Prestige Consumer Healthcare Inc.

Good day, ladies and gentlemen, and welcome to the Prestige Consumer Healthcare Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance, please press star and then zero on your touchtone telephone. And as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Bill Terpolilli, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning to everyone joining us today. On the call with me are Ron Lombardi, our chairman, president, and CEO, and Christine Sacco, our CFO. On today's call, we will cover the highlights and review the results of our fiscal 21st quarter, review our fiscal 2020 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 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 between adjusted and reported financial measures are included in today's earnings release and slide presentation. During today's call, management will make forward-looking statements around risks and uncertainties, which we detail in a complete safe harbor disclosure on page two of the slide presentation accompanying the call. Additional information concerning risk factors and cautionary statements are available in our most recent FCC filings and most recent company 10-K. I'll now hand it over to our CEO, Ron Lombardi, to walk through the highlights of our first quarter performance. Ron?

Thanks, Phil, and good morning, everyone. Let's begin on slide five. We are pleased with our solid start to the year and are on pace to achieve our fiscal year guidance. Q1 highlights include revenue of just over $232 million, which was approximately flat to the prior year on an organic basis in the quarter, slightly ahead of our expectations offered back in May. Importantly, the consumption trends for our leading portfolio remain positive, and we continue to expect approximately 2% consumption growth for the full year. EPS of 65 cents in Q1 was as anticipated, given the divestiture of the household cleaning segment last July, which we have now fully lapped. Finally, we generated approximately $51 million of free cash flow in the quarter, which allowed us to repurchase shares opportunistically, as well as reduce debt. Our capital allocation strategy continues to be enabled by our strong financial profile and consistent cash generation. Turning to slide six, we have further details around Q1 results. As I just mentioned, our net sales were 232.2 million, essentially flat versus the prior year on an organic basis. Sales were positively impacted by strong pipeline results in our international segment with growth of over 15% after adjusting for FX. The performance was driven by both strong consumption trends in Australia and the timing of distributor orders in other countries. Domestic sales were positively impacted by a number of categories including strength and cough cold and ear-eye care, but offset by retailer inventory reductions and changes at shelf in the oral care category. Women's health performance continues to experience positive consumption trends, but sales also declined in Q1, affected by the timing of orders as compared to the prior year. Total company gross margin in Q1 came in at 57.7%, slightly improved sequentially versus fourth quarter's 57.4% gross margin. Free cash flow was $50.8 million in Q1 and continues to benefit from our industry-leading EBITDA margins, minimal capital spending needs, and low cash tax rate. We used this cash flow towards our disciplined capital allocation strategy in Q1 opportunistically buying back approximately $30 million of stock and reducing debt by $20 million. Now, let's turn to slide seven for some details on our Canadian business. In addition to our fast-growing international business, we also have an important and growing portfolio in Canada, which represents about 5% of our annual sales. The Canadian portfolio is comprised of similar brands to the U.S., and is made up of many leading number one brands in niche categories. We have a few examples of these shown in the upper right of the slide. In addition, our Canadian portfolio is anchored by Gaviscon, which has grown steadily since we acquired the brand back in 2012. In many ways, our playbook in Canada is similar to the U.S. We successfully execute a wide-ranging brand building playbook by leveraging leading positions and iconic brands. As an example, we continue to expand our communications around Gaviscon by sharing with consumers the benefits of having one product to both treat and protect against heartburn. This message is communicated with our iconic Gaviscon Blue Man campaigns that are memorable to consumers. Consumer insights are also an important focus as we look for innovation opportunities. This has led to new products like Sleepy's Minis, and Gaviscon Extra Strength Liquid launched in the past year, in addition to bringing innovation from our U.S. business to Canada. As shown on the left-hand side of the slide, we've experienced healthy sales growth in excess of 3% in our Canadian business. The performance is driven by our brand-building strategy and portfolio positioning, each of which has set the stage for continued success. Now let's turn to slide eight. The key to our success comes from being a brand-building organization with our principal objective of positioning our core brands for long-term growth. An example of this is Dentek, which is one of our five core brands that makes up half of our company sales. Fiscal 19 was a challenging year for Dentek due to certain retailer changes at shelf, but we feel good about the strategic positioning for the brand and our ability to execute a long-term brand-building strategy. Acquired in 2016, the Dentek brand has many opportunities to win with consumers and retailers. Dentek is a leader in the fragmented peg section of the store, competing across dental guards, floss picks, interdental brushes, oral care accessories, and pain relief subsections of the oral care aisle. We collaborate with retail partners by educating them around the growing oral healthcare category and how to best organize a hard to shop section of the store. We then work with our partners to help develop an optimal mix of products across the category as well as merchandising initiatives with the end goal of driving incremental peg section sales and increased household penetration. One example of this is Dentek Dental Guards. Dental Guards, which represents about a quarter of Dentek's product mix, is a highly differentiated category where our brand enables retailers to add a high dollar and margin item to a growing category in their oral care aisle. In this space, we are executing our time-tested brand-building efforts to help increase household penetration and drive market share gains for Dentec. We've differentiated our brand by launching a lightweight Dentec Ultimate Guard and supported this effort through various brand-building efforts, including memorable TV campaigns that emphasize the damage that can be caused by nighttime teeth grinding. The strategy is working. We've outperformed the overall dental guard category by a factor of four year to date, and we continue to expand our number one positioning in this space. By executing these types of efforts across the Dentec portfolio, we feel good about the strategic position for the brand and our ability to drive growth over time. Before I turn the call over to Chris, I'd like to comment on our upcoming transition around logistics mentioned in today's press release. Following the divestiture of our household cleaning business, we performed an extensive analysis to determine the most optimal location and partner for our nationwide third-party distribution center to best service our retail partners. The result of this review was a decision to transition to a new third-party logistics provider and warehouse near Indianapolis with an expected completion in the spring of next year. We will provide additional information and updates during the year as we make progress on the transition. Chris will provide additional details on the financial aspects of this change as well. With that, I'll turn it over to Chris to walk through Q1 financials in greater detail.

