Prestige Consumer Healthcare Inc

NYSE:PBH

Earnings Call Analysis

Company Navigates Headwinds, Maintains Strong Outlook

In a challenging environment, the company achieved Q2 net sales of $286 million, marking its second-highest level of quarterly sales historically and generating earnings of $1.07 per share, a 5% increase year-over-year. The company's diverse brand portfolio and strategic investments, especially in e-commerce, have yielded growth in Goody's headache powders and sustained strength across its U.S. and international businesses. While Q2 revenue slightly declined by 0.7% from the previous year, excluding certain factors, the EBITDA and EPS grew by 4.2% and 5.4%, respectively. The full-year forecast remains robust, anticipating revenues of $1.135 billion to $1.140 billion, organic growth of 1% to 2%, and diluted EPS between $4.27 and $4.32, likely leaning to the higher end. The company also projects a free cash flow of over $240 million and aims to be below 3x leverage by the fiscal year-end.

Sustained Momentum with Encouraging Projections

The company started Q2 with solid performance, posting net sales of $286 million, which is slightly ahead of their expected figures and also signifies the second-highest quarterly sales in the company's history. This success story comes despite facing competition from previous record results. Key highlights include a portfolio that showcases its strength with robust sales in the U.S. and international markets, which counterbalanced the strategic exit from private label business. Their ability to turn revenue into earnings is evident with a 5% increase in earnings per share, reaching $1.07. Moreover, the company reported improvements in both sequential and year-over-year gross margins and maintained a steady EBITDA margin.

Effective Branding and Digital Presence Fuel Growth

The company's marketing efforts have paid off with initiatives like the Goody's headache powders brand building campaigns, which expanded with new products including Goody's Hangover. The focused marketing approach has significantly increased visibility and bolstered consumer and retailer engagement, growing the product line over three times faster than the overall analgesic category. Additionally, e-commerce growth stands at a strong 6% in the first half of the fiscal year across all partners, complemented by a profit profile reflecting the strategic advancements in targeted content, product assortment, and invigorating online brand presence.

Solid Financial Position with Strategic Capital Deployment

The company's financial prudence is evident with $55 million in debt repayment, reducing leverage to 3x. They plan to further lower this debt, all the while exploring other strategic capital opportunities. Their focus remains on a disciplined approach to capital deployment while maintaining a free cash flow forecast of $240 million or more. With an aim to stay below 3x leverage by fiscal year-end, the company is firmly on course to meet its full-year forecast and maintain a stronghold on both revenue and earnings.

Reaffirmed Outlook with Improved Revenue and Earnings Projections

Looking forward, the company remains optimistic, reaffirming their fiscal '24 outlook with anticipated revenues ranging from $1.135 billion to $1.140 billion. They expect an organic revenue growth of 1% to 2% compared to fiscal '23, or 2% to 3% considering the divestiture from the noncore private label business. Their EPS guidance reflects confidence in delivering at the upper end of a $4.27 to $4.32 range, courtesy of robust cash flow power. As for Q3 projections, they are foreseeing revenues of approximately $280 million and an EPS increase to $1.04, indicating slight improvement over the prior year.

Women's Health and Cough Cold Segments: Steady Despite Competition

The Women's Health segment, while having slowed down, exhibits promise with the company feeling good about the brand positioning of Summer's Eve and new product developments anticipated later in the year. Furthermore, no significant shifts have been observed in terms of market share or new competitive entries. The dialogue around the cough cold season noted three significant factors: better supply chain capabilities than the previous year, changes in retailer inventory strategy for cough cold products, and incident levels. The company is aligning its strategies in anticipation of these trends and remains poised to manage retailer channel shifts positively, with their e-commerce performance outpacing the brick-and-mortar segment.

Capital Allocation Strategy: Balanced Approach and Future Planning

Maintaining a sound capital allocation strategy, the company balances debt repayment while remaining open to stock buybacks and assessing M&A opportunities. They are on track to achieve their leverage target below 3x, and looking beyond, they consider initiating a dividend as an option once this goal is accomplished. Their strategic approach to capital management aligns with their robust operational performance, laying the groundwork for sustainable growth and shareholder value creation.

