Prestige Consumer Healthcare Inc (PBH) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Prestige Consumer Healthcare Third Quarter 2020 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference to your speaker today, Philip Terpolilli, Director of Investor Relations.

Please go ahead, sir.

Thank you, operator, and good morning to everyone who's 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's a slide presentation, which accompanies today's call that 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 2 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 5. 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 was 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 $0.81 was up approximately 11% 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 used 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 6 to review our year-to-date highlights.

Our revenue of $712 million through 9 months was essentially flat organically versus the prior year and 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 $0.04 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 3-pillar strategy, which has enabled us to raise our EPS outlook for the full year.

Let's now turn to Slide 7 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 3 well positioned brands that we have there: Hydralyte, FESS nasal sprays and Murine eye care.

This all falls under the Care Pharma 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, Murine and ultra Chloraseptic brands.

Each of these markets has a scalable infrastructure that can support added brands over time as we saw with the Hydralyte 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 8, Hydralyte.

Hydralyte 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 Hydralyte brand is synonymous with oral hydration for Australians, representing over 90% of the category, even with this #1 market share, Hydralyte 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 5 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 spend, ongoing new product development and expanded distribution.

Going forward, we see continued runway for growth of Hydralyte 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 bush buyers that 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 GAAP measure in our earnings release.

On Slide 10, you can see our high-level third quarter results, which included organic revenue growth of 0.5 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 cost 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 A&P, 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 brands.

Our G&A spending was around 9% of total revenues in the first 9 months, up slightly in dollars year-over-year.

Finally, we reported adjusted earnings per share in Q3 of $0.81, representing an increase of 11% versus the prior year, driven primarily by the effects of debt pay downs 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 flow.

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 4.9x.

We still anticipate leverage of approximately 4.7x 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 onetime costs related to this project in Q3, and we still expect to incur approximately $10 million of onetime 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 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 $2.70 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 and strategy, 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.

(Operator Instructions) Our first question comes from Jon Andersen with William Blair.

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 destocking front?

Is it very much in line with your expectations?

Are there any signs of any let up either soon or over the next several quarters?

Just an update there would be helpful.

Okay.

Sure.

So in terms of destocking, Jon, 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.

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 maybe adversely impacting sales.

Can you talk a little bit more maybe brand level on the -- what you're seeing happening in GI and skin care that's positive?

And then whether there's any -- when we might lap some of the shelf issues in the other 2 areas?

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 skin care, 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.

That's really helpful.

On -- as we look, I know 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.

Jon, 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've seen 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 that 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 this fiscal year that we can think about or should be aware of?

Yes, the majority of the shelf changes kind of happen in our -- Q1 and Q2 of our fiscal year.

And at this point, we feel good about what we expect for next year, and we'll give a further update in May.

Our next question comes from Mitch Pinheiro with Sturdivant.

Can you hear me?

We can, Mitch.

Okay, great.

I have trouble with the mute button sometimes.

Just getting back to one of Jon's questions.

I mean where do you think -- I know you're tired of talking about the destocking issue, but -- and it seems to have a longer tail than maybe originally forecast.

I don't want to put words in your mouth, but just seems that way.

Where -- when does this end?

I mean will they end up having nothing on the -- 1 item on the shelf with no backup stock?

Or is this like a -- and just in time?

Or when do you think this ends?

Yes, first of all, I would say it's not lasting longer than we would have anticipated.

I'll point to the 1 large drug retailer who, a little bit over a year ago, announced a 3-year program to save $1.5 billion 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.

So 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, 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 and 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.

Okay.

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, 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 that'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 DenTek and Monistat SKU 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 is going to be flattish in an earnings per share basis.

Is that -- am I seeing that correctly?

Yes, Mitch, at the midpoint of the range, it's about flat year-over-year.

So -- and just...

Remember, we're -- sorry.

Remember, we're calling for the top line to be slightly down, right?

As we think about facing a tough comp versus the prior year.

And then on a GAAP 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.

Is there -- are we going to see sort of a similar level of G&A in the fourth quarter?

How should we look at that?

Yes.

So I anticipate 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.

Our next question comes from Linda Bolton-Weiser with D.A. Davidson.

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.

Yes.

So I guess, 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, 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?

Sure.

SKU changes at retail is nothing new.

It's something that we deal with them every year.

Retailers make changes for lots of different reasons.

They're looking to shrink or expand a category, bringing 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, [these] 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 if you said, but what percentage of all of International is done through distributors?

Almost all of it is done through distributors, Linda.

(Operator Instructions) Our next question comes from Joe Altobello with Raymond James.

This is actually Adam on for Joe.

And 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.

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.

That's helpful.

And then I just want to ask 2 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 of the channel is up fiscal year-to-date through 9 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?

Adam, this is Chris.

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 are always looking opportunistically as a potential for share repurchase.

But as we sit here today, debt reduction will be our #1 priority for Q4.

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.