Prestige Consumer Healthcare Inc

NYSE:PBH

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Q4 2021 Prestige Consumer Healthcare Inc. Earnings Conference Call. [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, Phil Terpolilli, Vice President of Investor Relations and Treasury. Please go ahead.

[Philip Terpolilli, executive]

Thank you, operator, and thank you to everyone who has 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 the results of the fourth quarter and full year fiscal '21, provide a fiscal 2022 outlook and then take questions from analysts. We have a slide presentation which accompanies today's call. It can be accessed by visiting prestigeconsumerhealthcare.com, clicking on the investor's link and then on today's webcast and presentation.

Remember, some of the information contained in the presentation today include non-GAAP financial measures. Reconciliations between 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 we detail 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 aware, business environment uncertainty remains heightened due to COVID-19. These items include shutdown impacts for many areas of our economy, changes to consumer purchasing habits, the potential for disrupted supply chain and various other economic factors. This means that results could change at any time and the forecasted impact of risk consideration is the 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 most recent 10-K.

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

[Ron Lombardi, executive]

Thanks, Phil. Let's begin on Slide 5. A year ago, we began our fiscal year with a backdrop of tremendous uncertainty stemming from the COVID-19 pandemic. This uncertainty created widespread volatility across the categories we participate in, with rapid changes in consumer preferences and needs.

Despite all of this, we focused on executing a proven long-term business strategy, which resulted in a very successful fiscal '21 that exceeded our guidance. Several aspects of our business proved to be particularly beneficial during the quickly changing environment of the last year. Our brand building approach of growing categories and connecting with consumers paid off in a big way, especially as consumer shopping habits and needs shifted. Having a diversified portfolio of leading brands helped us connect with consumers as they turned to their time tested and trusted brands for self-care during the pandemic. Our widely distributed brands and robust e-commerce presence also paid off as consumers showed up online in greater numbers. Meanwhile, our company's agility allowed us to reposition our marketing to best connect with consumers in this environment. The net results of these factors is we continued to win market share in difficult backdrop and generated very strong cash flow due to our consistent operating model.

Let's turn to Page 6 to review some of the resulting fiscal '21 financial performance metrics. Even during this unique time, our proven strategy delivered solid results, generating record adjusted earnings and free cash flow. For fiscal '21, our net sales were approximately $943 million, down about 2% from the prior year. We were pleased with our consumption trends for the year with impressive performance in the vast majority of our brands. This included continued market share gains consistent with our long-term objectives. Our net sales and consumption declined slightly owing entirely to a few categories impacted by COVID, such as cough, cold, which I'll discuss later.

Full year gross margin came in at 58%, essentially flat to last year on an adjusted basis. Adjusted EPS grew nearly 10%, achieving the high end of our long-term expectations as we continue to benefit from our operating model, leading financial profile and ongoing debt reduction. Adjusted free cash flow of $213 million also grew versus the prior year and continues to fuel our disciplined capital deployment efforts.

In summary, we continue to feel good about our performance within a challenging fiscal '21 COVID backdrop and believe we are set up to continue winning with consumers by executing our long-term strategy.

On the next few slides, we'll review some of the positive effects of our strategy in greater detail.

Let's start on Slide 7. Here, our major brands and share performance are shown on the left side of the page. Share performance for a broad portfolio had an outstanding fiscal '21, especially considering rapidly shifting consumer habits due to COVID. Our breadth allowed us to focus our efforts on near-term brand opportunities like Monistat, Compound W and Clear Eyes, which we'll discuss on the next slide.

This helped offset certain brand pressures stemming from the pandemic, such as Summer's Eve, where our share in the on-the-go feminine hygiene products, such as wipes and sprays, pressured our share versus the category. This performance was underpinned by several factors. Having leading #1 brand is a strength, but just as important is the fact that we lead by a wide margin in many categories. In fact, many of our brand's market shares are significantly larger than the next category competitor. This allows us to concentrate our efforts on consumer insights that leverage brand heritage to enable growth with consumers and retailers to expand the overall category.

So in summary, the vast majority of our largest brands grew market share significantly, a continuation of the trends we've seen over the long-term. This success is the result of our portfolio positioning, brand building strategy and long-term investments, even in the current unique environment.

