Prestige Consumer Healthcare Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Prestige Consumer Healthcare Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference to your speaker today, Phil Terpolilli, Director of Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning to everyone who has joined 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 results of fiscal 2020 third quarter, discuss the full year outlook, and then take questions from analysts. There is 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 between adjusted and reported financial measures are included in today's earnings release and slide presentation. During our call today, 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 which accompanies the call. 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 CEO Ron Lombardi to walk through the highlights of the fiscal third quarter. Ron?

Thanks, Phil, and good morning, everyone. We were pleased with Q3 results which are outlined on slide five. Starting with the top line, Revenue of approximately $242 million in Q3 was up versus the prior year on an organic basis and was slightly ahead of our expectations offered back in October. Importantly, consumption for our portfolio is up approximately 2% in Q3 compared to the prior year. We continue to expect consumption trends for the full year to be around this level, attributable to the ongoing success of our long-term brand-building investments. Net sales benefited from strong results in our international segment, which experienced growth of approximately 12% after adjusting for FX. This strong Q3 performance was led by consumption gains in Australia as the country headed into summer. We'll discuss our strong year-to-date international performance and positioning in more detail later on. In North America, Net sales were led by continued strength in our GI and skin care categories. This strength was offset by ongoing retailer inventory reductions, changes at shelf in oral care and women's health previously discussed, and weakness in sore throat incident levels impacting our cough cold portfolio. Total company adjusted gross margin in the quarter came in at 58%, 30 basis points ahead of the prior year, and is consistent with year-to-date performance. Adjusted gross margin excludes costs related to our transition to a new third-party logistics provider that Chris will provide an update on later. Adjusted EPS of 81 cents was up approximately 11 percent versus the prior year. This strong performance was driven by our leading and consistent financial profile, which drove free cash flow in Q3 of $56 million. Our cash flow continues to benefit from our industry-leading EBITDA margins, efficient business model, and low cash tax rate. We use the cash flow in Q3 to reduce debt, which enables future capital allocation optionality that will continue to drive value for our shareholders. Now, let's turn to slide six to review our year-to-date highlights. Our revenue of $712 million through nine months was essentially flat organically versus the prior year, as strong consumption growth of approximately 2% was largely offset by anticipated inventory reductions occurring largely in the drug channel. We continue to feel good with the positioning of our leading brands and our ability to create value in this environment. Year-to-date adjusted EPS of $2.14 was up 4% versus a year ago, with the prior year including approximately 4 cents of contribution from the divested household cleaning business. EPS benefited from a stable financial profile that also resulted in $155 million of free cash flow generated year-to-date. This cash flow enabled about $100 million in debt reduction and $50 million in opportunistic share repurchases year-to-date. In summary, we feel good about the year-to-date performance of our business and the execution of our proven three-pillar strategy, which has enabled us to raise our EPS outlook for the full year. Let's now turn to slide seven and discuss one of the drivers of the solid year-to-date results, our international segment. As you can see on the left side of the slide, our international business makes up about 10% of our sales. It's highly concentrated with over 50% of international sales in Australia, primarily from three well-positioned brands that we have there. Hydrolyte, Seth Nasal Sprays, and Murine Eye Care. This all falls under the Care Farmer banner, which has experienced impressive growth since we acquired it in 2013. Our international business also includes products sold throughout Southeast Asia and certain other geographies, including our largest brand, Summer's Eve, as well as Fleet and others. We also have a small business in Europe, which is concentrated in the U.K. under the Dentek, Mirene, and Ultra chloroseptic brands. Each of these markets has a scalable infrastructure that can support added brands over time, as we saw with the Hydrolyte acquisition by CARE. Over the long term, we would expect our total international business to grow at 5% or more, and in fiscal 20, we're having a great year that is well above this target. Similar to North America, we are winning by focusing on leading and well-positioned brands that can grow both the category and our share over time. Let's review our fastest growing international brand on slide eight, Hydrolyte. Hydrolyte is our largest brand in Australia and a big driver to recent segment growth. It's an excellent example of our brand-building strategy that drives long-term success. The Hydrolyte brand is synonymous with oral hydration for Australians, representing over 90% of the category. Even with this number one market share, Hydrolyte continues to drive total category growth with solid execution of our long-term strategy Growing at sales in fiscal 20 year-to-date in excess of 20%. We've redefined oral hydration over the last five years by extending usage occasions through targeted messaging, expanding from vomiting and diarrhea into heat exhaustion, sports and exercise, and many other occasions. We've backed up this effort with various marketing tactics, including expanding from traditional TV media to digital ad spends ongoing new product development, and expanded distribution. Going forward, we see continued runway for growth of Hydrolyte by continuing to increase household penetration and driving awareness for the brand. Finally, we are constantly looking for ways to give back to our consumers and the communities we serve, and we encourage our employees to do the same. With that, we'd like to express our concerns for those affected by the bushfires that have have impacted large parts of Australia. It's a tragedy for the communities across the country, and we've been engaged with local relief services to help with donations and other efforts. I'd like to now turn it over to Chris to walk through detailed Q3 financials.

