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

Thanks so much for joining. So it's been a great conference and nearing the end now but certainly not done.

We've got Prestige Consumer Healthcare, a hugely exciting place where we've had multiple companies emerge over the last few years, perhaps more [indiscernible] wins. Delighted to be joined by Ron Lombardi, CEO; and Christine Sacco, CFO. So without further ado, I'll turn it over to them. Thank you so much.

Thanks, Ian, and good afternoon, everyone. Thanks for coming. Before we came in today, Phil and I, who's our VP of IR, we're talking about how many of these I may have done over the last 13 or 14 years. And my guess was 100-plus. I think one of the things I've learned over those 100-plus was, if your presentation is at the end of the last day, the crowds are thin, but they pay attention. So with that, we'll go from there. So Prestige Consumer Healthcare, just get to the first slide here. I always like to start talking about the company with this slide. It's a great way to kind of introduce and reinforce what's important about our company and what really drives and creates value over time, and it's the breadth and the depth of connections that we have with consumers. On the next slide here in a minute, I'll get into some of our leading brands, but this is a great way to show the kind of connections we have between our Clear Eyes and TheraTears brands, we have over 12 billion eye drops a year to help to help people deal with itchy, red or dry eyes. Luden's and Chloraseptic help treat 650 million sore and dry throat occasions. BC and Goody's, which are powdered analgesics, mostly found in the southern part of the U.S., although nationally distributed, treat almost 20 million pain occasions, including hangovers every week. So lots of deep and daily connections with consumers with those brands and then Monistat helping to treat 8 million serious yeast infections a year. So this is just a sampling of the occurrences that our brands have with consumers and users during the year. One of the things that we like to spend time talking about is the diversified portfolio and how it helps us be positioned to be successful over the long-term. So on the left side, we've got our sales broken out by category. Women's health is our largest category with Monistat and Summer's Eve, up on the top right. GI is our second largest, and I won't read the rest of the categories. We summarize our brands into those categories, but it's not the way we think about managing our business, we think about managing the leading brands that we have and helping them grow in the categories that they defined. So for example, with women's health, Monistat and Summer Eve's couldn't be any 2 different brands. If you try Monistat treats vaginal yeast infections, Summer's Eve is a wash and other treatments that help them treat hygiene or odor incidences. They're very different. Each of them #1 in their category, and they define the space that they compete in. For GI, we've got Dramamine and Hydralyte. Dramamine for motion sickness and nausea, Hydralyte for hydration occasions is primarily located in Australia and really is the anchor of our international business. For eye care, Clear Eyes for red and itchy care, TheraTears for dry eye. Again, when the consumer goes to the shelf, they don't think about buying an eye drop to help treat their eyes, they think about a very specific occasion. Do I have red eyes or I have allergy, do I have itchy eyes, do I have dry eyes? And that's what helps lead the customer to choosing the brand and the product there. And again, down at the bottom of the page here, we've got BC and Goody's. They are the only powdered analgesics and they define that arm and has a long heritage going back about 100 years or so or more in helping people treat headaches and other ailments. So really important we define the categories. We look to grow them and it is the driver behind our performance. So if we start down at the bottom, our total sales have grown about 5.5% over the last 3 years, our organic growth has been about 3.5%, which is above a long-term algorithm of 2% to 3% is what we would expect. And we've been able to deliver EPS growth of about 12.5% during that same timeframe. So the brands deliver fantastic financial performance. And it's really underpinned by our 3-part strategy, right? The best way to create value is to grow the business you have. And that's the first part of our strategy is investing for long-term growth in our brands. We have a proven playbook, which I'll spend some time talking about here next. But that's our first strategy. It's what we come to work every day to do, what are the brands we have. We've got an industry lead financial profile that delivers solid earnings and cash flow growth, which underpins the third part of our strategy, which is use our capital allocation optionality, that cash flow to amplify value creation. So the way that we're able to get 12% EPS growth on 5% top line growth is by delevering, paying down our debt allows us to have less interest expense