Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2022 Prestige Consumer Healthcare Inc. Conference Call. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Phil Terpolilli, Vice President of Investor Relations. Please go ahead, sir..

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 the results of the first quarter of fiscal ‘22, provide an updated full year outlook and then take questions from analysts.

We have a slide presentation, which accompanies today’s call. It can be accessed by visiting prestigeconsumerhealthcare.com, clicking on the Investors link and then on today’s webcast and presentation. Please remember some of the information contained in the presentation today includes non-GAAP financial measures.

Reconciliations to the nearest GAAP financial measures are included in today’s earnings release and slide presentation. During today’s call, management will 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 and continues to have numerous potential impacts.

This means the 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.

I’ll now hand it over to our CEO, Ron Lombardi.

Ron?.

our playbook continues to work, and we continue to win share to date in fiscal ‘22. We look forward to applying this proven knowledge base to the TheraTears brand and drive continued long-term success across our eye care franchise. With that, I’ll turn it to Chris, who will walk through Q1 financials..

Thanks, Ron. Good morning, everyone. Let’s turn to Slide 11 and review our first quarter fiscal ‘22 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.

Q1 revenue of $269.2 million increased 17.3% and 15.6% on an organic basis versus the prior year, the latter excluding the effect of foreign currency. As a reminder, Q1 faced a unique comparison in the year prior, where we experienced lower sales as consumers depleted items previously purchased in March 2020 as a result of COVID-19. By segment.

North America revenues were up about 15%. Nearly all product categories grew with the largest increases in GI and eye and ear care. As Ron discussed earlier, a return towards more normalized travel trends helped drive a significant lift for certain brands versus a year ago, namely, Dramamine in GI and Clear Eyes in eye and ear care.

International OTC increased approximately 30% in Q1 after excluding the effects of foreign currency. The increase was attributable to a more favorable comparison in the prior year as well as an overall uptick of Hydralyte sales for more normalized consumer trends around illness and activities in Australia.

EBITDA increased in Q1, approximately 13% while EBITDA margin remained consistent with our long-term expectations in the mid-30s. Diluted EPS for the quarter was a record $1.14 per share, up over 30% versus the prior year driven by both the higher sales discussed and lower interest expense.

Let’s turn to Slide 12 for more detail around consolidated results. Q1 fiscal ‘22 revenues increased 17% versus the prior year. Our strong and diverse portfolio experienced approximately 5% baseline growth driven by the favorable year ago comparison and our long-term brand-building efforts.

In addition, we experienced a sharp rebound in certain COVID-impacted categories, adding an estimated $25 million to our Q1 revenue performance. Of this, we believe roughly half of this relates to timing while the other half resulted from increased consumption in the current quarter.

We also continued to experience year-over-year double-digit consumption growth in the e-commerce channel, further building off the sharply higher online purchasing shift of the prior year. Total company gross margin of 59.1% in the first quarter increased 70 basis points versus last year’s gross margin of 58.4%.

This strength was driven by higher-than-expected sales performance as well as product mix. We continue to anticipate a gross margin of about 58% for fiscal ‘22. Advertising and marketing came in at 14.7% for the first fiscal quarter.

Following the abnormally low rate of spend in Q1 of last year due to COVID-19 shelter-in-place restrictions, A&M returned to normalized levels of spend of approximately 14% to 16%. For fiscal ‘22, we still anticipate an approximate 15% A&M rate as a percentage of sales. And for Q2, we anticipate A&M of closer to 14%.

G&A expenses were just over 8% of sales in Q1. For the full year fiscal ‘22, we still anticipate G&A expenses to approximate just over 9% of sales. G&A dollars are likely to be the highest for the year in Q2, owing to the timing of certain expenses. Lastly, record diluted EPS of $1.14 grew 32.5% over the prior year.

Higher sales and lower interest expense drove this growth. Looking forward, we now anticipate interest for the full year to approximate $63 million, reflecting the recent financing completed in conjunction with the TheraTears acquisition. Now let’s turn to Slide 13.

In Q1, we generated $67.8 million in free cash flow, down versus the prior year due entirely to the timing of working capital. We continue to maintain industry-leading free cash flow and are raising our outlook for the year.