Thank you, Ron. Good morning, everyone. I'll walk through our third quarter financial results in greater detail and offer some updated context around our expectations for fiscal 20. As a reminder, the information in today's presentation includes adjusted results that are reconciled to the closest gap measure in our earnings release. On slide 10, you can see our high-level third quarter results, which included organic revenue growth of a half a point to about $242 million, as well as an approximate 2 and 11% increase to EBITDA and EPS, respectively, versus the prior year. Year-to-date, adjusted EBITDA declined slightly versus prior year, while EPS of $2.14 per share was up nearly 4%. Both results were impacted by the divestiture of household cleaning, which as a reminder, we fully lapped the comparisons of in Q2 of this year. Now let's turn to slide 11 for a bit more detail around consolidated results. As I mentioned on the prior slide, third quarter fiscal 20 net revenues increased 50 basis points to $241.6 million which excludes the impact of foreign currency. Year-to-date revenues of $711.8 million were up slightly on an organic basis versus the prior year. Both the Q3 and year-to-date results were as anticipated with consumption growth offsetting the impact of retailer inventory reductions primarily in the drug channel. Adjusted gross margin which excludes transition costs associated with our new logistics provider was 58% for the third quarter up 30 basis points versus the prior year and flat sequentially. In terms of AMP, we came in at 13.9% of revenue in Q3 and 15% year-to-date with a lower level of spend in the second half as we expected. We anticipate continued investment behind brand building to drive long-term success in our core brand. Our G&A spending was around 9% of total revenues in the first nine months, up slightly in dollars year-over-year. Finally, we reported adjusted earnings per share in Q3 of 81 cents, representing an increase of 11% versus the prior year, driven primarily by the effects of debt pay down and share repurchases. For the full year, we now anticipate net interest expense of just under $98 million, attributable to the effects of debt reduction and lower interest rates. Now let's turn to slide 12 to discuss our third quarter cash flows. For Q3, we generated approximately $56 million in free cash flow, which went primarily to debt reduction. Our net debt at the end of Q3 was $1.7 billion, equating to a leverage ratio of 4.9 times. We still anticipate leverage of approximately 4.7 times by our fiscal year end. With our leading and consistent cash flows, disciplined capital deployment, and focus on debt reduction, We continue to maintain strong credit ratings and relationships in the debt community. As a result, we were able to issue $400 million of new senior notes in December, which replaced prior notes that were due in fiscal 22. The transaction both extended a key debt maturity and resulted in annual interest savings of about $1 million. Last, I'd like to provide an update on our transition to a new third-party logistics provider. We incurred $2.5 million in one-time costs related to this project in Q3, and we still expect to incur approximately $10 million of one-time costs for the project. Through January, we have transitioned more than half of our revenues to the new warehouse and are on track to complete the transition in the first quarter of fiscal 21. I'll now turn it back to Ron for an update on our fiscal 20 outlook and some closing remarks.

Thanks, Chris. Let's now wrap up on slide 14. For fiscal 20, we are in line to achieve our original expectations for organic sales growth and cash flow and now anticipate a higher level of EPS for the year, all driven by solid consumption trends and strong cash flow. I'd also like to note our fiscal 20 gross margin, which has trended to the higher end of our original expectation for the year, has enabled us to reinvest in higher levels of A&P, This reinvestment of gross margin savings is consistent with our long-term objective of investing in A&P to drive higher levels of sales growth over time. For net sales, we still expect fiscal 20 organic revenue to be approximately flat versus the prior year. For Q4, organic revenues are expected to be down slightly organically versus a year ago as we are comping a strong performance from the prior year. For EPS, We now anticipate fiscal 20 adjusted EPS in the range of $2.85 to $2.87 up from $2.76 to $2.83 driven by the strong Q3 performance. Our cash flow outlook is unchanged and we continue to expect full year adjusted free cash flow of $200 million or more. To recap, as we look across our business We remain confident in our outlook and growth prospects. Our top line continues to be driven by solid consumption trends that are a direct result of our long-term focus on brand building. Strong and consistent financial metrics and cash flows to date continue to enable our efficient capital allocation efforts. In total, these efforts leave us well positioned as we approach the end of our fiscal year and we remain focused on driving value for all of our stakeholders. With that, I'd like to turn it over to the operator for questions.