and be a big driver there. So that's an element of value creation, which Chris will wrap up on one of the last slides here this afternoon. So let's spend some time on our brand-building playbook, right? It's the single most important part of our strategy. And today, we're going to talk about 4 elements of it. And how we think about building brands, and it all starts with gaining consumer insights. And then the second part of it is being able to take those insights, get them real time and being agile and being able to change based on the environment that we're seeing out there. In the last 3 years, during the COVID environment, couldn't have been a better example of the need to be quickly reacting, understanding what consumers are looking for and making changes in where you spend your time and where you spend your money. Second is being able to have broad distribution, having your products available where consumers choose to shop for them, right? E-commerce has been a big driver of growth for us. And then finally, how new product and innovation plays a role in underpinning long-term brand growth. We'll spend a couple of minutes on each of these 4 elements here. So Dramamine, great example of consumer insights, right? When we went and talk to consumers about motion sickness, what they often told us was motion sickness, that's for a little kids sitting in the back of a car or somebody that was on an amusement park ride. I don't get motion sickness, I get nausea. I get the urge to throw up, and that's what I worry about treating. So as we got that feedback, it enabled us one to further enhance the way we communicate with consumers. We just launched a Drama Llama TV campaign talking about avoiding the drama of motion sickness and vomiting when you travel, but just as importantly, expanding into a new category. So consumers said, I give Dramamine permission to be in motion sickness, I also give it permission to be a nausea. So we launched a number of nausea products and very quickly became #1. So when we talk about growing our brands, expanding the brand into adjacent categories where the consumer gives it permission is an important element of long-term growth because if we're just going to stay in motion sickness, the Dramamine's brand opportunity for growth long-term would be more limited than if we expand it into new categories like nausea. Now let's talk about growing in sales through increasing usage occasions. So when we talk to consumers, we may often get insights about how they don't treat for various reasons or they mistreat as a way to address an ailment. So when we talk about Hydralyte, we've been able to grow household penetration from 2% or 3% to nearly 10% today. We're just getting going as we've launched different flavors, different forms. We have powdered, we had ready-to-drink. We have tablets -- effervescent tablets that create an effervescent drink. And that, along with expanding the communication of you need to think about hydration not only when you've been vomiting or diarrhea, but when you travel, when you've been working in the yard, when you're out in heat or when you exercise, which is a common thought of it. But really, it's all those occasions, expanded flavors in different forms as a way to get consumers to think about drinking Hydralyte more often. If you go back and take a look at our international growth, it's been phenomenal over the last 5 years. Hydralyte has been a big driver of that because of this as we've expanded household penetration, usage occasions, it's really fueled the Hydralyte brand and our international growth. Next topic is about being available where consumers choose to shop. In the quarter ended June of 2020 when COVID first hit and everybody went home and stayed home, our e-commerce business doubled in one quarter. It went from 4% or 5% of our sales to just over 10% of total sales in that quarter. And we had talked about our e-commerce strategy before that quarter. We had said we're ready. We've made investments. So when the consumer shows up in increasing numbers, we'll be ready to [ follow ] it. We didn't know it would double in one quarter, but the proof was in the pudding. Our products were available. We had the information online, and consumers were able to find the trusted brands, their desired products. They clicked and it showed up at their house the next day. The other thing that we talked about is how actively we manage the product offering in each channel, [indiscernible], mass, club, e-commerce, convenience channel, such that gross margins are consistent. We doubled sales in e-commerce, and our margins were consistent during that quarter. So lots of proof during that one quarter, but the importance of being there, having the right investment to support online [ with good ] experience working with our dot-com partners, whether it's Amazon.com, Walmart.com to help them understand what the shopper is looking for in our categories so that they can be successful. Now let's move on to talk about expanding categories through new product development and bringing innovation. Again, it's