At June 30, our net debt was approximately $1.4 billion, inclusive of the cash we built ahead of the anticipated acquisition closing on July 1. Following the acquisition of Akorn, our net debt at July 1 was approximately $1.6 billion.

The acquisition was funded from cash on hand, our ABL revolver and our term loan, which we simultaneously amended and now matures in calendar 2028. Our covenant-defined leverage ratio was 4.3x at the closing of the transaction, and we anticipate leverage of approximately 4x by year-end fiscal ‘22. With that, I’ll turn it back to Ron..

one, that the travel-impacted portion of our business will continue at the recovered levels for the remainder of the year; two, we still anticipate flat sales to prior year in the cough and cold and head lice areas of our business; and three, the acquisition of the Akorn portfolio discussed today should contribute approximately $40 million to the fiscal year net sales.

We anticipate adjusted EPS of $3.90 or more for fiscal ‘22. For Q2, adjusted EPS is expected to be $0.95 or more. These attributes translate into strong free cash flow as well, where we anticipate adjusted free cash flow of $245 million or more for the year. With that, I’ll open it up for questions.

Operator?.

Our first question comes from Rupesh Parikh of Oppenheimer..

Congrats on a really nice quarter. So I guess I wanted to start out first just with your guidance and just commentary on really the travel portion as you guys looking for. So clearly, the Delta variant is out there.

As you look at, I don’t know, recent weeks, like have you guys seen any changes in the channel just given the Delta variant in terms of demand? And then, and also in Australia, just curious if given some of the resurges, lockdowns there, are you starting to see any impact on the travel portion of your portfolio?.

Yes. So far, we haven’t seen any change in the trends that were helping to drive the Q1 results that we saw at this point.

The other thing, I think it’s important to point out when you consider our new updated outlook is that the base business continues to do very well, and we’ve incorporated some of that strong performance in the updated outlook as well.

We’re really in what’s going to be, I think, a 3-year period of really tough-to-understand comps right? Last year, we had the COVID disruption, right, and it created low watermarks for many companies. This year, I think we’re going to see very lumpy and oddly paced recovery in certain categories like we realized in Q1.

And then next year, we’re going to be comping against those oddly recovered periods.

So I think we’re entering a period that’s going to be tough to understand, but I think the important thing for our outlook in our business is that our base business continues to do very well with strong growth in consumption gains across the portfolio, not just a recovery in some of the COVID disruptive categories..

Okay, great. And then I guess just going back to your base business, I mean, very strong growth during the quarter. And I know you guys have talked a lot in recent quarters or even years just about the brand-building efforts and the execution in that area.

Just any more insight in terms of what you think contributed to a strong performance in the baseline portfolio? And then drug retail it benefits related to the vaccine. So just curious how you guys think about the sustainability of the momentum within the drug channel..

Yes. so let me address the drug channel or really sales by channel. Last year, we saw incredible growth in our e-commerce business as consumers changed where they bought the product, they went online. And this year, we’re seeing gains in the drug channel. Our strategy is be available wherever consumers choose to buy the product.

And that approach has really paid off for us last year and again this year, no matter where the consumer shows up. So who knows how consumer shopping patterns will change over time? For us, it really doesn’t matter. We’ll be available wherever they go.

I think the first part of your question is the ongoing strength across the portfolio and what the outlook is. Long-term brand-building investments, launching new products, bringing innovation is a playbook we’re going to continue to execute. And as we think about growing categories, it’s going to drive long-term growth.

So we continue to feel good about our long-term outlook and it gets reflected in....

Okay, great. And then maybe just -- sorry, go ahead..

I was going to say and it’s reflected in our increased outlook for the year..

Okay, great. And then maybe just one final question maybe for Chris.

Just on TheraTears, can you comment on seasonality of that business and just the margin dynamics of TheraTears?.

Yes. So the TheraTears business, Rupesh, we’ve talked about from a financial profile perspective, really being in line with our company from a margin -- gross margin perspective as well. So very similar to our business in terms of the profile. Seasonality, not seeing a ton of seasonality in the business.

So kind of similar to Clear Eyes as opposed to, say, an allergy brand for eye drops. So it’s limited..

Our next question comes from Jon Andersen of William Blair..

Congratulations on a great quarter.

