Prestige Consumer Healthcare Inc

NYSE:PBH

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2021 Prestige Consumer Healthcare Inc. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Phil Terpolilli, Director of Investor Relations. Thank you. Please go ahead, sir.

[Phil Terpolilli, Director, IR]

Thanks, operator, and thank you to everyone who is joined today. On the call with me are Ron Lombardi, our Chairman, President and CEO; and Chris Sacco, our CFO. On today's call, we'll begin with some topical remarks given the current pandemic, review the results of the first quarter fiscal '21, provide an outlook update and then take questions from analysts.

We have a slide presentation which accompanies today's call, and can be accessed by visiting prestigeconsumerhealthcare.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. Reconciliations to the nearest GAAP 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 are detailed in a complete Safe Harbor disclosure on Page 2 of the slide presentation accompanying the call. These are important to review and contemplate. As everyone on the call today is well aware, business environment uncertainty remains heightened due to duration and impact of COVID-19.

These impacts include an uncertain shutdown timeframe for many areas of our economy, ongoing changes to consumer purchasing habits, the potential for a disrupted supply chain, heightened unemployment and many other economic factors.

This means the results could change at any time, and the forecasted impact of risk considerations is a best estimate based on the information available as of today's date. Additional information concerning risk factors and cautionary statements are available on our most recent SEC filings and the most recent Company 10-K.

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

[Ron Lombardi, Chairman, President and CEO]

Thanks, Phil. Let's start on slide five. Last quarter, we were experiencing the very early innings of the COVID-19 pandemic. At the time, we outlined several factors our organization began focusing on in real-time to adapt to the changing environment. As a result of these actions, I'm pleased to report a solid Q1 earnings results and better than expected revenues. This is a testament to our preparedness and the strategy that we outlined.

For starters, our long-term strategy continues to work. Our mission to provide consumers brands they know and trust is unwavering. Even with the challenging environment being experienced due to COVID-19, our consumers continue to turn to our leading brands to meet their healthcare needs. Second, our robust continuity plans continue to have us well positioned to service our retail partners. Our investments in selecting the right manufacturing partners and maintaining ample inventory has paid off in this tight supply environment.

Third, embracing our company culture of leadership, trust change and execution has paid off in a big way. It's allowed us to be agile marketers, pivoting quickly to efforts that optimize our brands in this very unique environment. The end result is that we are winning and growing channels like e-commerce and our portfolio continues to be well positioned for the long term.

And finally, our strong operating model and disciplined capital strategy continue to reward stakeholders. Our strong Q1 free cash flow and industry-leading financial profile enabled further debt reduction in the quarter.

In summary, we are not sitting still. We are learning from what is happening and adjusting our go-forward strategy in real-time. We are doing this through the guide of our proven three pillar strategy, which remains intact. It drives our long-term success and Q1 was yet another example of it.

I'll now hand it over to Chris to review Q1 financial results.

[Christine Sacco, CFO]

Thanks, Ron. Good morning, everyone. Let's turn to slide seven and review our high level first quarter financial results. Q1 revenue of $229.4 million, declined 60 basis points on an organic basis versus the prior year, which excludes the effects of foreign currency.

By segment, in North America, revenues were essentially flat, positively impacted by the Women's Health, Oral Care, and Skin category but offset by lower Cough and Cold, Eye & Ear Care, and GI shipments as categories we participate in faced declines in incidence levels and usage rates related to COVID-19.

Our International business declined in the high-single-digits after excluding foreign currency. This decline was attributable to both a difficult comparison in the prior year for a number of products, as well as significantly lower sales of Hydralyte in Australia, as a result of COVID-19's impact to lowering both general consumer illness and activities such as athletics.

EBITDA and EPS for the first quarter grew 12% and 32% respectively versus the prior year. Solid EPS growth was attributable to positive contributions across our operating expense lines as well as lower interest expense and share count from our strong free cash flow and strategic capital allocation. Let's turn to slide eight for more detail around consolidated results.