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from John Anderson with William Blair. Your line is now open.

Hey, good morning everybody. Thanks for the questions. Okay, I'm trying to think where to start. Maybe an update on since consumption growth for the portfolio has been solid at 2% and the organic has kind of come in somewhat less than that. Can you talk about what you're seeing right now on the stocking front? Is it Very much in line with your expectations. Are there any signs of any let up, you know, either, you know, soon or, you know, over the next, you know, several quarters? Just an update there would be helpful.

Okay, sure. So in terms of destocking, John, the trends that we've seen year to date have largely been in line with what we anticipated at the beginning of the year. And again, the inventory reductions that the retailers are taking are in response to business challenges and objectives that they have for their businesses. And so far, we haven't seen any change in the factors that are causing them to do that. So although difficult to predict, we still anticipate inventory reductions to be a drag in the medium term, particularly in the drug channel, as I just said. We'll give a further update on this in May when we talk about our fiscal 21. But so far, it continues to be in line with what we thought, likely to continue. But just as importantly, the consumption and the winning with consumers has us well positioned to continue to be successful in this environment.

For sure. Okay. That's helpful. Maybe It would be helpful to me to have a little bit more color around some of the platforms which performed well in the quarter and some that maybe fell a bit short. So you called out GI and skin care as growth areas and then some shelf changes in oral care and women's health as growth. Maybe adversely impacting sales. Can you talk a little bit more, maybe brand level, on what you're seeing happening in GI and skin care that's positive, and then whether we might lapse some of the shelf issues in the other two areas? Thanks.

Sure. So in terms of GI, Dramamine continues to do well. We continue to... grow the category there, and that's not a recent trend. That's been happening since we acquired the brand all the way back in 2011. Gaviscon, up in Canada, is having a particularly good year and has had good performance for a while. In terms of skincare, Compound W has had a couple of new products over the last couple of years that have helped them continue to grow, help that brand continue to grow its share. So those are the brands that are doing well. In terms of Dentek and Monistat, at the beginning of the fiscal year, we had a number of retailers make some changes in the number of SKUs that they offered. And as a result, we've seen those businesses down year over year. And as we get into fiscal 21, we expect those headwinds to moderate. And those businesses, at least from a year over year perspective, will begin to stabilize. So we begin to feel good about those businesses heading into 21. I think it's also important to note that Summer's Eve continues to do well, growing nearly 5%. So the decline in the women's health category is pretty much concentrated in Monistat.

That's great. Really helpful. As we look You're not commenting on fiscal 2021 at the moment, but could you talk about such a key aspect of the story is the high cash flow generation, the conversion, and it looks like you're on track to do more than $200 million this fiscal year. How should we think about that as we look to fiscal 2021? Do we maintain that strength? Is there any drop-off? Given some of the amortization schedules, that would be helpful.

Hey, John, this is Chris. No, as you can see from our historical results, our cash flow is very consistent, very stable financial profile across the board. And so there's no major cliff events coming in fiscal 21 as it relates to free cash flow. So I would expect it to remain consistent with what you're seeing this year.

Great. And then just last question. I don't know the timing of all the shelf resets and line reviews that you go through with various retailers. I suspect it varies by retailer and potentially category. But are there anything that you can comment on related to distribution, maybe wins or maybe other adjustments, i.e. what you dealt with Dentek and Monistat? Thanks, John.

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

Hey, good morning. Can you hear me?

We can, Mitch.

Okay, great. Thank you.

I have trouble with the mute button sometimes.

Just getting back to one of John's questions, I mean, where do you think, I know you're tired of talking about the destocking issue, but It seems to have a longer tail than maybe originally forecast. I don't want to put words in your mouth, but it just seems that way. When does this end? Will they end up having one item on the shelf with no backup stock, or is this just in time? When do you think this ends?

First of all, I would say it's not lasting longer than we would have anticipated. I'll point to the one large drug retailer who a little bit over a year ago announced a three-year program to save a billion and a half or more, and it seems to be increasing in cost. So this is going to play out over a long period of time as we have anticipated, is the first thing. When their businesses recover and they start to perform in line with their objectives will be when this stops. Now, the good news for us is that our brands and our businesses are performing well in that channel. Our consumption in the drug channel year to date is about 2%. So we're not part of their problem. We're part of the solution of them turning their businesses around. Our sell-in is down meaningfully. which is creating a big gap in impacting our sales. So that's the first part. And again, it's not them reducing the number of SKUs that they have in the store. It's them looking for ways and finding ways to be more efficient in their supply chain, whether it's closing distribution centers, which we've seen them do, whether it's closing underperforming stores, which we've seen them do, or just getting better at being able to have Good fill rates at the shelf with lower inventory overall.

