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

Okay. Good afternoon, everyone. I'm Susan Anderson, Senior Analyst at Canaccord Genuity, and I am excited to have here Prestige Consumer Healthcare, and in particular, Ron Lombardi, CEO; and also Chris Sacco, CFO and now COO; and then also Phil Terpolilli, VP, IR and Treasury.

So Ron, I think maybe we could start out if you could provide a little update on where Prestige is at today and where you see the company going over the next few years.

Sure. Thanks, Susan. Good morning. Good morning to everybody. Thanks for joining us today. We've been on a journey over the last 4 or 5 years where we've been focused on increasing the company's capital allocation optionality by focusing on delevering the company, taking our debt down. And at the end of December, as we've been talking about this fiscal year, we actually got our term loan paid off in full. So our capital structure is made up of a couple of great bond tranches that are attractively priced. But the importance of that is it continues to allow us to focus on the billion dollars of free cash flow that we expect to generate over the next 4 years and use that to invest to grow value for the company and our investors. So it's been a while coming. We've been talking about it for a long time, but we continue to feel good about, first and foremost, being long-term stewards and brand builders of the portfolio we have and being able to take that cash flow to invest going forward.

Great. And then maybe if you guys could talk about just the industry-leading margins in the mid-30% range, which I think is important to that free cash flow and also how that gives you pretty flexible capital allocation priorities. So maybe also if you can go into that.

Chris, do you want to?

Sure. So Susan is talking about our EBITDA margins in the low to mid-30s as a percent of sales. I think if you go back in time, even through our very tumultuous COVID period, you'll see that we held those margins. It starts with the space that we're in, right? Consumers need base products. They're going to the shelf, stable top line. And then -- so gross margin for us at about 56% this year, very strong. We, of course, like other companies, look to expand that through continuous cost improvements, through pricing, through new product innovation, which is how we largely get margin. But we talk about wanting to reinvest that in the business. And so maintaining the EBITDA margin is where we focus. And again, in periods where we've had extreme volatility like others during COVID, we were able to hold that EBITDA margin, which is important. And it's the stability of our margins and our financial structure that enables us to generate the kind of consistent free cash flow also over that period to be able to provide that optionality that Ron just talked about.

Great. And then maybe if could talk about the distribution channels that you guys have. I think it's important to the strategy. And then also just how the brands are very niche like, which is important, given just less competition in the categories that you play in, less trade down to private label.

Sure. So we have a broad, diversified portfolio that we've built out over time. And our focus is really long-term brand building for brands that define and lead niche categories. So we look to compete in spaces that we can win in, right? Kind of sounds silly to say, but that's really been the focus behind our M&A strategy is where can we find places to invest that the brand can be well positioned to grow over time. So we invest over the long term that diversity of the portfolio allows us to manage through periods of change, right? If we go during the COVID period, right, we saw consumers run home, stay home. We saw them change the way they shop and where they shop, then they all ran back out and were active, then we saw high levels of inflation. And our brands performed well during that tumultuous fast-changing environment. And the diversity of the portfolio allowed us to do well when everybody stayed home and didn't go to the doctors. Our DenTek and Monistat, for example, brands did really well as people kind of self-treated at home. And then as people got out in travel, our Dramamine business took off as a couple of examples of that. So the diversity of the portfolio and then where we sell our products really serves us well. So as consumers have moved more to dot-com, whether it's Amazon or walmart.com or whoever -- whatever brick-and-mortar.com we're working with, has grown quickly. And we've been positioned to take advantage of that as consumers have moved to those channels.

Great. And just looking at the supply chain, so most is manufactured by third parties, so asset-light. Can you talk about some of the challenges that eye care business had and kind of where you're at with that, getting the manufacturing back up to speed and how you're thinking about that for 2025?

Sure. So as we talked about back in May at the beginning of our fiscal year, we saw some disruption in the 2 sterile eye care suppliers that we were using for 2 very different reasons. One was doing some upgrades and trying to expand capacity, and it didn't really work out initially as expected and then our second supplier who was making some additional investments in it. So this year, our top line is being impacted by about 1% on sales. And our outlook for the year was that for the year, again, we'd be down about 1%, but we would expect to see a gradual increase in improvement. So back in November, we said that we expected Clear Eye shipments in the quarter ended December to be above September's level, and that's what we realized at this point. So it was largely in line with what we expected for the quarter ended December. We continue to be on a bit of a longer-term process to expand the network supply that we have there. So the 2 current suppliers will expand capacity, and we'll work on balancing that with availability each quarter and looking to continue to make progress. And then we'll also look to add additional suppliers for next year to expand the network. So this takes a bit of a time to recover from it, and we're balancing availability of product and shipments each quarter with being able to make improvements in the capacity over time.