As I mentioned on the prior slide, first quarter fiscal '21 revenue decreased 60 basis points versus the prior year, excluding the effects of foreign currency. Consumption declined just over 4%. This was better than we had anticipated back in early May, driven by strong e-commerce growth as consumers continued to shift to online purchasing. That said, we continue to experience consumption declines in certain categories as a result of COVID-19. As expected, these consumption declines were partially offset by inventory replenishment efforts as retailers refilled their supply following strong March consumer demand.

Total company gross margin of 58.4% increased 70 basis points versus prior year's first quarter. We experienced early benefits from the transition to our new third-party logistics provider that was completed at the end of fiscal '20 which offset negative product mix. For Q2, we anticipate a gross margin of approximately 58%.

Advertising and marketing came in at 12.1% of revenue, down in dollars versus the prior year as expected as we eliminated ineffective spending during the unique pandemic environment. For the second quarter, we anticipate a more normalized rate of A&M spend of approximately 15%. Please note, this line item was previously shown as A&P or Advertising & Promotion, but has been relabeled to Advertising & Marketing to better reflect the nature of our long-term brand building expenses. There have been no changes to what we are included in the numbers.

Our G&A spend for first quarter fiscal '21 were approximately $20 million, or just under 9% of revenue, down from the prior year owing to disciplined cost management and lower costs resulting from the current environment. For Q2, we anticipate G&A expense of approximately $21 million. Left, as stated on the prior page, EPS grew approximately 32% versus the prior year. Lower operating costs, lower interest expense, and lower share count were all factors to growth. For Q2, we expect interest expense to approximate $21 million and a corporate tax rate of around 25%.

Now, let's turn to slide nine. In the first quarter, we generated $72.6 million in free cash flow, which represents over 40% growth versus the prior year, driven in part by the timing associated with strong retailer reorders placed in April, following the March consumption spike. For Q2, we would anticipate free cash flow below the prior year as we invest in CapEx of approximately $10 million. Despite this, total free cash flow for the first half of fiscal '21 is expected to exceed that of the prior year.

In the first quarter, we continued to focus on debt reduction and paid down $111 million in debt. At June quarter-end, we had approximately $1.6 billion in net debt, which equated to a leverage ratio of 4.4 times. We expect to continue to prioritize debt pay down as our primary use of free cash flow. Lastly, we would like to remind investors of our continued focus on liquidity in the current environment. We ended the quarter with over $50 million in cash on hand, with ample access to our revolving credit line of well over $100 million.

And with that, I'll turn it back to Ron.

[Ron Lombardi, Chairman, President and CEO]

Thanks, Chris. Let's turn to slide 11 to recap what we've seen so far this year. As I touched on earlier, despite the uncertainty caused by COVID-19, we are pleased with the plan we implemented and our results in Q1 performance to-date. There are a number of important factors shown here, each of which underpin the financial results Chris just touched on.

We continue to prioritize putting our employee safety first through various proactive measures. We have numerous manufacturing partners which are all operating in a similar capacity. All of these employees are the enablers to our success. We are proud of how our team members have adapted well to this volatile environment and thank them for their continued commitment.

In the middle of the slide, is our supply chain, we've continued to work with our third-party partners closely on continuity of supply. Although dynamic, we continue to avoid any material out-of-stock positions at retail. The result of this is continued and reliable inventory supply, and engaged workforce and committed partners, enabling us to maintain superior service levels with our retail partners. In doing so, we have set ourselves up for both short- and long-term success.

Now, let's turn to slide 12, for an update around our brand building efforts. Investing in our leading portfolio of brands remains the number one principal in our three-pillar strategy. Our leading brands have heritage in connections with consumers. We are also diversified, which positions us well to navigate the impact of COVID-19, as we realized in Q1.

We continually invest in our key brands over the long term through a wide-ranging brand building toolkit. Critically, it features various efforts which differentiate us from other brands and private label. This playbook has not changed. What has changed, as outlined last quarter is where consumers are shopping as well as which categories, they are using the frequency. This is truly a unique attribute of the COVID-19 pandemic versus prior recessions.

This impacts all of our brands in unique ways. Just over one quarter into this new landscape, we are learning and adapting to the changes it brings for each of our brands in the real time. Where we've experienced the largest opportunities at the right end of the spectrum, is from channel shifting into e-commerce. Our early investments in this channel had us well positioned to capture growth as consumers transitioned to digital shopping during the pandemic.