another important part where maybe we're addressing the non-treater because they haven't exactly found what they were looking for in a product or the mistreater who didn't necessarily understand exactly what the product efficacy might deliver for them. So if you look on the left part of the slide, we've got a DenTek Ultimate Guard for bruxism or teeth grinding. It was the best proposition out there in the category for helping people who grind their teeth when they sleep at night. Compound W freeze off. Again, nothing works better outside of our doctor's office for this product when we introduced it. And then finally, Goody's Hangover. When we talk to Goody's user, we heard lots of occasions of them using it to help treating the [indiscernible] so great in the morning after a fun night out. So we launched Goody's Hangover with an extra kick of caffeine to help get you going in the morning. So great examples of both technology with the DenTek and the freeze off Compound W and a little bit of innovation around the product with the hangover. And then on the right are some more current examples of new products, Clear Eyes sensitive eyes when we talk to consumers, they say, I've got all kinds of different problems with my eyes. But the most important thing I want to treat is my eyes are sensitive. So that was a learning that helped underpin that product launch. And then some Nix, not only pure life that prevent combo kit on the far of my right. So as I started off, the most important thing that we do is think about brand building. It's delivered great success on the top and bottom line. If you look at our 10-year CAGR, our sales growth is even above that 5% on the top line and our EPS growth is even well above that 12%. So it's not a short-term result, but this long-term focus on brand building has helped us grow dramatically and outgrowing the categories that we compete in, and particularly private label. The private label question is a hot topic that we often hear from investors these days, especially as there's concerns about a slowdown in the economy or the recession coming in is there were a lot of [indiscernible] people look to take a little bit of money in your category. And the answer is no. This is not the occasion that you're looking to save the dollar when you only buy the product once every 3 years. You're putting your kids in the back seat Dramamine last time, they didn't throw up. Are you going to look [indiscernible] try private label [indiscernible] that are worked not in our category. So on the right you can see our oral care is private label has -- it has grown negative 1% during that timeframe cough/cold all the way to the right is the biggest example of private label has been down 7% when it's held down 7%, and you see the other percent. So we're growing the category. We're growing our share and our competitor who only brings price or some other limited proposition to the shelf. They're losing as our better product and our better communication in connection with consumers help us win by growing our share and our top line. So with that, let me turn it over to Chris. Thanks, Chris.

Hi everyone. So I'm going to take you through a few slides on our financial strategy, our capital allocation. So we just came off of a really strong record fiscal '23. We are on March 31 year-end. So I'll talk a little bit about our results for our first quarter of fiscal '24. But as we wrapped '23, organic revenue up 3.5%. As Ron said, our evergreen model was 2% to 3%, and I'll take you through that a little bit later in the presentation. EBITDA for us basically follows top line. And then we get the quick [ earnings ] -- the power of our cash flow, as Ron mentioned, by paying down our debt and leveraging that. I'll show you the evergreen model. The normalized environment from an interest rate perspective, we would expect to see some leverage on that where you see bottom line growth 4 to 5 points higher than our EBITDA and our top line growth. This year, obviously, we all know what happened with interest rates this year. The power of our cash flow is able to offset the impact of those rising rates. So we were paying down debt rapidly. At the same time, rates were coming up. And as a result, we were still able to grow our EPS at 3.7% in fiscal '23. For fiscal '24, right, as of June 30 was our first fiscal quarter for '24. Solid performance. We were up almost 2% organically for the first quarter. Ron talked about our diversified portfolio, and it continued to play out through the ups and downs of COVID and continues to play out as we are working our way through fiscal '24. Our guide for the year for fiscal '24 is $1.135 billion to $1.140 billion. It's 1% to 2% of organic growth when we exclude foreign currencies. And we have talked about this year's particularly exiting some private label business we were doing that was worth an additional point of growth. It was not highly profitable and this year we were able to make the decision that we were going to exit that business. So diluted EPS at about $4.30 at the midpoint. Again, we're going to talk