Prestige Consumer Healthcare Inc. (PBH) Earnings Call Transcript & Summary

Yes. So certainly, when we talk about the Clear Eyes franchise, it's undergone a lot of challenges. It's been the biggest challenge to our organic growth, right? It is now 3% of sales, historically had been high single digits as a percent of sales. As we -- and I'm sure we'll get into a few more questions around that. But as we look to our long-term growth algorithm, the rest of the portfolio is performing well. We feel good about our ability to deliver that. And I think Clear Eyes recovery over the next few years likely puts us towards the higher end of that range. But yes, we believe the other brands performing according to the playbook that Ron mentioned can get us within that range of that 2% to 3%.

And can you tell us about what is the road map? What is the plan to recover then your eye care category in Clear Eyes? I think you mentioned also another acquisition earlier, Pillar5. So can you talk about what's the road map? What is the time line where you expect actually this brand to be back on track and to its leadership position? And I suppose a follow-up on that because you've been off the shelf for a while because of all those disruptions, is there actually a risk that the market share that you lost might be a little bit more sustainable? Or do you think you'll be able to recover that?

Sure. So hopefully, I'll hit on all of those points. So if we just step back, the sterile eye care industry globally, industry-wide has gone through increased inspections, increased activity from not just the FDA, but regulatory agencies around the world. The reason on the May earnings call, we mentioned that at this point, at that point, every single one of our sterile eye care facilities, whether it's Pillar5 that we now own or our third-party CMOs had been inspected by at least one regulatory authority. So there's been a lot of increased activity for a number of reasons around those facilities. Those inspections have resulted in things between industry-wide recalls and observations to specific facilities. And those observations have required sometimes more downtime for folks to address them, sometimes not as much. It varies pretty widely. What has happened for us is we've been talking for years and been looking for years really because for third-party sterile eye care capacity. It's limited worldwide. And Clear Eyes demands almost 10x, sometimes 5x, sometimes 10x what in terms of units that are required to sustain the brand, having this leading position in units for a long time. And as we scoured the globe looking for a provider and in connection with then this increased activity around regulatory, we realized that Pillar5 -- acquiring Pillar5, who was a third-party provider to us in Canada was our fastest path to improvement and long-term continuity of quality supply. And so in December of last year, we acquired Pillar5 up in Canada. And I think since we've owned it, we've been reassured that we think we made the right decision in acquiring it and taking ownership of a sterile eye care facility, not just for our near-term continuity plans, but for our long-term capacity plans to bring further capacity into that facility. And so we talked -- most recent update was on our August call, where we said we've -- to date now, we've owned it almost 9 months, right? We've made investments in equipment. We've made investments in infrastructure. And what we didn't want to speak to previously that we did on the call is we've changed out a lot of the leadership positions. The previous owner, for their own reasons, of course, made shorter-term decisions that we will look to make different decisions on. There were a number of third-party consultants that they had hired that were in pretty top positions there. We have now brought in sterile eye care experts into the facility that I think will make a meaningful impact. And under previous ownership, right, PE firm owned them and had different priorities. And now we have one priority, and it's to manufacture Clear Eyes. And so we feel good about the path that we're on. We talk about expecting increased supply in the back half of our fiscal '27. Our fiscal year ends on March 31. And it's going to take some time. But over time, we do think we can improve capacity, increase capacity and improve continuity of supply at that facility.

So maybe I'll take the brand recovery part, right, Chris just, kind of, covered how do we feel about Pillar5's progress. But in terms of brand recovery, right, we see the first step being getting better inventory levels of Max Red and Base Red, the 2 top SKUs in place. And then we would look to expand the product offering to include the other SKUs that we've had historically and then work with the retailers to make sure we've got full distribution and then ultimately get back to a place where we can market and advertise the brand. The Clear Eyes brand really has a unique position as the defining OPP in sterile eye care over the counter. If you go out to the shelf, you see that eye care products start at about $5 can go up to as high as $25 to $30 a bottle and Clear Eyes was the beginning of that price offering at retail. So it's important to the category. It's what consumers are looking for to treat red, itchy and dry eyes.