The second opportunity our portfolio is experiencing is, consumer focus on self-care at home. Examples here include, avoiding a doctor's visit and increasing focus on everyday hygiene and wellness. Each of these factors are benefiting many of our brands shown towards the right of the slide. We'll discuss a few of these in greater detail later on.

Towards the left, we highlight some challenges we are navigating due to COVID-19. Many activities remain at suppressed levels including time spent outdoor, travel and sports activities. Furthermore, less time spent with people means less overall illness, which is impacting certain brands such as Hydralyte, during Australia's winter season. We've also seen reduced convenience channel traffic temporarily impact incremental to-go purchases like Clear Eyes Pocket Pal and Powdered Analgesics.

Despite these category challenges, our brands maintain leading positions and many have actually expanded share in the impacted categories. An example here is mix. As the head lice category is currently declining due to children not in school or attending summer camps, our brand has expanded share through our ongoing brand building efforts. With a wide range of impacts, it remains critical that we continually adapt to the changing conditions. We are doing just that by allocating investments to the opportunities we have identified here.

Let's turn to slide 13, to discuss some examples. As seen on the previous slide, our diverse portfolio positions us to do well even in this challenging environment. Our marketing efforts have moved rapidly to target the shifting needs of consumers and help us to connect with them in a pandemic world. The page here shows just a few of the many new initiatives that kicked off recently.

On the left of the slide is Compound W. We are focused on expanding our leading position with Compound W by using marketing that reminds consumers of the ability to treat warts rapidly at home. We believe this message and our brands efficacy is resonating with consumers, further expanding our number one market position.

In the middle of the page is Clear Eyes. We've had several new messages from the brand since the pandemic began. Most recently, we are activating digital efforts focused on at-home usage and the feel-good benefit of having Clear Eyes for video calls. The results are positive. We're seeing higher than average click-through rates on Google and our brand remains as resilient as ever.

The last example we have here is BC and Goody's. These brands, which are concentrated in the Southeast, historically focused marketing efforts in sponsorship activities like Southern League Baseball and NASCAR. With these events abbreviated or temporarily suspended, we reallocated our spending into various digital opportunities. Two examples shown here are a refresh of our web pages and marketing of new products like the recently launched Goody's Hangover.

In summary, we are quickly identifying opportunities like the ones discussed here through consumer insights. From there, our nimble marketing strategy looks to address the shifting consumer habits. It's all part of our brand-building playbook that is built for long-term success.

Now, let's turn to slide 14, for an update on our e-commerce business. Investments in e-commerce had meaningfully paid off as we were able to successfully engage and transact with consumers as their spending patterns shifted online. These investments began several years ago, as we invested in digital content and bringing external resources in-house.

E-commerce traffic continues to increase. And as a result of these actions, we believe our market shares are actually above our average brick and mortar share in many categories. Our established business is a leader in e-commerce, consumer healthcare, and poised to continue benefiting from the growing interest in the channel. In Q1, consumers increased online purchasing with the goal for many to minimize person-to-person contact during the pandemic.

E-commerce grew triple-digits and now accounts for over 10% of our total retail sales with no signs of slowing. This growth is broad ranging across many major retail partners. It also does not include omni-channel solutions like click-and-collect, which have also seen impressive growth. But we aren't sitting still.

We continue to reallocate investments into this opportunity. Our three largest brands in the e-commerce channel are shown on the right side of the slide. Each of the brands, Summer's Eve, Monistat and DenTek have unique strategy that continued to build successful momentum for each in Q1. For Summer's Eve, consumers are at home more than ever. They are exercising at home as well. We therefore, refocused marketing efforts around home workouts and highlight our recently launched Summer's Eve active products.

For DenTek, we recently launched a Beyond Brushing campaign that reminds consumers the benefits of a broad oral healthcare routine. Beyond Brushing reminds consumers the benefits of flossing, dental guards and other medical devices for self-care. It's early but the campaign is resonating with consumers as they shop online and elsewhere.

Left, for Monistat, we're reminding home shopping consumers about quick and easy shipping to the home. Effective advertising has successfully reminded consumers of Monistat's largely superior proposition to an in-person doctors visit. As a result, we are seeing a doubling of visits to our monistat.com website.