a little bit about the evergreen model and our ability to leverage our cash flow to grow the bottom line faster than the top line. And here the cash flow numbers, right? The guide for the year is [ $243 million ] or more. We'll continue to execute our disciplined capital allocation strategy, which I'll take you through in a couple of slides. And we're talking about expecting leverage to be below 3x as we exit fiscal '24, and I'll take you through a little bit of that theory. And so our cash flow, right, a lot of folks talk about our cash flow but we like to talk about our cash flow. On the left is really the attributes of our business model and what leads to such strong cash flow conversion. So it starts with low capital expenditures. We're manufacturing about 15% of our sales in-house. And so our CapEx is about 1% to 2% of our top line, which is obviously pretty modest for our company. Ron talked about our leading margin profile, right? We have gross margins north of 55%. We had EBITDA margins in the mid-30s. We've been able to consistently maintain those even through the last 3 years of the inflationary environment we've been in. And so obviously, that helps as we work our ways through those [ down to ] cash flow. We have done a number of acquisitions as we were working our portfolio in years past. And so our GAAP cash -- excuse me, so our GAAP tax rate, effective tax rate is about 24%, but our cash tax rate is in the high teens because we are leveraging essentially amortization that we get from -- for tax purposes from some of the deals that we have done, and we have several years left on that amortization. And then just our ongoing focus on profitability, right? We talk about wanting to maintain our EBITDA margins in the mid-30s, and we look for gross margin savings that we can put back into our people and into our advertising and marketing spend of maintaining those EBITDA margins, which are industry-leading is important to us. And you can see the results over here on the right side of the slide, right, free cash flow conversion over 100% and about an 8% free cash flow yield. So on the left side of this slide, you'll see our free cash flow and how rapidly it's grown, how strong and robust it has been. In fiscal '23, we talked about a $40 million investment that we made in inventory in order to better service our customers. We were coming out of a very lumpy COVID period as was everyone else. And so that was really the outlier in the top left part of this page. And you can see our leverage has come down. So years ago, as we were morphing the portfolio, we were operating at levels of leverage of 4.5x to 6x. I think when I joined 7 years ago, we were at 5x to 8x. Then we stepped down, we continue to pay down debt, and we started operating between 3.5x and 5x, did an acquisition in there. Now we're approaching 3%. We were at 3.2x at the end of June, and we've set a new long-term leverage objective of less than 3x. So making a lot of progress there. On the debt side, we have about $1.3 billion in net debt, $1 billion of it is fixed, and our net maturity isn't until 2028. So well-positioned in this environment, and they say timing about everything in life. So what are our priorities in terms of capital allocation. As Ron said, the best thing we can do is [ best in ] the business we have, and that is [indiscernible] the one piece of our capital. We're going to continue to delever, right? and a little more than $300 million of available debt on the balance sheet. We have about 1.5 years left of free cash flow before we get those down. So we'll continue to delever it so the basket for the third item on here, which is to pursue disciplined and accretive M&A. The last deal we did was less than 2 years ago. We bought the TheraTears [indiscernible] it was in 2 quarters, our leverage was back down to pre-acquisition levels. But we're able to do multiple things with our capital allocation as we continue to delever and we get bigger. And then lastly, we've done some strategic share repurchases, most recently in our first fiscal quarter of '24. We executed a $25 million buyback, modest in terms of a percent of our free cash flow, right, less than 10%. But still was able to offset our annual dilution from equity issuance. So good use of cash flow. We put these numbers over here on the right because we get a lot of -- right after leverage, we get the question about M&A, which I always find comical, but the M&A growth, the pipeline is robust. People say what are you seeing out there, we continue to see a healthy stream of opportunities from an M&A perspective. And if you're not that familiar with the OTC landscape, but it's highly fragmented, right? We always use the example, you don't go into a drugstore and ask for a skin care product. You go in and you say I have a wart. You have a very specific ailment you're trying to treat. And so it's very fragmented. And you can see here on the right side of this page, how many brands are out there. This is in the U.S. alone. How many brands exist at what size [ in this screen ] -- scanner detail. So there's