Prestige Consumer Healthcare Inc. (NYSE:PBH) Q1 2023 Earnings Conference Call held on August 4, 2022, at 8:30 AM ET

Key Company Representatives Participating Today

Phil Terpolilli – Vice President of Investor Relations and Treasurer

Ron Lombardi – Chairman, President, and Chief Executive Officer

Christine Sacco – Chief Financial Officer

Analysts Engaging in the Conference Call

Chris Neamonitis – Jefferies

Jon Andersen – William Blair

Mitch Pinheiro – Sturdivant

Erica Eiler – Oppenheimer

Linda Bolton Weiser – D.A. Davidson

Operator

Good morning, everyone. Welcome to the Prestige Consumer Healthcare Fiscal 2023 Earnings Conference Call. All participants will be in listen-only mode during the presentation. [Operator Instructions] Following the presentation, there will be an opportunity for questions. [Operator Instructions]

Please be aware that this event is being recorded. I would now like to hand over the call to Phil Terpolilli, Vice President of Investor Relations and Treasurer. Please proceed.

Phil Terpolilli

Thank you, Operator. I appreciate everyone joining us today. Alongside me are Ron Lombardi, our Chairman, President, and CEO; and Christine Sacco, our CFO. In today’s call, we will delve into our first-quarter fiscal 2023 results, provide insights into our full-year outlook, and address any questions from analysts.

A slide presentation is available to accompany today’s call. You can access it by visiting prestigeconsumerhealthcare.com, clicking on the Investors link, and then selecting today’s Webcast and Presentation.

Please remember that some of the information presented today contains non-GAAP financial measures, and reconciliations to the nearest GAAP measures can be found in the earnings release and accompanying slide presentation.

Management will also provide forward-looking statements regarding potential risks and uncertainties, which are outlined in the comprehensive Safe Harbor disclosure on page two of the slide presentation accompanying this call.

It is vital to review and consider these details, as the business environment remains uncertain due to the ongoing impacts of COVID-19 and various geopolitical factors that may have a significant influence on our results.

Consequently, our results may fluctuate, and the projected impacts of these risks are based on the best available information as of today. Additional information about risk factors and cautionary statements can be found in our latest SEC filings and our most recent company 10-K.

Now, I will turn it over to our CEO, Ron Lombardi. Ron?

Ron Lombardi

Thank you, Phil. Let’s begin with slide five. We are excited about the momentum we have built at the start of this fiscal year, continuing the positive trajectory established during our record fiscal 2022, which concluded in March. This achievement is a testament to the strengths of our comprehensive 100% consumer healthcare platform and the effective implementation of our proven value creation strategy.

As a result of our focused efforts, we achieved net sales of $277 million in Q1, marking the highest quarterly sales in our company’s history and slightly surpassing our expectations from May. Our organic business trends have shown resilience across our entire portfolio, bolstered by robust consumer demand and our long-term brand development initiatives. This includes noteworthy contributions from our International segment and the Hydralyte brand, which I will elaborate on shortly.

Our strong sales performance has translated into substantial profitability, yielding a diluted EPS of $1.9 and nearly $60 million in free cash flow. We also attained an impressive EBITDA margin of approximately 34%, despite the challenges posed by a volatile supply chain and inflationary pressures that are affecting our industry.

Our predictable and consistent cash flow profile continues to support a disciplined capital allocation strategy. In Q1, we executed a segment of our share repurchase program while maintaining a leverage ratio of 3.8 times.

Now, let’s move to page six for a more in-depth discussion of Hydralyte. Hydralyte remains a key driver of growth within our International segment, thanks to its dominant market share and effective brand strategy.

The Hydralyte brand has established itself as the leading choice for oral hydration in Australia, capturing over 90% of the market share. Its high recognition among Australian consumers can be attributed to its excellent taste, proven efficacy, and our successful brand-building efforts.

