we expect some improvement in the DSOs and the payables rate as we go through the course of the year? Thank you.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Okay. So, three questions there, Steph. First, around consumption, we anticipate that as we get into the second half of the year, we'll see a narrowing of our reported sales performance to the consumption numbers, everything else being equal, right? It's hard to predict the timing and the concentration of retailer inventory reductions that we anticipate this year. We have forecast around 1 point or so of headwind in our sales outlook for the year. So, again, as we get into the later part of the year, we expect those to narrow.

The next question you had was around BC/Goody's timing both on the impact of revenue and then A&P spending. For Q2, we expect a more concentrated impact on both sales and gross margin, as we continue to accelerate the conversion of the new packaging with a number of our largest customers being converted in Q2. And then, starting in Q3, with Q3, we expect to see a bigger concentration of the marketing efforts around that restage and launch.

[Christine Sacco, Prestige Brands Holdings, Inc.]

And, Steph, I'll just remind you that for A&P spend, as we talked about expecting first half to be heavier than the back half, there are a number of initiatives as we're always rolling out certain initiatives and timing. And so while BC/Goody's will be more concentrated in Q3, there are other brands such as Summer's Eve that is more concentrated in the first half.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

And in terms of working capital, I'll let Chris address that.

[Christine Sacco, Prestige Brands Holdings, Inc.]

Yeah. So, Steph, your question around, would we expect DSO improvement, as an example, throughout the year and what do we think about working cap. Obviously, the timing is always difficult to predict. I mean, it's something as simple as the timing of a check run and how quarter end and could impact where the balance sheet ends up. But generally speaking, yes, I would expect that working cap would be in line as we work through the year to anticipate it being a – growing in line to support top line growth.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

One other thing to comment there is, there seems to be some thought that our DSOs have eroded, and they have not. We haven't made any changes in the terms and conditions to our customers, nor has there been any meaningful increase in our DSO when you compare the quarter ended June this year to last year. It's important to remember, unless you knew exactly the monthly flow of sales, you can't calculate DSO. And I think externally people just take the whole quarter without understanding the flow. And it looks like it's changing, but we have not seen any erosion in our DSO.

[Stephanie Wissink, Jefferies LLC]

Okay. That's helpful. And then, if I could, Ron, are you willing to give the specific consumption number? It's not in your deck this time, is it something that you're willing to share with us in terms of the percent change?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

For the quarter?

[Stephanie Wissink, Jefferies LLC]

Yes, for the quarter.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Go ahead, Phil.

[Phil Terpolilli, Prestige Brands Holdings, Inc.]

Yeah, Steph, it's Phil. I think consumption trends for the quarter were positive. They were slightly below that 2% to 3% range, but that was in line with our expectation for the year as you were going up against a difficult comparison.

[Stephanie Wissink, Jefferies LLC]

Okay. Thank you.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Yeah.

[Operator]

Thank you. Our next question comes from Linda Bolton Weiser with D.A. Davidson.

[Linda Bolton Weiser, D. A. Davidson & Co.]

Hi. So in terms of your projection for consumption growth for the fiscal year of 2% to 3%, can you break that down between category growth versus anticipated share gains?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

So category growth – and again, we'll have to summate all of the different categories that we compete in and, of course, the International business as well.

Probably two-thirds of it will come from underlying growth and the last third would come from us either growing the categories or continuing to grow our share in the categories that we compete in.

I think it's important to remind everyone that we continue to perform well and not only outgrow the categories that we compete in but also continue to outpace private label. I haven't gotten any questions on today's call about that. But we continue to be successful in growing our share and growing the categories that we compete in.

[Linda Bolton Weiser, D. A. Davidson & Co.]

Thanks. And then I guess on the gross margin, I believe Chris said at one point that BC and Goody's would have a bigger impact on second quarter in terms of impact on sales and gross margin. And you did say the gross margin in second quarter would be lower than the second half, but you didn't say if the gross margin would be up or down sequentially versus the first quarter. Should we read that it could be down sequentially in the second quarter versus the first quarter?

[Christine Sacco, Prestige Brands Holdings, Inc.]

Well, Linda, the gross margin for Q2 will be up as a result of the divestiture of Household, right? But there is no change to our underlying assumptions ex the Household divestiture.

So, yes, we had talked about in our initial outlook expecting a sequential step-down in Q2. And that's primarily related, as you said, to the biggest rollout with our largest customers for BC and Goody's transition in Q2.