Earnings Call Transcript 2024-Q2

[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.

[Philip Terpolilli, executive]

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 '20 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 and 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, executive]

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 2 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 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, executive]

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 1.7 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. EBITA 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 6 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, executive]

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% and 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] Our first question comes from the line of Rupesh Parikh with Oppenheimer.

[Rupesh Parikh, analyst]

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, executive]

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, analyst]

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, executive]

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, analyst]

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, executive]

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, analyst]

Nice job on the quarter. I was wondering if maybe you could talk about the cold cough season. It sounds like it 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, executive]

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, analyst]

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 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, executive]

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.

[Susan Anderson, analyst]

Okay. Great. And then if I could maybe just add one more on the capital allocation. I guess, how are you thinking about you're at 3x leverage, so almost reaching your goal by the end of the year? I guess, how are you thinking about beyond that, balancing share repurchases and debt paydown and then also M&A opportunities as we look forward.

[Ron Lombardi, executive]

So really, it's no different than it's been for the last few years, Susan, which is we'll continue to evaluate any M&A opportunities that come up, look at stock buyback as a way to offset dilution of shares each year and then longer term, we'll consider a dividend. But again, our leverage target is below 3, which is that next phase, and we'll get there, anticipating getting there at the end of March. So we continue to feel good about the capital allocation optionality that we have going forward.

[Operator]

This question comes from the line of Jon Andersen with William Blair.

[Jon Andersen, analyst]

During the first half of the year, your sales essentially flat, but you've reaffirmed the full year outlook for 1% to 2% growth, which means we're going to expect to see an acceleration in sales growth in the second half of the year. Could you talk about your visibility to that and what some of the underlying drivers are of that improvement on a year-over-year basis that you're expecting in the second half?

[Ron Lombardi, executive]

So the first place I'll start with Jon is comps. And as I mentioned during the prepared remarks today is for the second quarter in particular, we comped the highest level of quarterly sales ever in the company's history. As a reminder, last year, we were still in kind of a funny ramp-up in return to normal activities and catch up in supply chain and a number of other factors last year that kind of drove the comp. So as we get into the second half of our year, we begin to return to, I think, more of a normal level of comp to help drive year-over-year gains. That's really the big factor.

[Jon Andersen, analyst]

Okay. And you mentioned, Ron, in your response on -- to the question on cough cold that one of the factors there you're considering as changes in retailers' planned inventory levels, I guess, thinking they might hold less inventory this year than last year. Is that comment specific to cough cold or is there a broader trend now with things normalizing from a supply chain standpoint where retailers are looking to just kind of hold less inventory in aggregate? And could that affect your shipments?

[Ron Lombardi, executive]

Yes. So particularly the cough cold, right, last year, supply chain of many suppliers for cough cold were trying to catch up. So retailers are trying to carry as much inventory as they could because of that uncertainty in the supply chain. And then just as importantly, right, last year, cough/cold incident levels were happening all year long. So retailers were carrying a different level of inventory to support a year-round cold incident level rather than the historical seasonal. And I think as we get into this year, we're starting to see signs that return to seasonal peaks and valleys.

So it's really a different inventory profile held by the retailers rather than lower levels. If you see the fine difference there. And then, yes, right, we're hearing a lot of the same things you are from other CPG companies that their businesses are being impacted by retailers thinking about carrying lower levels of inventory. Not so much in our categories and specifically our subsections of our categories, right. So at this point, really no major impact that we would expect -- and our outlook for the year, I think, is supporting the levels we would expect going forward.

[Jon Andersen, analyst]

Okay. That's helpful. Last one for me. On gross margin, improved, I think, a little bit sequentially. And is that the -- I guess the first question on that is, was that seasonal? Or are you seeing early signs of some of your efforts to, I guess, restore gross margins after a couple of years of gross margin erosion, which was largely, I think, are solely due to just kind of the price/cost dynamic. Are you starting to feel like you've got some traction such that we could see ongoing gross margin improvement from here?

