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Operator
Good day, and thank you for standing by. Welcome to the Q2 2024 Prestige Consumer Healthcare Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Phil Terpililli. Please go ahead.
Phil Terpililli
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 24 results, discuss our full year outlook, and then take questions from analysts. A slide presentation 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. 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, which are detailed in a complete safe harbor disclosure on page two 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 now hand it over to our CEO, Ron Lombardi. Ron? Thanks, Phil.
Ron Lombardi
Let's begin on slide five. 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 US 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 the pay down of $55 million in debt and we finished the quarter at three times 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 six to discuss one example of brand building that's driving our success. Our goodies headache powders define the form and have a long 100 plus year history of helping consumers treat headaches and other ailments 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 used these and expanded with new forms and flavors as well as with targeted offerings like goodies hangover that solve on-the-go pain relief 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 two 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 goodies online. These recent marketing tactics are successfully leveraging our brand building toolkit to drive share with consumers and retailers, and the results are clear. In the fiscal year to date, we've grown goodies headache powders over three times faster than the overall analgesic category. Now, let's turn to slide seven 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 habits 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 healthcare 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.
Chris
Thanks, Ron. Good morning, everyone. Let's turn to slide nine 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 one-point 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. EBITDA 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 six 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 six 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 margins 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 six 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 six 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 crossed 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 30th, our net debt was approximately $1.2 billion, $1 billion of which is fixed, and we achieved a covenant-defined leverage ratio of three times. We still anticipate being below three times leverage by fiscal year end, absent other strategic uses of cash flow. This is consistent with our objective of targeting to operate below three times leverage over the long term. With that, I'll turn it back to Ron.
Ron Lombardi
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 healthcare portfolio. We are reaffirming our full year outlook thanks to our diverse portfolio of grants. For fiscal 24, we continue to anticipate revenues of $1,135,000,000 to $1,140,000,000 and organic revenue growth of approximately 1% to 2% versus fiscal 23 or organic revenue growth of 2% to 3% after excluding the exit of the non-core private label business. For Q3, we anticipate revenue of $280,000,000 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 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 three times leverage by fiscal year end as we continue to execute our discipline's capital deployment strategy. With that, I'll open it up for questions. Operator?
Operator
Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rupesh Parikh with Oppenheimer. Your line is now open.
Chris
Good morning, and thanks for taking my question. So I guess I wanted to kick it off just with the women's health segment. Just curious if you could just give us color in terms of how you're thinking about the recovery. I think earlier you expected it to improve later this year, but just curious the latest thinking on women's health.
Ron Lombardi
Good morning, Rupesh. 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.
Chris
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
No, no real change in share or new entrance that's disrupting anything, Rupesh. So it's kind of just overall category trends at this point.
Chris
Great, and then we've all seen, I guess, the bankruptcy of Rite Aid. So just curious as well if you're seeing any shifts between channels just given changing consumer dynamics and just what's happening with some of the challenges in the pharmacy channel.
Chris
Hey, Rupesh. Good morning. 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 shifts, mainly into mass and e-commerce. But as we've talked about, you know, 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 product to be available to consumers wherever they shop. And so we wouldn't anticipate a channel shift meaningfully impacting us.
Chris
Great. Thank you for all the color of hospital.
Operator
Thank you. One moment for our next question. This question comes from the line of Susan Anderson with Canaccord. Your line is now open.
Susan Anderson
Hi, good morning. Nice job on the quarter. I was wondering if maybe you could talk about the cold cough season. It sounds like it was a driver of your cells. I guess there's been some mixed commentary out there. Just curious if how you've seen it start out and how you expect it to play out or how you're modeling it for the season. Thanks.
Ron Lombardi
Good morning, Susan. You know, so we've been talking about kind of three 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 three factors continue to line up with what we thought about for the year. So we were 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
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 kind of volumes normalizing as we go into the back half, I guess, How do you feel about that dynamic, and would you expect the growth there to be more equal as we look forward?
Chris
Yeah, good morning, Susan. 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. 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, you know, consistent with our original guide, we still expect our growth to be about half price, half volume for the year.