In Q1, all Hydralyte product forms, including liquids, powders, tablets, and more, experienced mid-double-digit growth compared to the previous year. As illustrated on the left side of the page, this impressive performance is part of a long-term growth trend for the brand, contributing to increased household penetration and usage over time.

For the past 20 years, Hydralyte has been synonymous with oral hydration for Australians, and we see promising opportunities for continued growth. We are leveraging targeted messaging, expanding usage occasions, and implementing various marketing strategies to ensure that we are well-positioned to enhance the growth of the category and the Hydralyte brand moving forward.

Next, let’s turn to slide seven to discuss our long-term sales growth strategy. Our strong financial profile enables us to invest in brand development, including product innovation. Each of our brands has a multi-year product development pipeline designed to ensure that we remain responsive to consumer needs.

When launching new products, we base our designs on consumer insights to capitalize on market opportunities that drive brand and category growth. These innovations are crafted to provide new and effective solutions for consumers to manage their health while ensuring an exceptional experience. As these innovations reach the market, we collaborate with our retail partners to deliver essential channel support, enhancing consumer awareness of these new offerings.

Highlighted on the left are two recent examples of this strategic approach in action. The new Summer’s Eve Spa line expands the brand into a luxurious self-care segment that consumers are increasingly seeking. Since its launch, we have initiated an impressive omnichannel campaign to educate consumers about the spa difference, both in traditional wash forms and serums designed for skin hydration.

Clear Eyes Allergy is another exciting new product—a prescription-strength, once-a-day drop that provides relief from indoor and outdoor allergies. By leveraging our partnerships with social media influencers such as Hilary Rhoda and John Pier [ph], we are enhancing consumer awareness through television and digital channels, particularly during the summer allergy season.

In summary, the products showcased here exemplify our time-tested innovation strategy, and we are enthusiastic about the potential for new products to drive our growth in the future.

Now, I will pass the discussion to Chris to delve into the financials.

Christine Sacco

Thank you, Ron. Good morning to everyone. Let’s pivot to slide nine to review our financial results for the first quarter of fiscal 2023. As a reminder, the information provided today includes certain non-GAAP figures that are reconciled to the closest GAAP measures in our earnings release.

Our Q1 revenue reached $277.1 million, reflecting a 2.9% increase compared to the prior year, although it declined by 1.2% when adjusting for foreign currency effects and our acquisition of Akorn. North America revenues remained approximately flat year-over-year, with a mid-single-digit decline when excluding Akorn.

It is essential to note that Q1 presented a unique comparison against the previous year when we witnessed significantly higher sales due to consumer behavior shifts, especially in travel, which surged alongside increased vaccination rates.

Our International segment’s revenues, amounting to $34.5 million, increased by over 30% in Q1, excluding foreign exchange impacts, primarily driven by the strength of the Hydralyte brand discussed earlier.

As anticipated, both EBITDA and EPS experienced slight declines in Q1 compared to the unusual prior year, yet the EBITDA margin remained consistent with our long-term expectations in the mid-30s.

Let’s proceed to slide 10 for further insights into our consolidated results. As highlighted, our Q1 fiscal 2023 revenues increased by 2.9% year-over-year. We observed robust consumer demand across several categories, including cough and cold, where our Chloraseptic, Luden’s, and Little Remedies brands all demonstrated growth. Furthermore, we continue to experience double-digit year-over-year growth in the e-commerce channel, maintaining the long-standing trend of increased online purchasing.

The total company gross margin for the quarter was 57.8%, reflecting a decline of 130 basis points compared to last year’s gross margin. This decline was anticipated and attributed to the timing of cost increases and product mix. We expect an approximate gross margin of 56% for both Q2 and fiscal 2023, and we are actively implementing pricing strategies across our portfolio to counteract the dollar impact of inflationary pressures.

Advertising and marketing expenses accounted for 14.4% of sales in the first fiscal quarter. For fiscal 2023, we still anticipate an advertising and marketing rate of just over 14% of sales.