Now let's turn to Slide 8. Here, we have 3 specific examples of this fiscal '21 market share growth. Adding onto the underpinnings from the prior page, our company's proven brand building tool kit allows us to focus efforts on targeted brand opportunities, such as these in real-time. Shown on the left is Monistat. Our marketing efforts, including reaching consumers at home through digital and addressable TV efforts, having the ability to ship Monistat to your door, often on the same day. Shown in the middle is Compound W. As we touched on last quarter, Compound W has been a long-term leader in both innovation and consumer insights, and we successfully leveraged this during the rapid shift to e-commerce experienced over the past year. Finally, shown at right is Clear Eyes. Brand messaging evolved during the pandemic to emphasize the brand promise of having brighter, whiter and more comfortable eyes. We focused on the concept of at-home usage and are using time-tested brand building tactics, which helped grow share in the year.

The result is clear that our brand building capabilities, even during COVID, continue to pay dividends. Each brand won significant market share during fiscal '21, outpacing category growth by 5, 15 and 7 percentage points, respectively.

Now let's turn to Slide 9. Our fiscal '21 sales performance, driven by the attributes I just discussed, is particularly impressive in light of challenges in a few major categories we faced during the year. For us, 3 key categories, cough, cold, travel and head lice were materially disrupted by COVID, facing declines in incident levels and usage rates as consumers stayed home and wore masks. This drove double-digit category declines and a 500-plus basis point headwind to our full year sales performance. Despite this, we were able to grow our overall market share.

As we look ahead, we view this as a positive. The performance outside of these categories reinforces that our strategy is working while the pressured areas have stabilized and have begun to lap the prior year category declines in Q1.

Now let's turn to Slide 10. A final highlight to make that helped drive fiscal '21 results was e-commerce, which now represents about 11% of revenue. Our multi-year investments around e-commerce are delivering impressive results and we've benefited from growing interest in this channel by consumers. As a leader in consumer health care e-commerce, our market share in this channel are often higher than in brick-and-mortar due to our early and continuing investments. Also by design, our financial profile has remained consistent through this dramatic channel shift as we maintain a consistent profile across our distribution channels.

In fiscal '21, we continued to make investments behind online content and targeted pandemic-related messaging with the goal of expanding our share with consumers. We also invested across numerous online retailers during the year. The result was a doubling of e-commerce sales in fiscal '21, and we are well-positioned to continue to benefit from these investments as we look forward.

With that, I'll turn it over to Chris to discuss the financial results.

[Christine Sacco, executive]

Thanks, Ron. Let's turn to Slide 12 and review our fourth quarter financial results. As a reminder, the information in today's presentation includes adjusted results that are reconciled to the closest GAAP measure in our earnings release. Q4 revenue of $237.8 million declined 5.4% and 6.6% on an organic basis versus the prior year, which excludes the effects of foreign currency. As a reminder, Q4 faced a particularly unique comparison in the year prior, when we experienced a significant lift in March of 2020 as consumers stocked up on items as a result of COVID-19.

By segment, North America revenues were down approximately 4%. Several segment categories grew with the largest increases in women's health and analgesics. However, these gains were offset by lower cough and cold as well as GI category performances, both resulting from changes in consumer behavior due to COVID-19 that Ron discussed earlier.

International OTC declined approximately 24% in Q4 after excluding the effects of foreign currency. The decline was primarily attributable to lower sales in Australia as a result of the comparison to prior year as consumers stocked up on items as a result of COVID-19 in March of 2020 as well as COVID-19's impact of lowering both general consumer illness and activities such as athletics, impacting Hydralyte.

As expected, adjusted EBITDA declined in Q4 owing to the unusual year ago comparison while EBITDA margin remained consistent with our long-term expectations in the mid-30s. EPS for the third quarter was $0.79 per share, down $0.03 versus the prior year as lower interest expense from debt pay down and lower share count only partially offset the decline in revenues versus year ago.

Let's turn to Slide 13 for more detail around consolidated results for the full year. For the full year fiscal '21, revenues declined 2.4% versus the prior year in constant currency. Our diverse portfolio enabled the stable revenue performance, which strengthened many brands in our portfolio, helping to offset COVID-19 impacted categories. Channel diversity continues to help drive revenue performance as we experienced strong triple digit consumption growth in the e-commerce channel for the full year as consumers continued to shift to online purchasing.

Total company gross margin of 58% was approximately flat to last year's adjusted gross margin of 58.3%. This was in line with our expectations, and we continue to anticipate a gross margin of about 58% for fiscal '22.