[Christine Sacco, executive]

Jon, it's Chris. So really the latter. Gross margin in -- coming in this quarter for Q2 as expected compared to the outlook we gave in May. Q3, we said should approximate Q2, right? And we're still calling the year to be flat to up slightly. So we are starting to see some relief on certain costs sequentially like logistics costs, freight that you're hearing from people, but it's a little bit more marginal for us just given the magnitude of freight as a percent of our sales that we've talked about in the mid-single-digit range. So we're seeing a little bit of recovery there and some of our cost-saving efforts are starting to pay off. No reason to think we can't continue to march back to more normalized levels.

[Jon Andersen, analyst]

And then maybe I will squeeze one more in on -- is the comments on capital -- excuse me, on leverage, wanting to operate below 3x long term. Is that fairly new I guess I missed that. I hadn't heard that before. And then does that kind of maybe limit your willingness to engage in M&A in term as you work to achieve that goal?

[Ron Lombardi, executive]

Yes. So Jon, I think we announced that back on the May call at the start of the fiscal year that it was our new phase, right? Prior to that, I think we were between 4.5% and 3% or something like that. So it really, I think, is just reemphasizing our focus on operating at lower levels of leverage over time. It really doesn't [indiscernible] cost us in terms of optionality. And it's our job at an M&A opportunity shows up that we think is compelling for the shareholders to figure out how to get it done and we would rise above 3% for a period of time if it made sense. So it's not meant to put a feeling on things, but rather just emphasize the importance of operating at lower levels of leverage going forward.

[Operator]

One moment for our last question. This question comes from the line of [ Tony Kim ] with Morningstar.

[Unknown Analyst]

Congrats on a solid quarter. You guys have identified product innovation as one of your key priorities and talked about launching Dramamine in the nausea category as an example. And it's been great to see that win shares in that space over the few quarters. And so I guess, looking at your other portfolio, what other brands or which product category do you kind of view that you can do a similar thing with?

[Ron Lombardi, executive]

Yes. So thanks for the question. So yes, new product development and innovation is an important marketing element of how we think about long-term brand building. And if you look over time at our brands, you've seen that we've posted in new products and innovation and refreshments to the product offering really across the broad portfolio. Everything from brands that we don't talk about like Sky, where we launched a new Sky drop a few years ago, and it quickly rose to one of the better selling SKUs within the Sky category to Summer's Eve where we've launched spa products over the last couple of years. It's our largest brand.

So it's an important element across the portfolio and is a big driver of not only share in sales, but growing the categories for our retail partners. So going forward, you'll continue to see that element of long-term brand building show up across our portfolio.

[Unknown Analyst]

Great. That's helpful. And as more large pharmas kind of spin out their consumer division, as J&J did with [ Ken ] this year and [ Sanofi ] kind of playing it is the same thing by next year. Do you think you'll feel more competitive pressures in the industry? Or do you expect the landscape to be more or less same as usual?

[Ron Lombardi, executive]

Yes. We would expect it to be more of the same whether these big consumer health care companies are embedded in a big global CPG company or independent like we've seen [ Kemvi ] and [ Helion ] lately. They're focused on different things than we are. They're looking for move-the-needle opportunities which are big brands, big categories, different regions that we compete in as part of their business objectives. So we're going to continue to focus on those niche smaller categories that we can be successful in can define the categories and we'll likely look for opportunities to acquire brands that they may shed as they further focus on those bigger opportunities. So nothing new there. That's been the case for the last 10 to 20 years. So more of the same.

[Unknown Analyst]

Got it. That's helpful. And just one last question for me. With the FDA cracking down on products across different categories, such as the oral decongestion pills and eye drops, do you feel pretty strongly about your portfolio? Or are there any threats that maybe we should be thinking about?

[Ron Lombardi, executive]

Yes. So quality is the starting point for everything we do here, right? We need to deliver and sell a quality product that delivers against what the consumer expects out of it. So we start there. The recent announcements around recalls of sterile eye care products that have been sourced outside of North America and from suppliers that aren't necessarily proven over the long term is just a reminder of the importance of it and just something that we continue to focus on.

[Operator]

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Ron Lombardi, President and CEO, for closing remarks.

[Ron Lombardi, executive]

Thank you, operator, and thanks to everyone who's joined us on the call today, and we look forward to updating you on our next quarterly call. Have a great day.

[Operator]

Thank you. This does conclude the program, and you may now disconnect.