Great. That's exciting. Maybe if you could talk about the investment you guys have made in digital, which you did early on. So during the pandemic that really benefited you, I think maybe you're about mid-teens penetration now. But if you could talk about that investment and how you see digital going forward, particularly as consumers shift their preferences and where they want to shop, and we're seeing a lot of the drug stores close some doors?

Yes. So early on, our investments started with making sure that our distribution center could fulfill the orders. So could we get an order, could we pick, pack and ship it and get it to Amazon and the other dot-com partners in an efficient way. It sounds simple, but you got to start with that. And that was spec-ed out when we opened a new warehouse in 2020 to make sure that we had that core capability to support what we thought at the time would be a fast-growing channel. We didn't have any idea it would grow this fast and quickly become our #2 customer for us. So it started with that. And then we branched into making sure that each brand had an online strategy. So what was the marketing approach going to be? Was product information current? Were the reviews consistent with what we would expect to get for user feedback from consumers over time and working to make sure that, that was all in place? And then the next phase of it has been the kinds of investments that we make with Amazon and our other dot-com partners to invest in catching consumers when they come into the space online and are looking to shop. So each brand has its own approach in terms of the kinds of investment we make. But we've worked to get our marketing people to embrace online as an element of marketing. So if you're investing to catch shoppers on the bar when they're searching for an ailment or a type of product, that's marketing, right, the way you can connect with them. So getting the marketing people to embrace that as one of their Ps in terms of investment. So it's never any one thing, and we didn't swing the pendulum all the way to one end for each brand. It's been a journey to make sure we learn and understand the best way to invest to support that fast-growing channel for us.

Okay. Great. And then maybe if we could shift over just to the cold/cough season, which has been a pretty slow start this year. Maybe if you could talk about what percent of your business is levered to the cold/cough season and how it's trended so far and then what you're expecting for the rest of the season?

Sure. I'll let Phil give the cough/cold update for us.

Yes. So we talk about cough and cold representing a smaller percentage of our sales than other companies you may speak to out there, so representing, call it, 7% to 8% of our business. So certainly a sizable portion, but not as large as those others. To date, we've seen that soft cough/cold season that others have talked about. But because of the magnitude for us, it's a bit less of an impact. We expected that going into the year. And you really have to go back to kind of pre-COVID to set sort of an appropriate baseline around this category. We also have a business in Australia that has some exposure to the category. So we use that as a guidepost when we manage our year going into the next fiscal. So that's how we think about cough and cold. It's a smaller percentage of our business, as I mentioned, but nothing sort of out of line with what we've expected thus far.

Okay. Great. And then just in terms of inflation, we're finally seeing a lot of that inflation abate with the exception of a few areas, I guess. Maybe if you could talk about how that's -- how you see that impacting the P&L this year? And then also coupled with that, maybe pricing for this year? Is that changing how you think about pricing as well?

Sure. So I guess you can't talk about inflation without going back to the beginning of COVID, right, where we saw elevated levels of inflation. I'd like to remind people for us, the max year, the highest point was about $20 million of gross inflation to give you an order of magnitude when you hear other companies talking about much larger numbers, manageable. We talk about having leading brands in niche categories where we have pricing power. In many instances, exceptionally strong share of category, 50%, 60%. During those 3 years of COVID, we were able to offset inflation dollar for dollar with pricing and cost-saving efforts. So it dropped, so the bottom line impact was negated largely through our pricing power. How we think about it going forward? We largely get price through new product development, right, a new proposition to a consumer, which allows for a higher gross margin, generally speaking. We think we can take price probably more surgically, right, where there's inflationary pressures, but certainly not -- we're not in the period we were in a few years ago. So we think we're well positioned to take price should the need arise. But as we sit here today, it's largely labor for us, right? It's the conversion cost of making the product, and that's been around since we all started working.

Great. And then maybe if you could talk about just trade down. So PBH as we talked about, plays in a lot of very niche OTC category. So it seems like it's pretty buffered to trade down, but how have you seen consumers react in past recessionary environments or in weaker economic environments? Right now, we're not in a recession, but there is a lot of inflation. So have you seen any trade down in the categories that you play in?