Okay. It does sound like you have a lot on your plate for the year to come. So obviously, you have the 2 integration of the acquisitions that we talked earlier LaCorium, Breathe Right, then you have also this recovery around Clear Eyes that you are working on. How do you feel about that? How are you getting organized as a management team to, I guess, tackle all these different goals and milestones that you need to reach for this year?

Yes. So we started with in December, acquiring Pillar5, right? So the leadership team, obviously, at Pillar is only focused on what they need to be doing in the facility. Our operational team in New York, really just the Head of Operations focuses on that. And then the executive team is obviously focused on it. When we acquired Breathe Right, we separated it into 85% of Breathe Right sales in North America versus international. They function very differently. We were aware of that through our diligence. On our August earnings call, we announced the big chunk, the 85% had been fully integrated. That's the hard work. That's getting them in our SAP system. And as of, I want to say, August 4, it might be August 3, we flipped the switch. All the product is in our warehouse. It's coming in one order and through SAP. It's on [ RPO ] we're collecting the cash. It's fully integrated. The international piece, about 15% of the business, we knew it was going to take a little bit more time just because it's different than ours. And quite frankly, we want to choose the best model. So we structured a transition service agreement that extended for a longer period of time for that international business, and we're in that stage now, and it's going according to plan. Then LaCorium came along. And as Ron said, a lot of coffee had been drunk between the 2 leaders of the groups. And so you can't always plan when something comes, but we just said we'll derisk it by structuring it differently. That's the Australia team who's integrating that, limited impact to the U.S. team. And we also gave them a very long transition service agreement to account for that. 23 of, I think, 33 people from LaCorium came with the transition. That also helps. And so we really structured these in a way we were aware that there was a bunch to take on. We always start, by the way, any acquisition discussion when people say, when are you going to do the next transaction? And we say, we always start with is the organization ready to take on a transaction. And so we structured this in a way, certainly, we had conversations with ourselves and our Board and folks around, okay, how can we structure this to derisk it. And having gotten through that big chunk of the largest acquisition, Breathe Right, being fully integrated for the majority of the business, I think we're on the right track.

Okay. Maybe one question for you, Ron. I would like to switch gear to international expansion, which is also a very important topic for you. So I think international represents about 16% of your revenue as of today. So you have plans to expand that to about 20% on the medium term. So how do you plan to approach international expansion in terms of strategy? Are you planning to acquire local brands just like you did in the U.S., basically applying the playbook that you have in the U.S. to other geographies? And how confident are you that this playbook will actually work in some other countries? Maybe if you have a few examples of brands that you acquired that work very well and maybe some others that didn't work as well and the learnings from that?

Sure. One of the things that our company does well is we don't apply a master approach to every situation and every business opportunity. We step back and evaluate the right way to move forward and take advantage of opportunities. And that's true for how we think about managing growth opportunities internationally. So each market and each brand opportunity is going to be a bit different. So in Europe, with the addition of these Breathe Right distributors in about a dozen different countries, we're going to manage that differently, right? And the approach is going to be how do we make sure we have the right distributor partner and make sure that they execute the marketing programs and the retail programs to maximize the opportunities for Breathe Right in those markets. And then secondarily, once that's on its way, is there opportunities to bring other brands into those markets in Europe. And then same thing for Australia and Asia Pacific. So we'll look to see where we can take the LaCorium brands into the distributor network that we have for the Care Pharma brands, Hydralyte in particular, to take advantage of a good distributor partnership, somebody that executes marketing plans well in a given market to look to grow and then build off of it from there. So that's where we are today. In terms of examples of acquiring brands and taking them a step forward, we acquired the brand Zaditen in Australia from a big pharma company and have had nice success growing that eye care brand. It's an allergy eye care brand that was additive to our Murine eye care business in Australia. So again, consumer insight, we look to invest further in marketing and advertising. So each opportunity is going to have nuances to it, and we're going to approach it each one of those opportunities uniquely.