Thank you, Ron. Good morning, everyone. I'll walk through our first quarter financial results in greater detail and offer some updated context around our expectations for fiscal 20 by line item. As a reminder, the information in today's presentation includes adjusted results for the prior year that are reconciled in our earnings release. On slide 10, you can see our high-level first quarter results, which include flat organic revenue of approximately $232 million and a slight EPS decline of 3 cents per share versus the prior year impacted by 4 cents per share of household cleaning that was included in the prior year. Adjusted EBITDA also declined versus prior year due to the divestiture of households. As Ron noted earlier, we will fully lap the comparison impacts of household cleaning beginning in Q2. Now let's turn to slide 11 where I'll discuss consolidated first quarter results. For the first quarter fiscal 20, Our net revenues decreased 8.6% to $232.2 million, but were flat after excluding the effects of the household divestiture and FX. Our top line was also impacted by retailer inventory reductions, as assumed in our full-year outlook. Gross margin was 57.7% for the first quarter, up 30 basis points sequentially. Looking ahead, we still expect full-year fiscal 20 gross margin of approximately 57.5%. In terms of AMP, we came in at 15% of revenue in Q1. As a reminder, we expect AMP spend to approximate 14.5% of sales for the full year, with higher AMP spend in the first half versus second half. Our G&A spending was about 9% of total revenues in the first quarter, but was down slightly in dollars versus prior year, reflecting modest deleveraging as a result of the divestiture of households. We reported earnings per share in Q1 of 65 cents, representing a slight decline versus the prior year due to the household cleaning divestiture as discussed previously. EPS was also impacted by a slightly higher than anticipated tax rate due to the impact of certain discrete items. We continue to expect a 25.5% effective tax rate for the full year. Now let's turn to slide 14 to discuss our first quarter cash flow. For Q1, we generated approximately $51 million in free cash flow down slightly versus prior year due to the sale of households. In the quarter, we utilized $28.8 million of the $50 million share repurchasing program authorized in May, repurchasing just under a million shares. In July, we completed the remaining authorized buyback and therefore expect to focus on additional debt reduction through the balance of our fiscal year. Given share repurchase efforts in the quarter and the loss of the household segment cash flow, Our net debt at June 30 was effectively unchanged sequentially at approximately $1.8 billion, equating to a leverage ratio of five times. Given the complete use of our share repurchase program, we now anticipate leverage of approximately 4.7 times by our fiscal year end. Last, regarding the transition to the new third-party logistics provider Ron discussed earlier, we expect to incur approximately $10 million in one-time costs over the balance of fiscal 20. I'll now turn it back to Ron for a discussion surrounding our fiscal 20 outlook and some closing remarks.