As consumers research the category, these digital investments deepen the incidence association with Monistat, consistent with our long-term strategy. In summary, by being early and actively investing in the e-commerce channel, our brands are winning. As the pandemic shifts consumer preferences, this provides a great positioning for our brands to benefit.

Now, let's turn to Slide 16, to discuss our outlook. One quarter into fiscal '21, we are off to a solid start for the year, thanks to our business strategy and execution. By continuing to execute our proven strategy and focusing on our leading brands, we are well positioned to continue to weather the storm.

For the second quarter, we anticipate revenue of $225 million or more. Within this outlook, we expect consumption to decline low to mid-single-digits due to certain categories that are being affected by COVID-19. Despite this challenge, our brands continue to hold leading positions and many have expanded share in these declining category cases. Most importantly, our investments continue to position these brands for the long-term growth and categories returned to more normalized levels.

Our assumption also includes a modest inventory reduction expectation at retail. Over the last month, heightened week-to-week consumption variability has declined. As a result, we believe certain channels and retail partners may begin to adjust their inventory levels to reflect this more stable performance. We also anticipate EPS of $0.70 or more in Q2.

Our focus on cost management efforts, along with the benefit of our capital allocation strategy and debt reduction is expected to more than offset the anticipated Q2 revenue decline compared to the prior year. Last, our strong and stable free cash flow remains the company's strength. Free cash flow is expected to increase for the first half versus prior year. And as always, we intend to execute a disciplined capital allocation strategy with a near-term focus on debt reduction to drive shareholder value.

With that, I'll open it up for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Steph Wissink with Jefferies. Your line is now open.

[Steph Wissink, Jefferies]

Thanks. Good morning, everyone. Thanks for all the detail Ron and Chris, very helpful. I wanted to unpack three areas, Chris, the first one is for you is on the A&M, Advertising & Marketing. I think you mentioned Q2 at 15%. But it did look like you banked a little bit of value in Q1. What should we be thinking about how you plan to use that value or do you think you would just drop that through to the bottom line and that's a net benefit for the year?

[Christine Sacco, CFO]

Yeah, Steph I think the way we think about A&P, obviously can be impacted by timing in this COVID environment very fluid. And when I think about A&P, you'll recall in Q4, our gross margin came in higher than anticipated and as we always say, looking to maintain EBITDA margins in the mid '30s, we invested that additional gross margin back into A&P in Q4.

So, as I look to the step up for Q2 obviously in A&P from Q1 to more normalized levels of about 15%, you're right year-over-year down slightly. But, when I think about Q4 and Q1, Q2 combined more in line with our normalized rate of around 14% to 16%. So, it can fluctuate. Right now, we're anticipating at about 15% for the quarter, and I think we feel good about that number for Q2.

[Steph Wissink, Jefferies]

Okay. And then, Ron a question for you, you mentioned a benefit of inventory replenishment in the quarter but also your comments at the end of your prepared remarks talked about potential destocking again. Where are we along that continuum of normalizing to consumption? Or do you anticipate we're going to continue to see a headwind from destocking over the next several quarters or are we nearing that point of recalibration?

[Ron Lombardi, Chairman, President and CEO]

Yeah. So, first of all Steph, retailer inventory destocking is driven by each retailers individual performance and their objectives and goals. So, it's tough for us to answer that for them. But what we did call out in our second quarter outlook is that, we're seeing signs of retailers beginning to make adjustments already.

So, for example in July, we've received orders from retailers that have extended delivery dates as they begin to adjust their inventory levels on hand, while still trying to protect in-stock levels. So, it's something that we think is going to continue for a while through the second quarter as each retailer begins to take stock of their performance and objectives in response to those.

[Steph Wissink, Jefferies]

Okay. And then last one for us, is just on the allowance for doubtful accounts. It was up almost 2X as a percent of receivables in the quarter versus the prior year, was up a bit from Q1. So, I'm just curious if you can talk a little bit about the quality of your receivables. Here, some of the new channels that you're distributing into are bit higher risk. How should we think about reading that relative to the receivable balance? Thank you.

