Prestige Consumer Healthcare Inc. (NYSE:PBH) Q3 2023 Earnings Call Transcript

Prestige Consumer Healthcare Inc. (NYSE:PBH) Q3 2023 Earnings Call Transcript February 2, 2023

Operator: Good day and thank you for standing by. Welcome to the Q3, 2023 Prestige Consumer Healthcare Inc, Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now turn it over to your speaker today, Mr. Phil Terpolilli. Sir, you may begin.

Phil Terpolilli: Thanks 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 will review the third quarter fiscal 2023 results, discuss our full-year outlook and then take questions from analysts. The slide presentation accompanying today’s call can be accessed by visiting prestigeconsumerhealthcare.com, clicking on the Investors link and then on today’s webcast and presentation. Remember, some of the information contained in the presentation today includes non-GAAP financial measures. Reconciliations to the nearest GAAP financial measures are included in the earnings release and our 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, which accompanies the call. These are important to review and contemplate. Business environment uncertainty remains high due to supply chain constraints, high inflation and various geopolitical factors, which have numerous potential impacts. This means results could change at any time from the forecasted impact of reconsiderations of the best estimates based on the information available as of today’s date. Further information concerning risk factors and cautionary statements are available on our most recent SEC filings and the most recent Company 10-K.

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

Ronald Lombardi: Thanks Phil. Let’s begin on Slide 5. We are pleased with our third quarter results, which built on our first half momentum and what continues to be a dynamic supply chain and retail environment. Revenues of 276 million in Q3 grew about 2% organically versus the prior year. Thanks to our diverse portfolio of trusted brands. Q3 revenues were driven by a continued rebounding cough cold, which I will discuss in greater detail on the next page, the GI segments Dramamine brand, as well as a strong international segment performance. Solid revenue continues to translate into strong profitability, generating $1.4 in diluted EPS, and over $50 million in free cash flow in Q3. Even with almost $20 million in inventory investment in the quarter to support service levels and future growth.

Our consistent cash flow profile continues to enable our disciplined capital deployment strategy. These efforts resulted in a Q3 leverage ratio of three and a half times our lowest level of leverage in over a decade. We continue to anticipate gradually lower levels of leverage over time, which further enables future capital allocation optionality. Now let’s turn to Page 6 and discuss the Cough & Cold category which is experiencing extraordinary demand this fiscal year. Our Cough & Cold portfolio is comprised largely of two iconic brands, Chloraseptic and Luden’s, each with their own distinct heritage for sore throat treatment. Chloraseptic has a heritage in efficacious sore throat sprays and lozenges that began in the 50s. Luden’s goes back even further with a brand created in the late 1800s.

Today, consumers continue to associate the product with its iconic, great tasting, cherry flavored throat drop. This long standing history with consumers has allowed us to benefit from the extraordinary demand that has driven the category this fiscal year. Year-to-date, the category has grown well beyond our start of your expectations due to illnesses throughout the year, consumers being more proactive around health treatments, and a low-level of inventory of stores due to the supply chain environment. The combination of these factors has enabled strong growth for both Luden’s and Chloraseptic beyond what we typically expect. As shown on the right of the page. Each brand has grown over 20% year-to-date, with the potential for additional growth hindered by supply chain limitations that have kept upside for us and others in the category.

We have a clear opportunity to sell additional volume, and we have taken strategic actions like adding new suppliers to keep up with this demand and refill retailers depleted stocks. Looking forward, although the category is small as a percent of total company sales, we anticipate a strong demand to continue to the balance of the year and these strategic actions, helping to position these brands for long-term growth. With that, I will pass it to Chris to walk through the financials.

Christine Sacco: Thanks, Ron. Good morning, everyone. Let’s turn to Slide 8 and review our third quarter fiscal 2023 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. Q3 revenue of $275.5 million increased 40 basis points versus the prior year and increased 1.8% excluding the effects of foreign currency. North America revenues were down approximately 1% versus prior year excluding currency, with sharp increases in the Cough & Cold and gastrointestinal category, offset by declines in the Women’s Health and Eye & Ear Care category. Our international segment revenues of $38.6 million were up over 25% in Q3 excluding FX.

The performance included broad based strength across regions and product categories. EBITDA and EPS were up 4% and 5% in Q3 respectively from the prior year, with inflationary pressures and higher interest costs more than offset by higher revenues and lower marketing spent. Let’s turn to Slide 9 for more detail around year-to-date consolidated results. For the first nine-months fiscal 2023 revenues increased 2% versus the prior year on an organic basis. The performance drivers were largely similar to what we experienced in Q3, with the largest benefits coming from our international segment performance strength of Dramamine and robust Cough & Cold category growth. We also continue to experience solid year-over-year growth in the e-commerce channel, continuing the long term trend of higher online purchasing.

Total company gross margin of 56% in the first nine-months declined 170 basis points versus last year’s adjusted gross margin of 57.7%. The gross margin change was anticipated and attributable to cost increases partially offset by pricing actions across our portfolio which offset the dollar amount of inflationary cost headwinds. For Q4, we anticipated gross margin of approximately 54.5%. Advertising and Marketing came in at 13.6% for the first nine-months, down versus 14.7% in the prior year as a percentage of revenue. As a reminder, we anticipate spend for the year of about 13% of revenue, owing primarily to the timing of initiatives and reduced spending around certain categories due to strong consumer demand. G&A expenses were 9.5% of revenue for the first nine-months, we still anticipate full-year G&A dollars to approximate prior year at around 9% of revenue.