Advertising and Marketing came in at 14.9% for the fiscal year. Following an unusual Q1 related to COVID-19, A&M returned to normalized levels of spend of approximately 14% to 16%. For the upcoming year, we'd anticipate an approximate 15% rate with a higher rate of A&M spend in Q1.

G&A expenses were just over 9% of sales in fiscal '21 versus the prior year, owed largely to disciplined cost management. For the upcoming year, we anticipate G&A expenses to approximate just over 9% of sales.

Lastly, record adjusted EPS of $3.24 grew a strong 9.5% over the prior year. Lower operating costs, lower interest expense and lower share count were all factors to the growth.

Now let's turn to Slide 14. In Q4, we generated $54.2 million in free cash flow, which resulted in a full year record free cash flow of $213.4 million. We continue to maintain industry leading free cash flow with fiscal '21 free cash flow conversion coming in at 130%. As of March 31, we finished the year with approximately $1.5 billion in net debt and a leverage ratio of 4.2x. During the year, we reduced debt by $250 million and opportunistically repurchased $12 million in shares during the year, enabled by our strong generation and cash position entering the year. Our strong cash generation and stable financial profile enables our ability to access debt markets efficiently.

As a result, we were able to issue $600 million of new senior notes during the quarter, which replaced prior notes that were due in 2024. The transaction both extended a key debt maturity to 2031 and resulted in annual interest savings of over $15 million. As a result, interest expense for fiscal '22 is expected to be approximately $60 million. This savings will further enable our 3-pillar strategy and our disciplined capital allocation towards investing in our brand, deleveraging, M&A, and other considerations.

With that, I'll turn it back to Ron.

[Ron Lombardi, executive]

Thanks, Chris. Let's turn to Slide 16 to wrap up with some closing thoughts and our outlook for fiscal '22. Using our time-tested strategy, we delivered a very strong fiscal '21, including market share wins and record financial returns despite certain category headwinds related to the pandemic. This approach remains intact, and our best business is well-positioned to further these gains in the upcoming year.

For the full year fiscal '22, we anticipate revenues of approximately $957 million to $962 million, including organic revenue growth of 1.5% to 2%. This revenue outlook assumes our portfolio continues to generate approximately 2.5% long-term organic revenue growth, partially offset by certain categories like cough cold, which we expect to remain flat to fiscal '21. We anticipate EPS of $3.58 or more for fiscal '22. Disciplined cost management and the benefits of our free cash flow are expected to drive solid double digit earnings growth.

For Q1, EPS is expected to be flat to the prior year as a normalized level of advertising and marketing spend is expected to offset revenue growth and interest savings. These attributes translate into strong free cash flow as well. We anticipate free cash flow of $225 million or more. The recently completed debt refinancing further enables our disciplined capital allocation efforts that drives shareholder value.

In summary, we remain confident that our business is well-positioned with momentum heading into fiscal '22 and beyond. Our proven business model continues to deliver results, and we look forward to executing our long-term brand building strategy to reward our stakeholders.

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

[Operator]

[Operator Instructions] And our first question comes from Rupesh Parikh with Oppenheimer.

[Erica Eiler, analyst]

This is actually Erica Eiler on for Rupesh. So first wanted to touch on organic sales growth. As you look at your organic sales growth guidance for this year, I mean, it seems to us, it could prove conservative, especially with easier comparison and if you guys continue to gain share. So just curious as to what you see as the potential drivers for any upside that we could see play out during the year.

[Ron Lombardi, executive]

Sure. Erica, so first of all, I guess I'll start with your comment around easy comparisons in '22 -- fiscal '22 to '21. If you go back to Slide 9 in today's deck and you'll see that 80% of our portfolio grew over 3%, which is above our long-term outlook. But certainly for the COVID impacted part of our business, we're expecting '22 to be flat. There's still a lot of COVID impact to get out of consumers' habits these days. So if you look at our 2%, we expect about 80% of the portfolio to grow around 2% and then the balance to be flat year over year.

[Erica Eiler, analyst]

Okay. No, that's helpful. And then, Chris, I think you mentioned gross margins around 38% for the year. Could you maybe just talk about some of the key puts and takes we should be thinking about on the gross margin line this year?

[Christine Sacco, executive]

Yes. Erica. Gross margin of about 58%, right, for fiscal year '22.

[Erica Eiler, analyst]

Sorry, 58%.