[Christine Sacco, CFO]

Yeah Steph, no change in the quality of our receivables. That's a balance sheet account, so, it's really impacted by timing. There's been no change to the P&L impact of any of the items that would relate to an allowance, it's been consistent in terms of turns with customers and whatnot. So, the timing of when we clear those impacts in that number, and that's the only variability for this period over others.

[Steph Wissink, Jefferies]

Okay, thank you very much.

[Operator]

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is now open.

[Rupesh Parikh, Oppenheimer]

Good morning. Thanks for taking my question. So, I guess I wanted to start with a question just on M&A. Just given some of the change in consumer behavior you've seen out there related to COVID, do you see any new opportunities on the M&A front? And then, just curious what you're seeing out there right now?

[Ron Lombardi, Chairman, President and CEO]

Yeah so, first of all, the place we always start in terms of evaluating M&A opportunity Rupesh, is a brand position in the landscape that they compete in. We look for number one brands. Brands that can be successful over the long term, have innovation and new product opportunities. So, the COVID-19 environment really hasn't changed the screening, and we don't think has changed the positioning of categories long term that we would be interested in.

[Rupesh Parikh, Oppenheimer]

Okay. Okay, great. And then from a consumption perspective, so that was helpful color just in terms of what you guys are expecting for Q2. But if this is the right level of behavior, we see I don't know for a few more quarters, is that how you guys are thinking about maybe the consumption declines that you could see in the current environment?

[Ron Lombardi, Chairman, President and CEO]

Yeah Rupesh, I think it's still too early to tell what's going to happen in the impacted categories out in our Q3 and Q4 at this point, which is why we're only giving an outlook for Q2. Things are still changing quickly and fairly dynamically. So, it's too soon to tell.

[Rupesh Parikh, Oppenheimer]

Okay, great. And then maybe just one last question, just on destocking in terms of where you guys think you could see the pressure going forward. Is there any different than what you've seen in the past, or is it really the same channels that have been that are struggling, that you would expect to see that continued inventory adjustments?

[Ron Lombardi, Chairman, President and CEO]

We would expect it to be fairly consistent with what we've realized over the last year, year-and-a-half, Rupesh.

[Rupesh Parikh, Oppenheimer]

Okay, great. Thank you.

[Ron Lombardi, Chairman, President and CEO]

Good. Thank you.

[Operator]

Thank you. Our next question comes from Linda Bolton Weiser with D.A. Davidson. Your line is now open.

[Linda Weiser, D.A. Davidson]

Yes, hi. I was wondering if you could talk about just the margin impact of your more rapid e-commerce growth. Does that actually increase your gross margin, but add to SG&A? So, can you just give more color on that? And then, what are your top one or two biggest brands in terms of dot com e-commerce sales on their own brand websites?

[Ron Lombardi, Chairman, President and CEO]

Okay. So, Chris, do you want to touch on the gross margin and I'll talk about the brands?

[Christine Sacco, CFO]

Sure. Good morning, Linda. So, our margins across channels - we're channel agnostic from a margin perspective. So, as you can see actually in our results, margin is pretty consistent despite our online sales being over 10% of our sales for the quarter. So, we manage the channel that way, manage our product offering that way, and so, no significant deviation in margins across various channel.

[Ron Lombardi, Chairman, President and CEO]

So, Linda, I think your question was around what are our three biggest brands that are selling online? And I think as we -

[Linda Weiser, D.A. Davidson]

Yes.

[Ron Lombardi, Chairman, President and CEO]

I'm sorry, go ahead.

[Linda Weiser, D.A. Davidson]

Well, no, I was just curious in general, how much dot com your own brand website e-commerce activity there is? Are you doing any or is it just mostly through the Amazon of the world?

[Ron Lombardi, Chairman, President and CEO]

It's all through our customers. So, it's through Amazon and the dot com arms of our traditional brick and mortar retail partners. We don't have any direct-to-consumer business.

[Linda Weiser, D.A. Davidson]

Okay, great. Thanks for that. And then, just I was curious about on Monistat. I know you made some comments about your categories, but sometimes Monistat demand is dampened when there's less antibiotic use. And I would think with the pandemic and with social distancing that there is less just underlying conditions requiring antibiotics. Are you seeing that in terms of affecting the Monistat demand?