a lot out there. There are strategic -- large strategics looking to divest assets all the time. There are PE firm sponsors out there who are looking to keep turning over portfolio. So we'll continue to look. And I think the biggest -- the word I would remember with us around M&A is we're going to stay disciplined. We're always looking for long-term brand building opportunities as opposed to an opportunity for some short-term growth, and that's the number one reason we say no to deal. We're also looking for brands we can innovate, right? We want to be a leader in a niche category, right? About 2/3 of our portfolio are coming from brands with #1 positions in often significantly high market position over 70% of the category. That enables us to use consumer insights not just try to steal share from one person, coming on to next slide but we're trying to actually bring new users into the category and grow the category, and that makes us pretty valuable to the retailer. So lots of opportunities out there. We're positioned to do and continue to do M&A, and we'll continue to look for the right opportunities for us. Okay. So a little bit about our outlook for fiscal '24 -- excuse me, a little bit about why we think we're well-positioned to deliver on our outlook for fiscal '24. So Ron talked about, we have a diversified portfolio of leading trusted brands. When we give people the example of some of the things that happened during COVID, you really get an appreciation for how diverse the portfolio is. Dramamine was almost nothing during COVID, right? Nobody went anywhere. And then we all broke out of our houses and couldn't wait to go somewhere. And we got in the car, we went on vacations and Dramamine went through the roof. And so there's been some brands with large swings. Monistat did very well during COVID because no one wanted to go to the doctor's office. And so we've had some brands that really benefited and came back. We've had some brands that didn't do well during COVID and really came back pretty robustly. Now I would say the portfolio is essentially back, right? I'd like to see similar instances of [indiscernible]. But other than that, most of our brands are back to kind of pre-COVID levels. And so the crazy comps are kind of behind us. Second item here is organic growth playbook. Ron mentioned it, right? We can leverage the platform. We bring a brand into the portfolio. We know what to do with it, right? We're going to go out. We're going to get consumer insights. We're going to understand why you're not using the category or how we can get you to use it more, and we're going to execute on that. And there are -- these aren't rocket science ideas, right? Dramamine for kids, holy cow, no kidding. But they didn't exist. It didn't exist under large owners. And so our focus on it an important [indiscernible] in terms of innovation plays out here. We're going to continue to generate consistent cash flow. We're going to continue to put it to work, and it's going to kind of pile on itself as we've seen as our leverage came down from close to 6x now heading towards below 3x. We think we have a scalable platform. We have a playbook when we put -- it's not just that we have the infrastructure in place, it's that we have the playbook I just mentioned, which is the marketing team knows exactly as that comes on, what do we need to do and how are we going to reinvigorate this brand and put some license to it. And the last item here, just -- I'll take you through in a second, our organic growth engine and how we believe we can create value just with our organic growth. And then we think of M&A as the kicker. We don't have a target where we say we're going to do this many deals a year. We're going to do smart deals on brands that we think we can grow over the long-term, and that should just continue to enhance the top line with some of the stats that Ron gave you earlier. You can see how much the benefit that we've gotten off of doing some M&A and growing the portfolio. So this is our kind of evergreen model, right? We talked about organic growth of 2% to 3%. Ron showed you the CAGR a little while ago, and I mentioned the power of our cash flow in a normalized interest rate environment, which I imagine to be anything besides last year and this year in terms of comps. It's going to tick over another 4% to 5% growth gets you to the bottom line of a 6% to 8% organic net EPS. These are organic numbers on the left. And then you can see over on the right, our ability to create additional value is really to continue to do the repeatable, proven. We execute on M&A, which we present additional upside to the model that you see here in the numbers that if you look at them over a longer period of time, you would see that we have absolutely delivered on this model. With that, I think we're heading over to the breakout room for Q&A. And if you want to try Goody's Hangover because the weekend is approaching, I think we have some of our products, Dramamine nausea and some hangover outside, but thank you for your time. Thanks for turning around today.

Thank you.