[Christine Sacco, executive]

Yes. No worries. So largely consistent coming in essentially flat to fiscal '21. So of course, while there's puts and takes, reminder, we start with the benefit on the top line of a diverse brand portfolio, it also helps to diversify our cost components. So again, we're expecting our guide to incorporate some inflationary pressure, but we think we're able to offset that largely with a combination of cost-saving initiatives and some pricing activity. So we feel good going into next year that we can hold our gross margin pretty consistent with fiscal '21.

[Operator]

Our next question comes from Stephanie Wissink with Jefferies.

[Sebastian Barbero, analyst]

This is Seb Barbero in for Steph. The first one is, I'm wondering if you can talk about the consumption growth in fiscal Q4 and also talk about consumption trends year-to-date given that share gains relative to private label appeared to have accelerated recently.

[Ron Lombardi, executive]

Okay. So let me start, I guess, with the overall consumption trends. I think, again, if you step back and take a look at performance for the full year, you'll see that we actually performed quite well. Again, Slide 7 that showed the report card that we've been reporting on at the end of the last few fiscal years, you can see that we had a lot of momentum, even in the brands that were disrupted by COVID, in particular Dramamine and mix, we were able to continue to grow our share. So we continue with this long-term trend of not only outgrowing the categories but growing share compared to competitors, including private label.

[Sebastian Barbero, analyst]

Got it. Okay. And then talking about destocking, are you are that you -- this is more like forgone headwind and hence your ability to return to that low single digit organic growth? And also if you can talk about where are we in the restocking cycle.

[Ron Lombardi, executive]

Sure. So -- and I think we've touched on retailer inventory changes the last couple of quarters. And again, it's something at this point that we see is behind us and not something that we anticipate meaningfully impacting us in fiscal '22. Still tough to predict what the retailer activity patterns will be in fiscal '22. But again, we think that's largely behind us at this point. And can you remind the second part of your question there, Seb?

[Sebastian Barbero, analyst]

Yes, just on the restocking. I think you mentioned on today's release, you benefited throughout this year as retailers restock their shelves. So is that fully done? Is that benefit already realized, or is this an opportunity as well in fiscal '22?

[Ron Lombardi, executive]

That was really a Q1 fiscal '21 impact. In quarters 2, 3, and 4, we really didn't see any meaningful impact of shipments into the retailers ahead of consumption.

[Operator]

[Operator Instructions] And our next question comes from Linda Bolton-Weiser with D.A. Davidson.

[Linda Bolton-Weiser, analyst]

So I was wondering if -- I know you're a very -- a pretty high margin business. So commodity and input costs are not usually an issue. But we're seeing so many inflationary cost pressures kind of going on. Are you experiencing any kind of inflationary cost pressures in any of your inputs? Are you seeing any shortages of any particular materials? So can you just talk about kind of the cost input profile?

[Ron Lombardi, executive]

Sure. For starters, we deal with inflationary pressures every year, right? Most people get a wage increase every year and benefit costs go up. So it's something that's in our system in terms of being able to deal with. Certainly, as we get into fiscal '22, we're anticipating more headwinds from inflation than past years, and it's something that we've been planning and dealing around for quite a while ahead of fiscal '22. So although we anticipate additional inflationary pressures versus past year, I think as Chris already commented on it, we've got actions in place to mitigate it for fiscal '22. In terms of shortages and other supply chain impacts, we've been dealing with a challenge supply chain environment over the last year, right? COVID has impacted a lot of different aspects of the supply chain, and it's something that we've been able to manage through and we've got good inventory at retail and we continue to feel we're in good shape as we head into fiscal '22 on that.

[Linda Bolton-Weiser, analyst]

Great. And then just curious on the M&A front, if you've been seeing a lot of potential deals or not, and some of the companies have mentioned that there's just so much competition out there because of all the SPACs and everything. Is that something that you feel has been impacting your ability to maybe do a deal?

[Ron Lombardi, executive]

Yes. So the M&A pipeline has been pretty active over the last year or so and there's been lots of transactions out in the press. We continue to be pretty well-positioned so that if something comes up that meets our M&A criteria that we think we would be -- continue to be pretty competitive and that the landscape hasn't changed for us. Our scale business and the ability to absorb brands into the business that we have has us, I think, well-positioned against the kinds of bidders that we would face. So the environment really hasn't changed much for us, Linda.

[Operator]

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 closing remarks.

[Ron Lombardi, executive]

Okay. I'd like to thank everybody for joining us today, and we look forward to updating you on our business on the next quarterly call. Thank you, and have a good day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.