Finally, diluted EPS of $3.14 compared to $3.15 in the prior year, as higher revenues were more than offset by the gross margin compression just discussed. Our year-to-date tax rate of 23% was slightly favorable to prior periods, due to the timing of certain discrete tax items. We still anticipate a Q4 and long-term normalized tax rate of approximately 24%. Now let’s turn to Slide 10, and discuss cash flow. In the first nine-months, we generated $165.5 million in free cash flow down versus the prior year. Although quarterly variations can be affected by the timing of working capital, beyond this, we have strategically invested behind inventory in light of the current supply chain environment, finding opportunities where we can increase inventory to better support targeted service levels.

This is the primary driver to our updated free cash flow guidance for the year of $220 million. Our stable EBITDA margins enabled consistent and strong free cash flow generation and as a result, we have the ability to invest behind our brands to support increased levels of customer service through working capital investments without derailing de leveraging efforts and targets. We anticipate Q4 free cash flow of about $55 million and year-end leverage below 3.5 times reflecting our disciplined capital deployment strategy that includes debt pay down. Looking beyond this inventory step up and related cash flow timing, we anticipate a more normalized free cash flow profile in fiscal 2024 and will provide a full outlook in May. At December 31st, our net debt was approximately $1.4 billion and we maintain the covenant to find leverage ratio of 3.5 times.

We now anticipate interest expense of $69 million for the year owing to the timing of debt paid down. With that, I will turn it back to Ron.

Ronald Lombardi: Thanks, Chris. Let’s turn to Slide 12 to wrap up. With just one quarter to go in the year, we are refining our outlook. Our proven business strategy and leading consumer healthcare portfolio are enabling us to grow within our original outlook range for the year, even in the current supply chain and inflationary environment we and others are facing. For fiscal 2023, we anticipate revenue growth of approximately 3% on both a reported and organic basis, consistent with our long-term target. Q4 revenues are anticipated to be approximately 278 million to 280 million translating into growth of mid single-digits versus the prior year. We anticipate EPS of $4.18 for fiscal 2023 which implies Q4 EPS of $1.4. A disciplined pricing actions and cost management are helping to offset inflationary headwinds, while the benefits of our strong free cash flow continues to help offset the impact of higher interest rates.

Lastly, we now anticipate free cash flow of 220 million or more reflecting the strategic increases in inventory investments that Chris just discussed. So in summary, our business strategy is working with one quarter to go, we anticipate solid typical 2023 growth with record revenue and earnings that builds on our strong fiscal 2022 despite a dynamic market backdrop. We also expect this momentum to result in continued growth in fiscal 2024, which we will provide a full outlook on in May. We remain confident in our business attributes. And then our strategy is set up to reward our stakeholders over the long-term. With that, I will open it up for questions, operator.

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Q&A Session

Operator: Thank you. And our first question will come from Susan Anderson Canaccord Genuity. Your line is open.

Susan Anderson: Hi, nice job on the quarter, thanks for taking my question. I was wondering if you could follow-up on the supply chain. Obviously, there were some really strong sell-throughs and Cough & Cold. I’m curious, are you guys seeing still, supply demand imbalances in the store? Do you guys feel like – I guess maybe if you could talk about by category to, that the in stocks are getting better, and the out of stocks fewer as we kind of look forward through the rest of the year?

Ronald Lombardi: Sure. Thanks Susan, good morning. So the supply chain, we have been talking about that topic, I think just about every one of these calls for a good year now. I think the positive thing is we have been able to keep up with record demand for our business through last year and through this year so far. But we are seeing certain categories that are challenged to keep up with demand and Cough & Cold is a clear example of that situation for us and quite frankly, for many other players in the Cough & Cold category and you can see that shelf when you go to retail. I think we mentioned in the prepared remarks that we brought on some additional liquid, a liquid supplier to help with capacity there going forward. But it is clearly a category where we see limitations.

The other thing I will call out during the third quarter was our Eye Care category was another example where despite good continuity of supply so far through the year, the third quarter actually saw a slowdown an impact impacted our shipments there and something we are expecting to into the fourth quarter. So make the important note here on the supply chain is that we continue to operate in a challenged environment, we have been trying to add to inventory for a good year now we made some progress in Q4, really as a way to add buffer to the categories that are doing well and get ourselves in a good position to support continued growth next year and improve our service levels.

Susan Anderson: Great, that is really helpful, and then maybe if I could just add one more on the international business, so another strong quarter there. Maybe if you could just talk about kind of the trend you are seeing there and particularly Hydralyte and how you are expecting that to play out the rest of the year?

Christine Sacco: Yes, good morning Susan, this is Chris. So you are right international had another really strong performance coming off of a record year last year and so helped a little bit with illnesses, but we saw strong performance across all regions, not just Australia in the third quarter. So we feel good about Hydralyte, and we are up to about 10% household penetration on Hydralyte which is a few points over the last couple of years which is quite good. But obviously at 10% household penetration still plenty of room to go. So we have continued to feel good about the growth prospects internationally and we target remember a long-term growth rate of about 5% internationally and we feel pretty confident about that going forward.

Susan Anderson: Great that sounds good. Thanks so much, I will let someone else jump in. good luck for the rest of the year.

Ronald Lombardi: Thank you.

Operator: Thank you. Our next question will come from Rupesh Parikh of Oppenheimer and Company. Your line is open.

Rupesh Parikh: Good morning and thanks for taking my question. So I just want to go back to the prior year guidance, if you can just give more color in terms of the sales reduction to the lower end of the range, in terms of what drove that and it also for EPS, it looks like higher interest expense may have had an impact on EPS range? Thank you.