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Prestige Consumer Healthcare Inc. (PBH) Q3 2024 Earnings Call Transcript

Prestige Consumer Healthcare Inc. (PBH)

Q3 2024 Earnings Conference Call

Company Participants

Phil Terpolilli - Vice President, Investor Relations and Treasury

Ron Lombardi - Chairman, President, and Chief Executive Officer

Christine Sacco - Chief Financial Officer

Conference Call Participants

Rupesh Parikh - Oppenheimer

Susan Anderson - Canaccord

Jon Andersen - William Blair

Linda Bolton Weiser - D.A. Davidson

Mitchell Pinheiro - Sturdivant

Anthony Lebiedzinski - Sidoti

Presentation

Operator

Good day and thank you for standing by. Welcome to the Prestige Consumer Healthcare's Third Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the call over to your speaker today, Phil Terpolilli, Vice President, Investor Relations and Treasury. Please go ahead, sir.

Phil Terpolilli

Thanks, operator, and thank you to everyone who has joined today. On the call with me are Ron Lombardi, our Chairman, President, and CEO; and Christine Sacco, our CFO.

On today's call, we'll review our third quarter fiscal 2024 results, discuss our full year outlook, and then take questions from analysts.

A slide presentation accompanying today's call can be accessed by visiting prestigeconsumerhealthcare.com, clicking on the investors link, and then on today's webcast and presentation.

Remember, some of the information contained in the presentation today includes non-GAAP financial measures. Reconciliations to the nearest GAAP financial measure are included in our earnings release and slide presentation.

On today's call, management will make forward-looking statements around risks and uncertainties, which are detailed in a complete safe harbor disclosure on page two of the slide presentation accompanying the call. These are important to review and contemplate. Business environment uncertainty remains heightened due to a variety of factors including high inflation, geopolitical events, and supply chain constraints, which have numerous potential impacts. This means results could change at any time and the forecasted impact of risk considerations is the best estimate based on the information available as of today's date. 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 our CEO, Ron Lombardi. Ron?

Ron Lombardi

Thanks, Phil. Let's begin on slide five. We are very pleased with our Q3 performance that exceeded our sales and earnings expectations and added to our strong results earlier in the fiscal year.

Net sales were $283 million in the third quarter, up nearly 3% and ahead of our outlook. This performance was thanks to strength in our ear and eye brands in the U.S. and continued strength in our international segment, which more than offset the impact from the strategic exit of the private label business we've previously discussed. As expected, gross margin improved versus the prior year, enabling increased marketing reinvestment.

For EPS, we generated $1.06, up 2% versus the prior year. These results translated into robust free cash flow of approximately $70 million, enabling further debt reduction that had us finish the quarter at 2.9 times leverage. We are now within the long-term leverage target of operating with less than 3 times leverage that we outlined back in May. We will discuss the benefits and capital deployment optionality this gives us later on in our remarks.

So in summary, our strong Q3 performance built on a solid first half and these results continue to enable robust free cash flow that can drive incremental shareholder value from our proven business strategy.

Now, let's turn to page six to discuss the strength in Ear & Eye Care in more detail. Ear & Eye Care is our third largest category on a percentage of revenue basis, representing over 15% of sales. As shown on the left side of the page, this category contains a wide assortment of leading brands, each designed to solve for a specific consumer need.

Clear Eyes is a time-tested and proven leader in redness relief and has a long heritage with consumers. TheraTears is well established as a leader in dry eye solutions. For a consumer, it stands for soothing eye relief. Eye drops, ointments, and compresses define the category and help alleviate the discomfort associated with the eyes.

And lastly shown here is Debrox, the leading solution for ear care at home and without a doctor's visit. By strategy, we've created a portfolio that gives us market-leading scale in eye care. With the number one position in units across OTC eye drops, we leverage our broad learnings to provide unique insights. These help establish category leadership with both retailers and consumers that enables brand building and long-term growth.

There are two examples of this on the right side of the page. For marketing, we continue to drive consumer awareness across TV and digital channels around the benefits of safe and effective eye drops like Clear Eyes and TheraTears. We also continue to invest in digital content, which helps consumer find the eye drop solutions that's best for them.

Innovation is also another element to long-term success and generally fits in two categories. First, we established claims which help differentiate products for consumers. For example, our 12 hours of hydrating comfort claim delivers the all-day relief consumers desire. Second, we establish innovation across need states that offer specific solutions consumers seek.

Clear Eyes Sensitive Eyes is an excellent example specifically formulated for sensitive eyes. The results of our strategy is a winning franchise that continues to experience solid growth. After certain supply disruptions in fiscal '23, we've returned to growth of over 10% year-to-date and continue to grow in the mid-single-digit range over-time, thanks to these characteristics.

With that, I'll turn it over to Chris to discuss the financials.

Christine Sacco

Thanks, Ron. Good morning everyone. Let's turn to slide eight and review our third quarter fiscal '24 financial results. As a reminder, the information in today's presentation includes certain non-GAAP information that is reconciled to the closest GAAP measure in our earnings release.

Q3 revenue of $282.7 million exceeded our expectations, increasing 2.6% from the prior year on both a reported and organic basis. North American OTC segment revenues were flat versus prior year, with strength in the Eye and Ear Care category offset by headwinds related to the strategic exit of the private label business and weakness in certain non-core brands.

International OTC segment revenues increased approximately 20% versus the prior year, with broad-based strength that included solid double-digit growth for the Hydralyte brand. As expected, EBITDA was approximately flat to prior year, attributable to higher A&M spend, while EBITDA margin was consistent with first half performance. EPS increased 2.2% in Q3 from the prior year, reflecting the benefit of our free cash flow and reducing debt in a more stable interest rate environment.

Let's turn to slide nine for more detail and discuss year-to-date consolidated results. For the first nine months of fiscal '24, revenues were up 80 basis points to $848.4 million and grew 1.2% versus prior year when excluding FX. By segment, excluding FX, North American segment revenues were approximately flat while the international segment increased approximately 12% versus the prior year.

In North America, the largest category growth drivers for the first nine months were strong Ear & Eye Care and Dermatological category sales, which helped partially offset declines in Women's Health and the strategic exit of the private label business.

Year-to-date, we also experienced solid high single-digit year-over-year growth in the e-commerce channel. The international segment performed above our long-term expectations, thanks to strong performance across numerous brands and geographies.

Total company gross margin of 55.7% in the first nine months was down slightly versus prior year, owing to challenging comparisons in Q1. This gross margin was as we expected and attributable to cost increases, partially offset by pricing actions and cost savings across our portfolio, which entirely offset the dollar amount of inflationary cost headwinds.

For the full fiscal year, we continue to anticipate gross margin flat to up slightly versus fiscal '23 with Q4 estimated to increase nearly 200 basis points versus prior year to 55.5%. Advertising and marketing for the first nine months was up in dollars versus the prior year and flat on a percentage of sales basis at 13.6%....

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