And as a reminder also, the largest impact of the acceleration of the revenue recognition, timing of expenses and deductions is going to come in the second quarter. So those are the factors that will impact Q2. So it will be up because of the Household divestiture, but down sequentially, as expected, excluding that.

[Linda Bolton Weiser, D. A. Davidson & Co.]

Got you. And then I guess a similar type question on the revenue, because I guess you said flat organic in the first half, so it was down 1% in the first quarter. So second quarter has to be up about 1% in terms of the organic revenue growth. Would that be correct?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

That's correct.

[Linda Bolton Weiser, D. A. Davidson & Co.]

Okay. And then just in terms of long term, I guess, you've never really stated a target leverage ratio. But I know your long-term strategy remains relatively unchanged in terms you would look for acquisitions down the road. So could we say that 4 times to 6 times leverage is like a long-term range that we would expect you to be in?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

So to your point, Linda, we've never given a long range leverage target for a number of reasons. One is, it really depends on the environment at a given point in the future in terms of what the right leverage or range that we should operate the company in. And it's fluid, and it changes constantly.

The one thing that we have been consistent saying as well is that it's likely that we will operate at higher levels of leverage than most other companies, because of the stability of our business and our industry-leading free cash flow.

I'm not sure in the future if we'll go as high as 6 times. I think we've said we may operate at peak levels closer to 5 times. And I'm not sure if 4 times would be the right floor as well. So you may be a bit high on both. But I don't know, if that answers your question.

[Linda Bolton Weiser, D. A. Davidson & Co.]

Yes. That's helpful. Thank you very much.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Thank you, Linda.

[Operator]

Thank you. And our next question is from Frank Camma with Sidoti. Your line is open.

[Frank Camma, Sidoti & Co. LLC]

Good morning, guys.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Hey, Frank.

[Frank Camma, Sidoti & Co. LLC]

Hey. You usually talk about your brands, sort of your leading brands versus the rest of your portfolio. Is there a reason why you changed that in the presentation, sort of calling out that difference?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Just that we wanted to give a little more detail on Household, and we wanted to give an update on the all-important BC/Goody's transition. So, we felt that that was enough to cover on the call today. But we continue to execute our strategy of investing behind our leading brands, and focusing on new products and bringing innovation out to market. One highlight we could talk about is the Dramamine-N for nausea that we launched during the most recent quarter. That continues to do well and is very successful at this point, but we'll get back to providing a bit more insight into the brand success next quarter, Frank.

[Frank Camma, Sidoti & Co. LLC]

Did the leading brands or I forgot the label given, did they outgrow the rest of your portfolio, when you strip out Household Cleaning, when you look at that? Or was it about even this time?

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Our power core and core brands did meaningfully outpace the rest of the company, even excluding Household, as you would expect, right?

[Frank Camma, Sidoti & Co. LLC]

Sure.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

We're investing behind that.

[Frank Camma, Sidoti & Co. LLC]

Sure. Okay. That's all I'm getting. My other question was just on, when I adjust G&A, it has obviously come down for the adjustments you have in it, but it still looks elevated relative to – especially where you have it, I think was for the year the percentage 8.5%, is that right?

[Christine Sacco, Prestige Brands Holdings, Inc.]

That's correct.

[Frank Camma, Sidoti & Co. LLC]

Okay. So, that's the adjusted number, right? Was there something else in the quarter that would have elevated it?

[Christine Sacco, Prestige Brands Holdings, Inc.]

Yeah.

[Frank Camma, Sidoti & Co. LLC]

Oh, okay.

[Christine Sacco, Prestige Brands Holdings, Inc.]

Yeah. So we – there's variability from quarter to quarter, given the timing of initiatives, right? And in the first quarter, we had some unique IT costs that we don't expect to repeat, as an example. We upgraded our ERP system during the quarter. So, we continue to expect G&A of about 8.5% for the year.

[Frank Camma, Sidoti & Co. LLC]

Okay. And last question for me is just what do you have built in to your interest expense assumption like two more rate increases? Or I mean, since you still have floating debt, I mean what do you kind of build in there?

[Christine Sacco, Prestige Brands Holdings, Inc.]

Yeah, we've built in two more increases. As you recall, our outlook is for our interest to be flat – interest expense to be flat for the year, year-over-year.

[Frank Camma, Sidoti & Co. LLC]

Okay. Okay. Great. That's all I had. Thanks, guys.

[Operator]

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to management for their final remarks.

[Ronald M. Lombardi, Prestige Brands Holdings, Inc.]

Thank you. I'd like to thank everyone for joining us today, and have a good day. Thank you.

[Operator]

Thank you, ladies and gentlemen, for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.