General and administrative expenses were 9.6% of sales in Q1, slightly exceeding our expectations due to the timing of specific expenses; however, we maintain our forecast for full-year G&A expenses to be around 9% of sales, similar to the previous year.

Finally, diluted EPS was reported at $1.9, compared to $1.14 in the prior year, reflecting a decrease from the previously discussed factors.

Our Q1 tax rate of 22% fell below prior periods due to the timing of certain discrete tax items, leading to a $0.03 EPS benefit. We still expect a full-year tax rate of approximately 24% for fiscal 2023.

Now, let’s shift to slide 11 to discuss cash flow. In Q1, we generated $57.2 million in free cash flow, a decrease compared to the prior year due to timing in working capital. We continue to maintain industry-leading free cash flow and uphold our outlook for the year.

As of June 30th, our net debt stood at approximately $1.5 billion, and we maintained our covenant-defined leverage ratio of 3.8 times. We anticipate being below 3.5 times leverage by the end of the fiscal year, while also expecting a slight increase in interest expenses compared to the previous year.

Lastly, during the quarter, we utilized about $38 million of the $50 million share repurchase program authorized in May, repurchasing roughly 700,000 shares.

With that, I will hand it back to Ron.

Ron Lombardi

Thank you, Chris. Let’s move to slide 13 to wrap things up. Our business continues to exhibit strong momentum, and we are reaffirming our full-year outlook based on our positive start to the year. For fiscal 2023, we anticipate revenue growth of approximately 3% to 4%, including organic revenue growth of 2% to 3%, aligning with our long-term target. Q2 revenues are projected to reach approximately $283 million, reflecting a 2.5% increase compared to the prior year.

We also continue to expect EPS in the range of $4.18 to $4.23 for fiscal 2023. For Q2, EPS is anticipated to be between $0.98 and $1. Our disciplined pricing strategies and effective cost management are assisting us in mitigating inflationary pressures, while the benefits of our strong free cash flow are expected to help counterbalance the impact of rising interest rates.

Finally, we still expect free cash flow of $260 million or more. We anticipate being below 3.5 times leverage by the end of the fiscal year, as we persist in executing our disciplined capital deployment strategy, which includes debt repayment.

With that, I will open the floor for questions. Operator?

Engagement Session for Questions and Answers

Operator

[Operator Instructions] The first question comes from Stephanie Wissink with Jefferies. Please proceed.

Chris Neamonitis

Hello. Thank you, everyone. It’s Chris Neamonitis on behalf of Stephanie today. I would like to gather more insights regarding the strength in our International segment, particularly about rebuilding channels or achieving a more sustainable uptick. My inquiry stems from the notion that it may appear counter-seasonal; thus, any additional context regarding the dynamics at play would be greatly appreciated, especially considering your previous comments suggesting a trend towards sustainability.

Ron Lombardi

Sure. Good morning. First and foremost, there is indeed some usage of Hydralyte during the cough and cold season, which Australia is currently experiencing. Therefore, not all of it is counter-cyclical. Additionally, Australia continues to operate under a distribution model, making it challenging to predict the timing of distributor orders. At this point, we attribute most of the gain to timing factors.

Chris Neamonitis

Understood. I’d also like to touch on the elements embedded within your guidance related to cough and cold trends. Have there been any adjustments to your assumptions based on what you have observed year-to-date?

Christine Sacco

Hello, this is Chris. Good morning. There have been no significant changes to our initial guidance. As Ron mentioned regarding the International business, we believe there may have been timing benefits related to retail order patterns for cough and cold products.

Chris Neamonitis

Great. Thank you.

Operator

The next question is from Jon Andersen with William Blair. Please proceed.

Jon Andersen

Good morning, everyone. Thank you for the opportunity to ask questions.

Ron Lombardi

Good morning, Jon.