[Ron Lombardi, Chairman, President and CEO]

So, for the quarter ended June, we actually saw the total number of incidences down and we measure that by looking at how many prescriptions were written during that same time period. So, incidence levels in totality were down, but the actual percentage of people using OTC treatments was flat to slightly up. So in total, we actually grew share for the total vaginal yeast infection incident treatment.

And again, as we called out in the prepared remarks today, we also saw a significant growth in our online business, where we've got a meaningfully bigger share online than we do even with our leading position in brick and mortar. So, it's again a great example where our long-term investment is connecting with consumers and making investments to help educate them on the incident has continued to pay off for us.

[Linda Weiser, D.A. Davidson]

Thank you. And then finally, can I just ask you about your balancing of your capital allocation and how you're thinking about share repurchase versus debt repayment at this point?

[Ron Lombardi, Chairman, President and CEO]

Sure. Chris, do you want to take that?

[Christine Sacco, CFO]

Sure. So Linda, obviously, in this environment continued focus on liquidity but debt pay down will continue to be our primary use of cash for now. But as always, we'll remain flexible as conditions warrant. And if an opportunity arises, as we've done in the past, we'll certainly take advantage of it.

[Linda Weiser, D.A. Davidson]

Okay, great. Thank you for taking my questions.

[Christine Sacco, CFO]

Thanks, Linda.

[Ron Lombardi, Chairman, President and CEO]

Thanks, Linda.

[Operator]

Thank you. Our next question comes from Joe Altobello with Raymond James. Your line is now open.

[Adam Kozek, Raymond James]

Good morning, guys. This is actually Adam on for Joe. Hope you're all staying safe. I appreciate all the color you guys gave on 1Q in terms of breaking down that organic number. But how does consumption look more so in July, I know you gave your expectations for low to mid consumption for the quarter. But maybe kind of more of a breakdown of what you've seen so far? And then maybe an outlook of when you can return it at rough 2% level, although maybe some low visibility there?

[Ron Lombardi, Chairman, President and CEO]

Sure. So, beginning very late May and into June, we began to see consumption levels stabilize and that continued through July. So, the outlook of $225 million or more of revenue for the quarter ended September as soon as that will continue to be at that level of consumption.

So, if we compare the $225 million to last year, we're down about $13 million. So, two-thirds to roughly three quarters of the decline year-over-year is due to that lower level of consumption, largely driven by the categories we talked about earlier today, motion sickness, lice, for example, the convenience channel. And then the balance of the last one-third to one-quarter decline year-over-year is from an anticipated retailer inventory reduction.

[Adam Kozek, Raymond James]

Got you, that's very helpful. And you guys are obviously executing quite solidly. Maybe and perhaps a tough question, but why do you think maybe your products aren't seeing the same consumption left as we've been seeing perhaps from some other HPC companies?

[Ron Lombardi, Chairman, President and CEO]

Yeah. Again, our products are largely incident based. So, if you don't have the illness, if you're not sick, you're not generally going to go out and buy our products. We didn't see the same kind of pantry loading that many other categories like tablet and analgesics or cold and flu category saw late in the quarter ended March and then the impact of it into the quarter ended June and then future anticipated impact.

So, it starts with that. So, we didn't really see any pantry loading or delay in future purchases as a result of that.

[Adam Kozek, Raymond James]

Great thanks, Ron. And if I could just piggyback one last question here. I know you guys have touched on a capital allocation pretty thoroughly throughout the call. So, I don't want to belabor the point. But I was kind of thinking more about obviously, you guys mentioned your thoughts on prioritizing debt reduction. But have you seen anything in the M&A environment that's interesting? Have you noticed that may be sellers are more or less likely to sell in this environment? Even if it's not priority, I assume you guys have been keeping an eye on the market.

[Ron Lombardi, Chairman, President and CEO]

Yeah, the M&A pipeline have been fairly active over the last year. And surprisingly, it really hasn't slowed down all that much over the last three or four months, right. Each seller has their own motivation, and we continue to see a lot of activity out there.

And again, for us and we've been saying this for a long time, if the right opportunity comes along, it's Christine's job to figure out how to get it done if we think it's meaningful for in terms of value creation for our shareholders. So, that'll hold true going forward if something compelling shows up, we'll figure out how to get it done.