Susan Anderson
Okay, great. Thanks. And if I could maybe just add one more on the capital allocation. I guess, how are you thinking about, you're at three times leverage, so almost, you know, reaching your goal by the end of the year. I guess, how are you thinking about beyond that, balancing share repurchases and debt pay down, and then also M&A opportunities as we look forward?
Ron Lombardi
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 three, 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.
Susan Anderson
Great. Thanks so much. Good luck the rest of the year. Thank you, Susan.
Operator
Thank you. One moment for our next question. This question comes to the line of John Anderson with William Blair. Your line is now open.
John Anderson
Hi. Good morning, everybody. During the first half of the year, your sales essentially flat. But, you know, you've reaffirmed the full year outlook for one to two percent growth, which means, you know, we're going to expect to see an acceleration in sales growth in the second half of the year. Could you talk about, you know, your visibility to that and what you know, some of the underlying, you know, drivers are of that improvement on a year over year basis that you're expecting in the second half. Thanks.
Ron Lombardi
So the first place I'll start with john is comps. And as I mentioned during the prepared remarks today is for the second quarter in particular, we comp the highest level of quarterly sales ever in the company's history. You know, 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 comps. So as we get into the second half of our year, we begin to return to, I think, more of a normal level of comps to help drive year-over-year gains. That's really the big factor.
John Anderson
Okay. You mentioned, Ron, in your response to the question on cough cold, that one of the factors there you're considering is changes in retailers' planned inventory levels. I guess you're 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 to just kind of hold less inventory in aggregate and could that affect you know your shipments.
Ron Lombardi
yeah so particularly to cough cold right last year, the supply chain of many suppliers for cough cold we're trying to catch up so retailers. were 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, you know, 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's returned 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.
John Anderson
Okay, that's helpful. Last one for me on gross margin improved, I think, a little bit sequentially. And, you know, 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, or 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 – you know, ongoing gross margin improvement from here. Thanks.
Chris
Hi, John. It's Chris. So really the latter, you know, gross margin 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, you know, 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 the march back to more normalized levels.
John Anderson
And then maybe I will squeeze one more in. The comments on capital allocation, excuse me, on leverage, you know, wanting to operate below three times 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 the long term as you work to achieve that goal? Thanks.
Ron Lombardi
Yeah. So, John, I think we announced that back on the May call at the start of the fiscal year that it was our new phase. Prior to that, I think we were between four and a half and three 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 handcuff us in terms of optionality. And it's our job, if an M&A opportunity shows up that we think is compelling for the shareholders, to figure out how to get it done. we would rise above three for a period of time if it made sense. So it's not meant to put a ceiling on things, but rather just emphasize the importance of operating at lower levels of leverage going forward.
John Anderson
Great. Thanks so much. Good luck going forward.
Ron Lombardi
Sure. Thanks, Ron.
Operator
Thank you. One moment for our last question. This question comes from the line of Connie Kim with Morningstar. Your line is now open.
Morningstar
Hey, good morning and congrats on a solid quarter. You guys have identified product innovation as one of your key priorities and talked about launching Dramamine in 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
Yeah, so good morning. 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 pulsed in new products and innovation and refreshments to the product offering really across the broad portfolio. You know, everything from brands that we don't talk about, like sty, where we launched a new sty drop a few years ago, and it quickly rose to one of the better selling skews within the sty category. Uh, 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.
Morningstar
Great. That's helpful. And, you know, as more large pharma kind of spin out their consumer division, you know, as J&J did with Canby this year and Sanofi kind of planning to do 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
Yeah, we would expect it to be more of the same. Whether these big consumer healthcare companies are embedded in a big global CPG company or independent, like we've seen Canview 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 than 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 will 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.
Morningstar
Got it. That's helpful. And just one last question for me. You know, with the FDA cracking down on products across different categories, you know, 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? Thank you.
Ron Lombardi
Yeah. 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.
Morningstar
Got it. That's really helpful. Thanks, guys.
Ron Lombardi
Okay. Thank you.
Operator
Thank you. I'm showing no further questions at this time and would now like to turn it back to Ron Lombardi, President and CEO, for closing remarks.
Ron Lombardi
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.
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