Jon Andersen

My first inquiry revolves around the recovery or improvement in organic growth that your guidance implies for the remainder of the year. I am curious about the consumer landscape and whether new products or general business momentum are encouraging you to believe that this recovery will manifest as outlined throughout the year.

Ron Lombardi

Thank you, Jon. To begin, our business trends have remained relatively stable over an extended period, and our outlook for the remainder of the year is simply an extension of that stability. The variance in growth compared to the previous year in upcoming quarters is primarily attributed to the comparison period.

Jon Andersen

That provides clarity. Are we approaching a point where the variations we have witnessed over the past couple of years due to the pandemic will become less of a focal point in our discussions? Given that it seems we have largely surpassed that comparison period, what is your perspective on that?

Ron Lombardi

Indeed, if we review our business results from last year after the first quarter, they exhibited considerable stability, and that trend has persisted as we transitioned into fiscal 2023. Thus, we anticipate a smoother trajectory moving forward.

While the environment remains challenging to predict due to fluctuating COVID infection rates, which have surged recently, we take solace in the fact that our business has demonstrated stability, regardless of the operating environment. Therefore, while it’s challenging to predict, we remain confident that we are well-positioned to perform well, irrespective of the circumstances of the upcoming quarter.

Jon Andersen

We have heard recent discussions surrounding elevated inventory levels among some retailers. While I acknowledge that this primarily affects categories outside of our competition, there is a possibility that retailers may shift to faster-turning categories to enhance working capital productivity in the near term. Are you witnessing any impacts from a customer perspective that could influence your shipments relative to takeaway, which, as you mentioned, seems to remain consistent?

Ron Lombardi

There have been no substantial changes from what we discussed in May. In general, I believe most players in our industry would prefer increased inventory levels. We want more inventory as well, and we believe our retail partners would also benefit from higher inventory levels.

This situation continues to present a challenging supply chain environment. Many industry participants are emphasizing service levels, and we would like to see improved service levels moving forward. However, it remains a complex supply environment, where resolving one issue often leads to the emergence of another.

We are effectively managing through these challenges, as evidenced by our record sales performance this past quarter. While it remains a difficult environment, we believe there are more opportunities for improvement in the supply chain and inventory levels than potential downsides.

Jon Andersen

It appears you are successfully aligning price and cost, as evidenced by your ability to maintain your gross margin outlook while many companies have had to revise theirs downward. What factors do you believe contribute to your success in this regard? Is it primarily due to reduced inflationary pressures associated with your products, or is it your ability to implement pricing strategies effectively in a timely manner?

Christine Sacco

Hi Jon, this is Chris. It’s a combination of both factors. We believe we accounted for the inflationary pressures we are facing in our initial guidance back in May, and the environment remains fluid, as Ron mentioned. However, we have not encountered any material changes in either pricing or inflationary pressures compared to our initial guidance, so we expect more of the same moving forward.

Jon Andersen

Thank you. Lastly, your leverage ratio appears reasonable by historical standards for your business, and you have been engaging in stock buybacks. What is your current stance on capital allocation as we look ahead over the next six to twelve months? Additionally, have any changes in the CHC marketplace due to pharmaceutical companies restructuring their assets influenced your outlook for M&A?

Ron Lombardi

Firstly, our M&A pipeline has remained consistent for a significant period, and we anticipate that it will continue to yield opportunities, as it has in the past. Our approach remains focused on identifying the right opportunities that align with our long-term brand-building objectives.

The acquisition of the TheraTears brand last year, which provided excellent value for our shareholders while aligning with our long-term focus on reducing leverage, serves as a prime example of how we intend to approach M&A opportunities in the future. Therefore, we will continue our efforts to pay down debt while maintaining a disciplined perspective on capital allocation moving forward.

Jon Andersen

Thank you very much.

Ron Lombardi

Thank you, Jon.

Operator

The next question is from Mitch Pinheiro with Sturdivant. Please proceed.

Mitch Pinheiro

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