[Adam Kozek, Raymond James]

Great. Thanks for the time and wish you guys the best of luck for the rest of the year.

[Ron Lombardi, Chairman, President and CEO]

Thanks, Adam.

[Operator]

Thank you. Our next question comes from Mitch Pinheiro with Sturdivant. Your line is now open.

[Mitch Pinheiro, Sturdivant]

Yeah hey, good morning, couple of ardent questions here. First, Ron why is it that your market share is higher in e-commerce than in brick and mortar? Is that private label, is that the primary factor?

[Ron Lombardi, Chairman, President and CEO]

The competitive landscape online can be different in some categories versus brick and mortar, but we don't generally see a difference in private label offerings in-store versus online, Mitch. Maybe what I'll say is, it's a testament to the heritage and the connection and the trust that's important in these categories is that when consumers go online, it's even easier for them, if you will, to find a trusted brand that they're looking for out there.

And our continued brand building and connections with consumers plays out online. And our Q1 results are a testament to that.

[Mitch Pinheiro, Sturdivant]

Has there - speaking of private label, has there been any change in any private label share in any of your categories that is noteworthy?

[Ron Lombardi, Chairman, President and CEO]

Now, it's interesting that the trends of the last three or four months as we've started to understand what this COVID-19 impact means, really are the same as we've seen over the long-term, which is, our brands tend to outgrow the categories we compete in and we have a history of outgrowing private label.

And it goes back to the fact that we are a marketing and brand building company. And every day, our employees come to work, focused on providing differentiated products to any and all competitors, whether it's another branded competitor that happens to be in the category or private label. So that when the consumer shows up at the shelf, there's a whole lot more difference between our products and the other offering beyond just plain price.

So, that's how we think about it over the long-term, is to continue to provide differentiated product and strong heritage connection and trust with consumers. And we don't think that will change going forward either.

[Mitch Pinheiro, Sturdivant]

Okay. What is the breakdown of your A&M spending in terms of channel? Is it consistent with your sort of your sales by channel, or is it weighted more heavily to one area?

[Ron Lombardi, Chairman, President and CEO]

It does shift a bit over time, based on opportunities or initiatives we've got going on. But clearly, we invested at higher levels in the past couple of quarters, supporting the e-commerce side of things as consumers began to run to that market.

But over time, we're going to have a multi-pronged approach to managing our brand-building and marketing, whether it's traditional TV, targeted TV, digital investments to support online purchases, whether that's search and other similar investment opportunities.

[Mitch Pinheiro, Sturdivant]

I don't watch a lot of TV, but I've happened to see a couple of the, I guess, your ads, your DenTek ads. I guess, that's the reason you mentioned a recent campaign, any comments regarding that campaign, any near-term or recent measures of effectiveness?

[Ron Lombardi, Chairman, President and CEO]

Sure. First of all, what you're seeing is targeted TV. So, the DenTek Beyond Brushing campaign that started during the quarter ended June is using that as a way to identify and connect with those targeted consumers.

And if you take a look, our DenTek business was up over 10% during the quarter, and we think an important driver of that performance is the Beyond Brushing marketing campaign, as well as our broad distribution and availability online. That's another great example where consumers are looking for those trusted differentiated products online. And that was a help in driving solid growth for DenTek during the quarter.

[Mitch Pinheiro, Sturdivant]

Okay. Just one last question sort of, just sort of bigger picture and I know we're still early in this COVID environment. But as you look at your business relative to this new environment, any observations, anything, whether you see opportunity somewhere? Anything change in the way you're managing your business, can you talk a little bit about that bigger picture?

[Ron Lombardi, Chairman, President and CEO]

Sure. We've talked about the benefits of our diverse business model for a long time. And it paid out again during the quarter ended June. We've talked about the diversity of our business, it's really on lots of different fronts. It starts with a diverse portfolio of brands, right. We compete in many different categories, but more importantly, we're the leader in many different subcategories, whether it's Summer's Eve, Monistat, Clear Eyes, BC and Goody's, right, the list goes on and on.