I think the contribution that you quantified from the recovery in some of the travel-related brands in the quarter, as you look to the balance of the year and kind of the guidance that you’ve provided, are you assuming kind of a similar contribution in dollar terms from those COVID-impacted categories? How are you kind of assessing that? Or is there some kind of diminution as you go forward in that contribution?.

Yes. Jon, it’s Chris. So our full year outlook is expecting continued rebound in the travel-related categories to prepandemic levels. Still, a highly volatile environment, but that’s the assumption going in. This is most impactful to the summer travel season in Q2.

We’ve talked about the base business being strong in Q2, similar to Q1, right? With the strong consumer activity, we’ve seen a bit easier comps and then normalizing trends in the back half versus the first half. So think of the base business returning to kind of that low single-digit growth in the second half as we exit this unusual period.

With the remainder of the COVID-impacted categories, not really expecting any change to the original guide, which was flat to prior year, and that’s cough, cold and head lice primarily.

So you kind of have to break COVID into travel-related and nontravel-related, but in terms of that travel-related bump we got, we are expecting the normalized recovery to continue throughout the year..

Okay. And then will -- should we expect some benefit from, let’s say, a brand like BC, Goody’s, which has a strong presence in the C-store channel, which should also benefit, I would think, from kind of a return-to-work, return-to-travel scenario and maybe even something like Nix with more schools open in person in the fall.

How are you thinking about those categories and brands -- channels, categories and brands?.

Yes. So when we talk about a recovery in travel and on-the-go, like I had in my comments today, it includes a pickup in BC, Goody’s and Clear Eyes, in particular, the Pocket Pal product that’s sold through C-store.

So that was a component of the $25 million and the increase in the full year outlook, Jon, because to your point, we absolutely see a pickup in that channel for those brands. In terms of head lice, again, we’ve been monitoring it closely. We’re in the middle of summer camp season and we still haven’t seen any uptick in head lice outbreaks.

And we’ve got a head lice tracker out online if you want to take a look for yourself as well.

So we haven’t seen -- we’ll see what happens when we get back into the school season, whether kids back in the classroom triggers that and we’ve got the unknown around cough/cold as the weather will have an increase in cough/cold incident levels such that it will trigger retailers to rebuy, right? In both of those categories, retailers still have decent levels of inventory.

We keep an eye on it for, say, our top 5-plus customers. So it’s not only about an increase in incident levels, it’s about an increase enough to cause retailers to reorder at some point. So a little bit more complicated than it may sound from the surface..

Understood. And then could you -- you may have talked about this in your prepared remarks, I’m sorry, I joined a bit late.

The gross margin improvement that you saw year-over-year, can you talk a little bit about the factors that drove that? And the follow-on to that, are you planning any pricing to address any inflation that you’re experiencing in the business?.

Sure. Hey, Jon, maybe I’ll take the gross margin and Ron can take the pricing question. Gross margin was primarily mixed this quarter. You think about a brand like Dramamine as a higher-than-average gross margin. International sales with Hydralyte particularly -- in particular, with strong performance this period drove the mix for the quarter.

And then also just the higher -- we get some leverage from higher sales as we saw back in Q4 of fiscal ‘20 when sales elevated and we got some leverage there..

In terms of inflation, Jon, we face inflationary pressures every year. We’re seeing many of the same inflationary pressures that you hear others talk about, although to a lesser degree, given our high ring and low weight profile of our products.

So it’s something that we’re used to dealing with every year, and we’ve got tactical price increases planned for the year along with cost savings programs to help offset those going forward. So really, nothing new for us in terms of dealing with inflationary pressures..

Okay. And the last one for me. On Akorn, obviously, the vast majority of the business is the TheraTears brand, but there are a handful of smaller brands there.

Where do those get classified? Do those get classified as noncore? Are they -- what are your plans for the, I guess, the smaller brands in that part of the portfolio?.

Sure. So those tail brands that have strong loyal followings, role will be to generate earnings and cash flow that we invest in behind the rest of the business, just like the rest of our noncore and tail brands.

So it’s really more of the same, which is we acquired a very nice leading brand that we think has wonderful opportunities to grow long term, and it came along with a small tail that we’ll manage for cash over time..

Our next question comes from Steph Wissink of Jefferies..

Chris, I think this is probably a question best for you. I just wanted to follow up on your comments on advertising and marketing plans. Sounds like -- and maybe this is a reflection of Ron’s mention of variability, but it sounds like you’re maintaining a degree of discretion in how you’re allocating A&M.