Thanks, Chris. Let's wrap up on slide 14. We are off to a solid start to the fiscal year, driven by the continued success of our strategy. For net sales, we continue to expect fiscal 20 to be in the range of approximately $951 million to $961 million. We continue to anticipate organic revenue to be approximately flat versus the prior year, with Q2 revenues down modestly year over year. We continue to expect fiscal 20 adjusted EPS in the range of $2.76 to $2.83, although we now anticipate being at the higher end of our outlook given our recent opportunistic share repurchase. EPS is still expected to be weighted more heavily in the second half due to the timing of A&P and G&A spend compared to the first half of fiscal 20. regarding cash flow, we still expect full year adjusted free cash flow of $200 million or more for the year. So in summary, one quarter into the year, we feel good about our guidance and growth prospects. First, our top line results experience solid consumption trends, market share wins, and strong international growth. Second, our financial profile was stable in Q1 with consistent and strong cash flows and margins. Finally, We continue to effectively allocate capital both reducing debt and repurchasing stock in the quarter. These recent results and our long-term success are underpinned by our proven three-pillared strategy. The company has a strong record of providing long-term growth through brand heritage, product innovation, and channel development, and we will continue in these efforts to drive similar results to the balance of fiscal 20 and beyond. With that, I'd like to turn it over to the operator for questions.

Thank you. Ladies and gentlemen on the phone lines, if you'd like to ask a question at this time, please press star and then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And our first question comes from Joe Altabello from Raymond James. Your line is now open.

Hey, guys. Good morning. This is Adam on for Joe. I just wanted to ask, with inventories up 9% and sales down 9%, we just appreciate a little bit more clarity in reconciling this, and then perhaps a bit more color on the destocking trends as a headwind for the rest of the fiscal year.

So let me let Chris take the inventory question, then I'll comment on the destocking. Chris? Yeah, hey, Adam.

So really two factors impacting the inventory. One, we're starting to prepare for the warehouse move that we mentioned on the call today. So we'll start to see that ramp up. and then it'll come back down as we work through the transition. And we also built a little bit of inventory ahead of an SAP go-live at our Lynchburg facility during the quarter. So that'll come back during the rest of the year as well.

So in terms of destocking, Adam, we continue to see destocking largely concentrated in the drug channel during the quarter. Continues to be in line with what we expected not only in the first quarter but what we expect for the full year as well.

Thanks, Ron, Chris. I appreciate that. And then if I could ask kind of one more follow-up here. I was looking at the OTC gross margin declining for three years now, down again in the June quarter. If you guys could provide a little more color there, that would be helpful. And I was also looking at international gross margin being down rather significantly. So I know that that could obviously be volatile from quarter to quarter, and you are lapping a tough comp. But I just was curious what was going on there.

Yeah, Adam, so if I start with North America, remember, if you're looking over time, we have certain stranded costs from households that have remained now with the business, and we've also talked about the BC and Goody's packaging transition, which has impacted our margins in the North American business. On the international front, if you look back over time, the prior year Q1 was really a bit more of an anomaly than this quarter. As you mentioned, that business can be a bit lumpy, given the distribution nature of it, and so product and channel mix can really impact it, so I would say that the current quarter was more indicative of the international gross margin.

Great. Thanks, Chris. Thanks, guys. I'll get back to you. Sure.

Thank you. And our next question comes from John Anderson from William Blair. Your line is now open.

Good morning, everybody. Good morning, John. Going back to inventory, destocking for a minute. Are you, you know, kind of a quarter in here, I guess, to the fiscal year, Ron? Is the destocking that you're seeing, is it really just isolated to the drug retail channel? Or is there still work being done, you know, more broadly across channels? And then what kind of visibility do you have? Is this just really kind of a Hold Your Breath Every Quarter kind of situation with respect to inventory destocking, or is there a certain amount of visibility based on your assessment of where inventory levels are in a given channel in conversations with a given retailer?

So the first part of that question is in terms of where are we seeing the destocking. As anticipated, it's largely concentrated in the drug channel. Although there is some impact as expected as we see some regional retailers close or meaningfully scale back, but that's as expected. So at this point, it continues to be in line with what we thought we would see going into the year at this point. And in terms of insight, again, the retailers really don't share with us advanced plans of what they expect. So it really is a little bit of hold our breath each quarter. And we've talked about this over the past years where it kind of comes out of nowhere in a given quarter. So we don't get a lot of insight into it.

Okay. Can you talk a little bit about pricing and private label? How has price trended across your portfolio recently? I know it may vary quite a bit by brand, but pricing and aggregate, if you could comment on, and then your core brand performance versus, say, private label in aggregate across your portfolio. Any changes?

Sure. You know, our portfolio being based on leading brands really puts us in a good position in terms of managing price over the long term. We've actually started to take some price increases over the last couple of quarters, but it really is managed strategically over time. In terms of our positioning versus private label, we continue to take share and grow the market categories with our retailer partners. So that trend continues as it has over the long term.