So, if you take a look at our results for the first quarter even though, we had some challenges related to categories that have been impacted by COVID, like motion sickness and lice, to-go products like Clear Eyes Pocket Pal, the diversity of our portfolio allowed us to mostly offset those challenges because of the solid and strong growth online with Summer's Eve, Monistat, DenTek and other brands.

And then secondly, as I just mentioned with the solid e-commerce, our products are broadly available across most channels, whether it's convenience, drug, grocery, mass, dollar, and now e-commerce. So that, no matter where the consumer decide that they want to purchase the healthcare needs, our products are available and we manage the offering in such a way that we don't have any difference in our gross margin based on where the consumer chooses to buy those products.

So, we talked during the prepared remarks today, a number of times around how solid our performance was and the benefits and the attributes of our strategy in our business model. And the quarter ended June's results are just a great example of how well we're positioned to do well in this challenging environment.

[Mitch Pinheiro, Sturdivant]

Okay. Thanks for the time. Appreciate it.

[Ron Lombardi, Chairman, President and CEO]

Thank you, Mitch.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Carla Casella with JP Morgan. Your line is now open.

[Sarah Clark, JP Morgan]

Hi, good morning, Chris and Ron. Thanks for taking our question. This is Sarah Clark on for Carla Casella. Just two quick ones for you. In terms of cost for transportation of products, are you seeing any changes there? We've heard from other consumer product companies that they're seeing an increase due to a shift towards air freight to ship products. Are you seeing any changes there on your end?

[Christine Sacco, CFO]

Yeah. Hi, Sarah this is…

[Ron Lombardi, Chairman, President and CEO]

Go ahead.

[Christine Sacco, CFO]

Sarah, so we have seen modest benefits from - benefits actually from diesel and freight. But no, for our business, just as we said when freight costs were rising in an environment, in air freight to your point, we've always talked about freight as a percent of our sales really not being a large component.

We always say we're not shipping dog food, as an example. So, we haven't seen anything material from the transportation line, other than some savings that we've got in the rates from our new warehouse location. But from an air freight perspective, nothing meaningful from our point of view on margin cost structure.

[Ron Lombardi, Chairman, President and CEO]

In addition to that, I think Chris called out earlier today that, we began to see some benefits from our move to our new 3PL partner that finished up at the end of March and was our primary - our sole shipping location for the U.S. during the quarter.

[Sarah Clark, JP Morgan]

Got it. That's super helpful. Thank you. And then, apologies to go back to this, but on capital allocation thanks for your transparency on prioritizing debt pay down and what you've been seeing in the M&A space. We are wondering where you would feel comfortable taking leverage up to for an opportunity on the M&A side? And also, how you feel about your current portfolio? Are there any potential asset sales in the future or do you like all of the brands you have now? Thanks.

[Ron Lombardi, Chairman, President and CEO]

So, why don't I start with the question on our portfolio and then Chris, you can talk about leverage. So, we don't see ourselves actively managing the portfolio. We sold the household business I guess, it was almost two years ago now, or a year and a half ago, something like that. And that was the last major change that we've seen in the portfolio. So, we feel good about the business we have and the opportunities that is going to provide us.

[Christine Sacco, CFO]

Yeah Sarah, then on the leverage front, just talked about ending the quarter at 4.4 times. We continue to target a leverage ratio of 3.5 times to 5 times. That said, given our consistent financial model and our consistent strong free cash flow, for the right opportunity would we step just above 5 times, it depends on the opportunity, right. Obviously, qualitative factors come in as well. But with the ability to quickly de-lever and get back into our range I think, it all depends on the opportunity. But our targeted range remains at 3.5 times to 5 times.

[Sarah Clark, JP Morgan]

Great, thanks for all the color. That's all from me. Stay well.

[Ron Lombardi, Chairman, President and CEO]

Thank you, Sarah.

[Operator]

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to CEO, Ron Lombardi for any closing remarks.

[Ron Lombardi, Chairman, President and CEO]

Thank you, operator. The first quarter results and our outlook are a great reminder of the resilience of our three-pillar strategy. We continue to invest in our leading brands. We are generating impressive cash flow and have a proven ability for effective capital allocation that will continue to create value moving forward. We look forward to updating you on the success of our business again in a few months. Have a great day. And thanks for joining us.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.