Prestige Consumer Healthcare Inc. Q2 FY2021 Earnings Call

Thanks, operator, and thank you to everyone who's joined us today. On the call with me are Ron Lombardi, our Chairman, President and CEO; and Chris Sacco, our CFO. On today's call, we'll begin with some topical remarks given the pandemic, review the results of the second quarter and first half fiscal year '21, provide an outlook update and then take questions from analysts. We have a slide presentation, which accompanies 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 between the nearest GAAP financial measures are included in today's earnings release and slide presentation. During today's call, management will also make forward-looking statements around risks and uncertainties, which are detailed in a complete safe harbor disclosure on Page 2 of the slide presentation accompanying the call. These are important to review and contemplate as everyone on the call today is well aware, business environment uncertainty remains heightened due to COVID-19. These items include shutdown impacts from many areas of the economy, ongoing changes to consumer purchasing habits, the potential for disruptive supply chain, heightened unemployment and many other economic factors. This means that 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. Additional information concerning risk factors and cautionary statements are available in our most recent SEC filings and most recent company 10-K.

Thanks, Phil. Let's start on Slide 5. I'm pleased to report our long-term strategy and business positioning continued to deliver solid results as seen in Q2, where we experienced strong earnings growth and a stable revenue performance. We continued to focus on the critical near-term factors that I've previously discussed in order to successfully navigate the pandemic environment. For starters, our long-term strategy of providing consumers with a wide range of brands they know and trust continues to work. In this unique time, we continue to see consumers turn to our leading brands to meet their health care needs. Meanwhile, our nimble business continuity efforts have been paying off. We continue to work closely with our manufacturing partners to ensure consistent service levels in this tight supply environment. In Q2, we continued to find effective ways to optimize our brands during the pandemic as consumer habits have begun to stabilize. We are benefiting from these agile investments in channels such as e-commerce, and our portfolio remains well positioned for the long term. Finally, our strong operating model and disciplined capital strategy continue to reward stakeholders. We continue to use our industry-leading financial profile to further reduce debt in the quarter. We have reduced leverage levels to the lowest point since 2014, which continues to increase our capital allocation optionality. So to recap, we continue to feel good about our positioning and the agile adjustments made during COVID-19. Q2 performance reinforces the strength of our business, and we look forward to further benefits.

Thanks, Ron. Let's turn to Slide 7 and review our first half financial results. As a reminder, the information in today's presentation includes adjusted results that are reconciled to the closest GAAP measure in our earnings release. Q2 revenue of $237.4 million declined 50 basis points on an organic basis versus the prior year, which excludes the effects of foreign currency. By segment, North America revenues were up 1.3%, positively impacted by the women's health, analgesics, oral care and ear and eye care categories, partially offset by lower cough and cold and GI shipments as certain categories we participate in faced declines in incidence levels and usage rates related to COVID-19. Our international business declined approximately 16% after excluding foreign currency. This decline was primarily attributable to significantly lower sales of Hydralyte in Australia as a result of COVID-19's impact to lowering both general consumer illness and activities such as athletics. We anticipate headwinds for the brand and the region to persist for the remainder of the fiscal year. Adjusted EBITDA and EPS for the second quarter grew approximately 5% and 15%, respectively, versus the prior year. Solid EPS growth was attributable to lower G&A costs and lower interest expense from debt paydown.