Okay. Great. And now going back to your core business. So I think you are playing now in 8 categories, and there are a few that stand out to me. Maybe can we talk a little bit about gastrointestinal. So this is a category that has been very successful for you over the past 5 years, I think 5 consecutive years of growth. So you talked a little bit about some brands that are successful for you, Fleet, for instance, Hydralyte, Dramamine as well. So how much of that growth has actually come from category growth versus you gaining market shares against your competitors? And I suppose as a follow-up, are you happy with your portfolio currently? Or do you think you will require another leg of growth to continue growing gastrointestinal going forward?

Yes. So although we categorize sales by these segments, we don't think about them that way. So we don't think about GI per se and having a strategy around GI. We think about the brands. And there's one common thread amongst the 4 brands you just mentioned. So Dramamine, Fleet, Hydralyte and Gaviscon up in Canada is they're #1 brands in their niche categories, and they define the space. And although we have grown share in those cases, we've really grown the categories. And as a result of that, been able to grow our shares as we've brought in new users into the category. I talked about Dramamine earlier is the best example we have. It's grown by 5x as we moved it from 4 SKUs and very much motion sickness oriented to nausea over time. Fleet enemas and suppositories, again, we've taken the opportunity of GLP-1 side effects. The #2 side effect is constipation to do clinical studies to be able to communicate with sufferers of constipation from GLP-1 use about how fleet can be helpful to them. So each one of those GI brands has its own version of how we're thinking about growing the category and growing the brand over time.

Another one I would like to focus on is women's health. So you have a few brands there. You have Monistat that you talked about also earlier and Summer's Eve. It does feel like those 2 brands actually have a different trajectory. So when it comes to Monistat, you're gaining share in a category that is mostly declining, whereas Summer's Eve is improving. So can you talk a little bit about the strategy for those 2 brands? How can you accelerate growth in women's health? What is the outlook and your ambitions for those 2 brands and this category in general?

Yes. So again, our goal for both of those brands is to continue to find ways to grow the categories that they compete in. They're both category-defining brands. They both have significant shares. Monistat is over 50% and Summer's Eve is clearly the #1 share in the hygiene category. So each of them will have different playbooks. So Monistat defines vaginal yeast infection treatment over the counter. There's only so many of those incidences each year. So for us to be able to grow outside of whatever, kind of, natural growth rate there is in infections is to move into adjacencies. So care, right, prevention. A couple of years ago, we launched a wash under the Monistat care line, and it has quickly grown to be a very meaningful SKU for us in the offering and connects very well with what women are looking for as part of prevention and care either before, during or after a vaginal yeast infection. So that's Monistat. For Summer's Eve, we acquired the brand back in 2017. We did a lot of consumer insight work. And what women told us was is that they'd like to think about Summer's Eve differently, destigmatize it, move it away from just odor. And we went down the path to launch a number of new products and changed our marketing campaign around daily usage. And what we learned was you always have to think through the feedback you get through consumers was that they really think about Summer's Eve around odor and odor prevention and odor treatment. So we've moved back to the long-term positioning of the brand and have it well positioned to get back to a growth trajectory and continue to be the leader of the space.

I think we have time for one last question. So maybe to conclude and summarize, if you were sitting there 5 years from now, looking back, what would you -- what would success look like for Prestige Consumer Health? I suppose what are the milestones that you would like to have achieved over the past 5 years? Yes, I suppose what does success look like on a 5-year time for.

Yes. So our strategy of creating value for shareholders is pretty simple, right? Lever #1 is continue to focus on growing the brands that we have. The second is to continue to deliver industry-leading cash flow over the next 5 years. We'll use that to meaningfully delever and create capital allocation optionality. If you look back over the last 5 years, we've had significant share repurchases. We've done meaningful acquisitions and continue to position our brands for long-term growth. So as we sit here today and I look back at the progress our business has made over the last 5 years, we feel good about what we've done. And 5 years from now, I think it would look a lot like the same things that we've executed over the last 5 years.

Okay. Great. Well, I think we can finish it there. Thanks a lot, Ron. Thanks a lot, Christine. Thanks a lot, Phil. And yes, thanks a lot for attending the session, everyone.