So just talk a little bit more about responsive your A&M plan is. I think you mentioned Q2 is going to be around 14%.

But how should we think about, just as a basic framework, the cadence for the year?.

Yes, Steph. So A&M really rolls up from our brands individually, and we always say the numbers fall where we run our programs. And so I’m expecting A&M as -- for the first half to be about equal to the second half in terms of dollars. So I think if you do the math from Q1, we guided closer to 14% for Q2. Q3 is usually higher for us than Q4.

Q4 is usually our lowest quarter in terms of seasonality of A&M spend in particular. So that’s how it will probably flow for the rest of this year..

Okay. That’s really helpful. And then a follow-up to Rupesh’s earlier question on any changes in weekly cadence.

I’m just curious about thoughts you’re hearing from your retailers, how are they planning into inventory? Is it a wait-and-see approach? Are they willing to take some inventory to have some back stock and safety stock? What are you noticing about order patterns? And how does that frame how you think about kind of the back half of the year opportunity and whether a level of conservatism or conviction in your guidance?.

Yes. So I think for starters, Steph, is that I think in general there’s a little bit of a worry around supply chains out there in retail, right, to paint a broad brush here. So I think that’s the first part. So I think retailers are looking to play it more safe and not looking to reduce inventory or keep things short.

So -- but for our categories, it seems to be fairly stable at this point. So we’re not anticipating any meaningful swings in retailer inventories during this period..

Okay. Last one for me, and Ron, this is for you just on the destocking effect we’ve been seeing in the drug channel. It seems like drug maybe is picking up a little bit of traffic again with the vaccination cycle.

Are we through the bulk of what you expect to be that destocking headwind and now at a new baseline to grow from?.

Yes. And again, the destocking that we saw in the drug channel for a couple of years was driven by their focus to improve the performance of their business. And as their businesses have stabilized, we think that initiative is behind them and behind us at this point..

Our next question comes from Linda Bolton-Weiser of D.A. Davidson..

I was just -- a couple of the companies that we follow have reported kind of a channel shift as brick-and-mortar retailers have reopened.

Can you remind us what percentage e-commerce represented for you in FY ‘21? And then did you see any shift in kind of away from e-commerce to brick-and-mortar in the fiscal first quarter?.

Yes. So last year, our e-commerce business grew to just over 10% or so of our total business. And for the first quarter, we continued to see strong double-digit consumption growth in e-commerce. And again, that includes not only Amazon, but the dot-com arms of our brick-and-mortars, target.com, walmart.com and others.

So for us, it continues to be a channel of continued growth..

Okay. And then just a couple of things on TheraTears. So you do kind of have this, well, I guess, you could call it synergy with Clear Eyes.

Is that expected to result in any actual cost synergies? So in other words, is there any overlap on outsourced suppliers where you can consolidate or anything of that nature that would result in maybe some special synergies that you wouldn’t normally get in your acquisitions?.

Yes. I think over the long term, it will present cost savings for us, but any change in the supply chain, especially in sterile eye care, takes a very, very long period of time. The seller -- we entered into a long-term supply agreement with the seller of the brands with Akorn, which we’re delighted to have.

So we’ll see where it goes over the long term for cost-savings opportunity, but it really all starts with having a great partner, which we got as part of this transaction..

Okay. And then, finally, on free cash flow, it seemed like you were kind of stuck at that $200 million level for a couple of years, but you’ve really taken a bump up in terms of your annual free cash flow.

How sustainable is that level? I mean is it the accretion from the deal that’s adding to it, so that’s sustainable? Or do you feel like this is an abnormally high level that you’re seeing in FY ‘22 that may come down a little bit in the future?.

Yes. So I guess for starters, we saw a string of continued cash flow growth for a long period of time now. We’ve had a dramatic increase as our EBITDA and EPS has grown. And in particular, our cash interest has dropped from $100 million a year to this year’s outlook in the mid-60s, has been a big driver of it.

So as we look forward, we would continue to expect ongoing cash flow growth as our powerful cash flow allows us to delever and reduce our cash flow -- our cash interest as well as continued EBITDA and EPS growth. So we think, Linda, we’ll continue to see nice growth in our cash flow..