Thanks, Chris. Let's turn to Slide 11 to provide an update on our efforts during COVID-19. Despite the uncertainty caused by the pandemic, a few key factors underpin our strong financial results in the first half and have us well positioned for the balance of the year. We continue to remain focused on safety and business continuity. Our team members have adapted impressively to this volatile environment faced today. This extends to our third-party suppliers who we have continued to work closely with in a dynamic supply chain environment. Ultimately, the objective of these efforts is to maintain a laser focus on service levels to our retail partners. Although a continuing effort, I'm pleased to report that we've maintained a strong supply chain that's enabled shelves to remain well stocked at retail. Now let's turn to Slide 12 for an update around our brands in the current environment. Our broad and diverse portfolio is an invaluable core strength of our business. Not only are we diversified, as shown on the left side of the page, but the vast majority of our key brands have a deep heritage in connection with consumers. The majority of our key brands are #1 in their category, which allows us to focus on meeting evolving consumer needs. These factors provide us a great starting advantage as we navigate the impact of COVID-19. We are leveraging these attributes and investing in our key brands for long-term success. The strategy is working and is evident in our stable results for the first 6 months, where these factors helped to offset declines in certain categories like travel, sports activities and cough, cold. This diversification in leading positions have also found great tailwinds from various consumer trends during COVID-19. For example, consumers have increased the use of health and hygiene-related products, while at the same time, being more cautious around time spent in public. The result of this is an accelerated shift to e-commerce shopping along with consumers' increasing purchases of self-care products. Even further, consumers are seeking brands they know and trust during this recession. We are well positioned to win from these shifts. First, we have the benefit of having many leading brands that help consumers treat health incidences at home. We've reallocated marketing dollars to opportunities to help with self-care, like Monistat, Compound W and DenTek. Our toolkit is wide ranging. In this example, the end goal is to remind consumers how our leading brands help them avoid a doctor's visit. Second, we benefited in a big way from consumers' shifting additional purchases into e-commerce. Our early investments in this channel over the last several years continue to pay off. Finally, with 10 of our top dozen brands holding #1 market shares, we have the fortunate position of being the trusted go-to brand for consumers in many categories. We continued to benefit from these strengths, resulting in a stable business performance during the pandemic thus far.

Let's turn Slide 8 for more detail around consolidated results and first half performance. For the first half, our revenues were down 60 basis points, excluding foreign currency. Revenue growth continued to benefit from strong consumption trends in the e-commerce channel as consumers continued to shift to online purchasing. We broadly benefited from strength in many brands in our portfolio, but did experience consumption declines in certain categories as a result of COVID-19, most notably the cough, cold and motion sickness categories. Total company gross margin of 58% was flat to last year's adjusted gross margin and stable to recent quarters. This was in line with our expectations for Q2 and also what we anticipate for the remainder of fiscal '21. Advertising and marketing came in at 16.1% of revenue in Q2 and 14.2% for the first 6 months. As anticipated, A&M returned to normalized levels in the second quarter. We expect A&M for the full year to be just under 15% as a percent of sales as we continue at a normalized rate of spend in the second half.

So the first of those questions is, are we happy with our portfolio, and it's a strong response, which is yes. And it's because that the portfolio is heavily concentrated around #1 brands that have substantial leading positions in the categories that they compete in. This is even true for the COVID disruptive categories. We still continue to feel very good about Dramamine, right? It's number one; it's got a 50-plus percent share. We continue to look for ways to invest to position that brand to grow the category and its share over the long term. Sure. So the first of those questions there is, are we happy with our portfolio, and it's a strong response, which is yes. And it's because that the portfolio is heavily concentrated around #1 brands that have substantial leading positions in the categories that they compete in. This is even true for the COVID disruptive categories. We still continue to feel very good about Dramamine, right? It's number one, it's got a 50-plus percent share. We continue to look for ways to invest to position that brand to grow the category and its share over the long term. So even with the brands that are disrupted by COVID, we continue to feel good with them. And certainly, we're going to overemphasize and concentrate our investments in our power core brands, right? So we have five brands that make up over 50% of our sales, and we're going to be looking to concentrate our investments around there. Summer's Eve, Monistat, Clear Eyes, BC & Goody's, DenTek is where we'll be concentrating our efforts and looking for our largest areas of growth long term. No, we're not seeing any signs that retailers are looking to make changes to their product offering because of the, I guess, what I'll call, short-term impact of COVID. They generally change their shelves kind of annually. And at this point, we're not seeing any indications that might impact Dramamine distribution over time. And even if they do decide to skinny up on the available shelf space in our categories, we wouldn't expect to be meaningfully impacted because our brands tend to be the leaders with large shares in the category. So if they decide to tighten up on motion sickness, clearly, they're not going to be impacting Dramamine, which is the leader, which invests in growing the category and has a 50-plus percent share. So that benefit of a leading position continues to play out in lots of different ways as an advantage for us. Thank you, operator. Thanks again to everyone for joining us today. We look forward to updating you on the business again in a few months. Have a great day. Thanks.