Okay. You made a comment during the prepared remarks that the women's health business, I think consumption was up but sales were down due to timing. I think there are two big brands in that platform for you with Monistat and Summer's Eve. Could you talk a little bit about how those, both from a consumption standpoint and maybe this timing issue, How those brands are performing and how you think about those brands in terms of their growth potential moving forward?

Sure. Both Summer's Eve and Monistat had solid consumption trends during the quarter, and we continue to feel good about their ability to grow for the full year. During the quarter, it was really timing versus activity last year. So for Summer's Eve, We had more new product launches during the quarter last year than this year, so it was really a comp issue. And then this year, it was really the result, excuse me, for Monistat this year was a change in SKU offering that we made that impact the timing of some retail orders. So in both cases, it really was just a cadence of orders versus the prior year with both realizing solid consumption trends during the quarter.

Okay. and just some rationale on the logistics, some more rationale on the logistics provider change. It seems like a big deal. I think you've been working with the same provider now for a decade or more out of St. Louis, a St. Louis facility. Can you talk about what you're really hoping to achieve through this move? Thank you.

Sure. So the St. Louis location really is a legacy location Thank you very much. evaluate where was the best location for the consumer healthcare business. So that was the primary driver was all around where's the best location for service for our retailers. In addition to that, we will get some modest cost savings over time that we'll reinvest back in higher levels of A&P and other growth initiatives over time, which would be consistent with our strategy.

Great. Thanks so much. Good luck.

Thank you. And our next question comes from Steph Wissink from Jefferies. Your line is now open.

Thanks. Good morning, everyone. Most of our questions have been asked already, but just, Chris, I think this is for you maybe on the guidance. One of the points of confusion this morning is just on the underlying guidance versus the inclusion of the logistics change. I just want to make absolutely clear that the underlying guidance is not changing. Is that correct? For either EPS or for the cash flow, you're just adding back the adjustment for this logistics change in the full year numbers now?

That's correct.

Okay. So then the follow-up question would be just with respect to destocking. I know we keep coming back to this theme. But are you seeing any sort of thinning out in the amount of destocking that's happening broadly across the space? Are we seeing any relief regarding the degree of pressure or has it been pretty consistent throughout the cycle of destocking?

I would say, Steph, it's been fairly consistent in that it was kind of the slow drip during the first quarter where overall order patterns in the drug channel were below consumption trends. As a matter of fact, we actually saw good consumption trends in the drug channel which was a bit of a reverse in trends for us. So we're hoping that that will help relieve some of the pressure as we see an increase in consumption trends in that channel. But overall, really no change from what we've been realizing over the last six to eight quarters in that channel.

Okay. And just a final one is as you're talking with your buyers in that channel, and they're looking at their average weeks of supply and starting to try to think about what the appropriate level of weeks of supply is. Any sense of if we're getting towards the end of this phase of destocking or getting close to the end, how should we think about kind of average weeks of supply in the marketplace relative to consumption trends and weekly sales?

Yeah, I guess first comment is generally the inventory levels are managed outside of the buyers at the retailers in most cases. So that's the first part. The second is that I think the big retailers are on a long journey in terms of slowly reducing their inventory over time. So once it really normalizes and gets in the base of our business, we won't see a change from year to year as we go forward.

Okay, that's very helpful. Thanks for all the detail.

Okay, thanks, Deb.

Thank you. And our next question comes from Linda Boltenweiser from DA Davidson. Your line is now open.

Hi. Again, I don't mean to focus overly on the destocking, but just another question on that. Have you done any benchmarking or looking at competitors who also compete in the OTC space to see if they're experiencing and to what extent the same thing? So like a J&J or a Parago or a Church and Dwight? And then secondly, is it maybe because you carry mostly niche products whereas those other guys are carrying bigger Higher Velocity Items, and is that why maybe you're more affected by the destocking than some of the other competitors? Can you just comment on what you think you are experiencing versus competitors in the same space? Thanks.

Yeah. In general, based on the publicly available information, it seems that the competitive set is largely feeling the same headwinds that we are, although to a lesser extent. We're more concentrated in the drug channel than most of the other competitors, especially the larger competitors, who may have a business that is more balanced on the international side of things, for example. So you don't necessarily hear them talk about it as much because it has a smaller impact on their business than it does us. So our information that we're getting back from the retailer partners and what we're hearing is that we're all in the same boat and niche categories or large categories are all being treated the same where the retailers are trying to be more effective with the inventory that they have in their stores and in their warehouses in a declining front of store sales environment.