Our next question comes from Mitch Pinheiro of Sturdivant..

Most of my questions have been asked, but I do have a couple odd ones here. The $25 million you called out of the Q1 sales increase, you mentioned like half is timing.

What do you mean by that?.

Yes. Hey, Mitch, it’s Chris. So for timing, we’re talking about things that Ron was discussing such as C-store opening back up, right? We saw a recovery in the C-store of stocking back up, if you will. There were also certain programs, Prime Day comes to mind that most folks know about that shifted from later in the year to our fiscal Q1.

So that’s what we meant by about half of that $25 million being timing..

Got it. And then -- and when it comes to consumption, I mean, so you feel -- I guess we feel pretty good about inventory in the channel. But what I’m trying to understand is -- so e-commerce is still growing strong. The C-store is growing strong. Drugstores are up.

Is there -- is it really just pent-up demand, but a big thing that you’re a needs-based occasion, I’m just having trouble understanding where all the consumption is coming from.

Is it just merely comparative to last year’s disruptive environment? Or how do you parse out the various elements of sort of consumption?.

Yes. So first of all, as I started with Rupesh this morning, I talked about really the odd period and comps that we’re seeing, right? We’re comparing against low watermarks last year, right, this unprecedented disruption. So we start by looking at our business with long-term trends.

So we’re back looking at our fiscal ‘20 and fiscal ‘19 period and comparing our market share and our consumption levels against an undisrupted period of time. So if you go and you look at the share, the consumption level for our brands compared to fiscal ‘19 and ‘20, we’re seeing long-term consistent gains in growth over that period of time.

So you go back and look at our biggest brands, Clear Eyes, Summer’s Eve, Monistat and even a number of our core brands, things like Debrox, Gaviscon up in Canada, Compound W has been killing it for a number of years now. We have just had steady, consistent growth across our portfolio year in and year out.

Even last year, right, our business was down 2% last year in total. If you pull out the 20% of the sales that was impacted by COVID, our base business grew 5% last year, which is above our long-term outlook and expectation.

So our business has been killing it really for a long period of time and it’s one of the messages we’re trying to make sure that you folks get today, which is continued solid performance across the portfolio, driven by our long-term brand-building approach..

Great.

And then as it comes to -- Chris, you mentioned on the A&M spending, if I heard that right, was it 14% of sales for the year or is it 14% for the Q2?.

It’s about 14% for Q2 and about 15% for the year..

15%, sorry, yes. Okay. That’s all I have..

And our next question comes from Anthony Lebiedzinski of Sidoti & Company..

So as far as the gross margin, I know you guys talked about that benefiting in the quarter from a favorable mix shift. You’re guiding to a slightly lower gross margin for the full year.

Again, is that just simply because of you expect the mix shift to change? Or are you seeing any other cost pressures already in this quarter? Or how should we think about the cadence of gross margins for the rest of the year?.

Hey, Anthony, it’s Chris. There continues to be a lot of uncertainty about how COVID will impact every consumer and the supplier environment. We’re one quarter into fiscal ‘22. And while we did benefit from some favorable mix during the quarter, at this point, we think holding our initial guide for the year is prudent..

Got it. Okay. And then in terms of acquisitions going forward, obviously, you guys just closed on the TheraTears acquisition. But just wanted to get a sense as to what your appetite is for additional acquisitions? It seems like by the end of the year, you’ll be closer to the lower end of your target leverage ratio at 4x.

So I just wanted to get a sense from you how are you guys thinking about growing the business potentially through additional M&A activity..

Yes. So let me answer this, I guess, in the context of our capital allocation strategy, which remains unchanged, which is continuing to look to delever and lower our debt over time and then we’ll address M&A opportunistically as things come up. The first order of business is to integrate TheraTears, right? We’re 35 days post close.

So we’re busy getting that integrated into the business. And once that’s behind us, we’ll be ready to think about future opportunities.

So historically, I think we’ve been disciplined in our approach to M&A and focus on things that make long-term sense around brand-building opportunities and growth, and that will be the way we continue to think about things..

Thank you. I would now like to turn it back to Ron Lombardi for closing remarks..

Thank you, operator, and thanks to everyone for joining us today, and we’ll talk next quarter. Have a great day..

This concludes today’s conference call. Thank you for participating, and you may now disconnect..