So that's what we're seeing. Thank you. And then when you look, and you may have talked about this, I may have missed this, but which is the channel or which besides e-commerce, which is obviously going to have, you know, obviously a strong growth, but are there any channels that are showing stronger than expected consumption growth? Anything weaker than expected to?

So online, both Amazon and the other retailers, .com, are performing very well, very high levels of growth at that. As I just mentioned, drug is 2%, so it's performing well there. Convenience tends to be a good channel for us over the long term. Mass has been a little bit slower for us this year, and again, Some of that's just due to the impact to the Dentec and Monistat skew changing. So we expect that to change as we get into next year. So I think that's a little bit of an outline of what we're seeing.

Okay. And then I guess my final question, and I may have done the math wrong here, but just based on the guidance, the fourth quarter, you know, is going to be flattish overall. in an earnings per share basis. Am I saying that correctly?

Yeah, Mitch, at the midpoint of the range, it's about flat year over year. Remember, we're calling for a top line to be slightly down, right, as we think about facing a tough comp versus the prior year, and then on a gap basis, continued FX headwinds in Q4.

Okay, and then the other thing was just I'm curious, looking at G&A, G&A obviously dropped sequentially. It was up a little higher year over year. Are we going to see sort of a similar level of G&A in the fourth quarter? Yeah, so I anticipate it.

A similar level in Q4 to Q3. Remember, Q2 is typically our highest quarter when you saw Q3 drop off. It can vary with the timing of initiatives, but Q4 looks in line with Q3. Okay.

All right. Well, that's all I have. Thank you.

Thank you, Mitch.

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

Hi. I was just curious about the long-term viewpoint on EBITDA margin. I know that you've always said that your margins are high and you don't expect much expansion over the long term, but I'm wondering if that viewpoint is changing at all. That's my first question. Thanks.

Yeah. So I guess the first thing is we've said for a very long period of time that Managing our EBITDA margin in the mid-30s, 34%, 35% is what we feel is the right balance with long-term growth objectives. So as we get gross margin gains or other gains in the P&L, we would look to invest them in higher levels of A&P, as I called out in my prepared remarks today.

Okay. And then... I was just curious about Monistat, you know, given the SKU reductions at Mass. You are the brand leader there. You're the innovator. Is that something that you've been focusing on in terms of having new SKUs come out, new products leading the innovation there? And can you just talk about a few of the things if you have done anything on the innovation front recently? Thanks.

Sure. You know, skew changes at retail is nothing new. It's something that we deal with every year. Retailers make changes for lots of different reasons. They're looking to shrink or expand a category, bring in something new to help them grow sales over time. So these things ebb and flow over time. So in terms of Monistat, we continue to have a long-term Playbook, where we look to connect with consumer through digital campaigns and other ways to connect with the consumer to grow it over time.

Okay, and just finally, thanks for the overview of your international business. I didn't catch a few said, but what percentage of all of international is done through distributors?

Almost all of it is done through distributors, Linda.

Oh, okay. Great. Thank you very much.

Thank you, Linda.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from Joe Altopello with Raymond James. Your line is now open.

Hi, guys. This is actually Adam on for Joe. I didn't want to belabor destocking, but we were kind of curious, as you look ahead to fiscal 21, Would you expect that destocking continues to impact shipments at the same rate, or would it roughly differ? Or just kind of any color on there would be helpful.

You know, it's tough to predict. And again, I'll go back to the comments I had earlier, which is we haven't seen any meaningful changes in the factors that are causing the retailers to take these actions. So At this point, we would anticipate the level to be fairly similar next year to what we've realized this year. And again, we'll give an update in May on that.

Perfect. Thanks, Ron. That's helpful. And then I just want to ask two smaller questions. You guys have alluded to these in the past, and you also mentioned a little bit earlier. But in terms of the online business, could you guys just mention again how much the channel is up fiscal year to date through nine months here and Do you still expect to reach that 5% of total sales goal by the end of the fiscal year? And then just revisiting capital allocation, I was curious, obviously you guys are centered on debt, but just curious if there was anything additional there. Thank you.

Adam, this is Chris. How are you doing? So yes is the answer to the online. We still anticipate approaching 5% as we exit the year. Online continues to grow high double digits for us, and we're experiencing that thus far this year. From a capital allocation perspective in Q4, at this point, we expect all of our free cash flow or all of our allocation to go to debt pay down in Q4. Obviously, we're always looking opportunistically at the potential for share repurchase, but as we sit here today, debt reduction will be our number one priority for Q4.

Awesome. Thanks, Chris. That's all for me.

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

Okay. Thanks, operator, and thank you to everyone for joining us on today's call. We look forward to speaking with you again in May for our year-end results. Have a good day.

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