Okay, and then just since you highlighted Dentech today, You know, the IRI data, and I know it's not completely representative, but some of your stuff looks fine, but Dentek actually looks more negative than some of the other products. Is that just the comparison of the loss of space versus last year? Or why does the data look so poor, the consumption data? And then can you talk about, you mentioned there could be some dental guard distribution opportunity. It seemed that you might be saying that. Can you give us some idea of how many doors that carry the picks and other products also carry the dental guards. Thank you.

Yeah, so a number of questions in there. You know, first of all, we gave an update on Dent Tech today so that we could bring you up to speed on our ongoing focus of continuing to get Dent Tech back on a long-term growth trajectory. You know, our outlook for sales this year are still above what the trailing sales were for the business at the time of the acquisition. So we've been able to grow the business modestly Since we've acquired it and we continue to have plans to invest and get it back on a growth trajectory. So that was the intent of today's update. In terms of distribution, we've got high levels of ACV for both dental cards and the rest of the Dentex offering. So it's out there in all the major retailers on a national basis. So there's no difference there for the brand. and a final comment is that we did realize declining sales during the first quarter in totality. And again, we're focused on it and looking to get that brand over the long term back to a growth trajectory.

Okay. Thanks very much.

Thank you, Linda.

Thank you. And our next question comes from Frank Kama from Sedoti. Your line is now open.

Hey, good morning guys. Thanks for taking the question. First, I promise not to ask a question on destocking. That's my first thing. My big thing, and I'm surprised nobody's asked it, is I felt other than destocking, the biggest reason your stock has pulled back is leverage. And, you know, fast forward six months ago, seven months ago, the world was coming to the end with interest rates going up, you know, three, four times, whatever it was. Now we think it's going to go down two to three times. So can you talk about how that's affected your view on guidance and how we should think about that? Because I would think since your stock was hit because of its leverage, it should therefore benefit the other way, which it has maybe a little bit, but not so far reflected in the stock.

I guess let me start with a couple of comments and I'll let Chris add on at the end in terms of our outlook. Even though it looks like there may be some delay in rising interest rates, I think over time, though, they're going to go back up at some point. So our strategy of getting our leverage level...

It's hard to go down from zero.

Well, I mean, it's not quite at zero yet, right? It's somewhere between two and two and a quarter percent, so... But it is up from zero. So let's not forget that. But we still think that moving our targeted leverage rate down from four and a half to sub six to three and a half to five or so is still the right thing to do long term to provide flexibility and growth opportunities for the business. So the recent change in That activity doesn't have us rethink that focus.

But did it make you think sort of the timing, your stock buyback? I guess you did it last year at the beginning of the year. But was there some thought in that given maybe a different outlook for when rates would change? Or was that really so nominal that you didn't think about it that way?

We really didn't think about it that way, Frank.

Remember, we're only utilizing a quarter of our free cash flow for the share we purchased.

The other question is just on timing of the AMP spend. Can you just remind me, I know second quarter is always typically your high AMP spend, but why is that now, given where your portfolio is a little more or less seasonal than it has been if you go back years ago. So why is the Q2 sort of slanted like that way as a percent of revenue?

It really is just a function of the timing of our A&P initiatives during the year, Frank, rather than a decision to concentrate spending at any given time of the year. It really is based on what's best to support new product launches or other initiatives or opportunities in the marketplace.

Okay, but it has nothing to really do with the seasonality of the revenue is what I'm getting at.

No, it doesn't.

Okay, great. Thank you.

Thank you, Frank.

Thank you. And as a reminder, ladies and gentlemen, if you would like to ask a question at this time, you may press star and then one on your touchtone telephone. And our next question comes from John Anderson from William Blair. Your line is now open.

Thanks for the quick follow-up. I just wanted to come back to An earlier question on guidance. You've expressed earlier, I think, greater confidence in the high end of your EPS guidance range. Is that number one accurate? And what has changed to the extent that anything has changed that gives you greater confidence that the high ends are more likely than, say, the midpoint? I know we're not talking about a lot of A big range here, but just any thoughts there would be terrific. And I just wanted to confirm again that you pointed to the high end this time around as opposed to last time. Thanks.

John, this is Chris. So confirming that, yes, this time we are pointing to the high end of the range and the primary driver of that really is the share repurchase.

Okay. Thanks a lot.

Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Ron Lombardi for closing remarks.

Thank you, Operator, and thank you to everyone for taking time to join us today. We're encouraged by our Q1 results and look forward to executing our discipline three-pillar strategy in coming quarters and talking with everyone again in Q2. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.