Dean Siegal - Director, IR Ron Lombardi - CEO

Joe Altobello - Raymond James Frank Camma - Sidoti & Company Linda Weiser - B. Riley & Co

Welcome to the Q1 2016 Prestige Brands Holdings Inc. Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host for today, Dean Siegal, Director of Investor Relations. Please proceed, Sir.

Good morning and welcome. As a reminder, there's a slide presentation which accompanies this call. It can be accessed by visiting prestigebrands.com, clicking on the Investor link and then on today's webcast and presentation. I'm required to remind you that during this call Management may make forward-looking statements regarding their beliefs and expectations as to the company's future business prospects and results. All forward-looking statements involve risks and uncertainties which in many cases are beyond the control of the ccompany and may cause actual results to differ materially from Management's expectations. You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this conference call. A complete Safe Harbor disclosure appears on page 2 of the presentation accompanying this call. Additional information concerning the factors that might cause actual results to differ from Management's expectations is contained in the company's annual and quarterly reports which is filed with the U.S. Securities and Exchange Commission. As an additional reminder, some of the information contained in this presentation includes adjusted results which excludes acquisition related and other items. A reconciliation between adjusted results and reported results is included in today's earnings release along with a full set of disclosures about our non-GAAP financials. Now, I would like to introduce Ron Lombardi, our CEO.

Thanks, Dean and good morning, everyone and thank you for joining our Q1 earnings call. Today's agenda and presentation will be consistent with previous quarters and I'll cover our financial results, an update on our brand building initiatives and close with an update on our outlook for the remainder of the year. With that, let's turn to page 5 and get started. We're very pleased with our results for the quarter with strong performance across a number of fronts including the continuation of strong consumption across our core OTC brands and our recent acquisition. Sales were largely in line with expectations and came in at just over $192 million for the quarter. We saw very strong organic growth of 3.7% excluding the impact of FX and plus 1.8% including the headwinds from FX during the quarter. We continue to see the benefits from our long-term brand building focus and A&P investments with core OTC consumption growth of a very strong 6.5% during the quarter. Our gross margin came in at a record level of 58.4% for the quarter and was up over 2 points from last year. And finally here, adjusted EPS came in at $0.52 for the quarter. We also saw continued strong cash flow performance in the quarter with approximately $42 million of free cash flow for the quarter which resulted in a leverage ratio of about 5.1 times and we continued to build M&A capacity during the quarter. In terms of our full-year outlook, we believe we're on track to deliver a full-year outlook of --our full-year outlook and anticipate a strong financial result for the quarter. We will discuss all of these results in more detail. With that, if you turn to slide 6 we will start with our consumption chart. Slide 6 shows our last five quarters of core OTC consumption and sales trends. As you can see on the top, over the last four quarters we have had strong and steady consumption gains in the household in many of the categories that we compete in. If you look at the bottom, you can see that this is driving sales. Over the last few quarters, we've had organic sales growth of about 6% each quarter. These consumption and sales trends as well as strong performance in our international business has us well-positioned for the remainder of the year. Turning to page 7, we have more information on our core OTC performance. Side 7 shows that our core OTC performance is broad-based and this trend is continued good news for us. During the quarter, we saw consumption growth across 82% of the core OTC portfolio with our largest brands performing extremely well. On the right side, you can see that over the last five quarters, our largest brands have performed extremely well. Starting on the top, BC and Goody's grew over 9% during the quarter. Clear Eyes continued its double-digit growth with nearly 16% consumption gains in the quarter and Monistat at the bottom, continued its strengthening trend with consumption growth of approximately 8% during the quarter. These results are driven by our continued focus and adjustments in brand building. Over the next few slides, we'll give an overview and a few examples of how we approach brand building and position our brands for long-term success. On slide 8, we start with Goody's. For Goody's, it's all about speed of relief and the tie-in with Dale Earnhardt, Jr. and NASCAR events, has been a big driver of our success. Dale, Jr. has been our spokesperson for two years and continues in a new campaign which began on June 1 and ties our new products into current advertising. On the right side of the page, we show a few of these new products launched in July. Goody's recently launched a mixed fruit flavor to expand our flavored offerings as well as a back and body shot to complement the headache relief shot we currently have in market. New product development is an important part of growing our brands and we have introduced a number of new flavored and forms for both BC and Goody's as a way to increase both usage occasion and trial which is ultimately what drives long-term consumption for us. Turning to slide 9, we have Clear Eyes. Clear Eyes is another brand that has had success in using a celebrity spokesperson and with excellent execution has become the number one brand in redness relief for us. On the left side of the page, we have examples of targeted marketing campaigns that have centered on Vanessa Williams and have used television, digital and print advertising to reach our customers. On the right side, we show the Clear Eyes product offering. The Clear Eyes product line has expanded significantly over the last five years and has been a driver of growth in market share gain for us. We've also seen distribution gains in the convenience channel with our pocket pal product which has added to recent growth trends as well. We see in Goody's and Clear Eyes a great example of how we think about brand building and how marketing initiatives, new products and winning at retail needs to work together for a brand to grow over the long-term. Turning to slide 10, we have an update on our Monistat initiatives. We closed on Monistat not quite a year ago back in September of 2014 and we continue to feel very good about the opportunities there for this brand. Starting in July, we kicked off our new healthcare professional initiative as well as a separate targeted consumer program. On the left side of the page, we have our healthcare professional initiatives. Developing a relationship with key healthcare providers is an important part of rebuilding the Monistat brand for us. In July, we started our doctor detailing and other professional training programs that are focused on reinforcing the benefits of Monistat over prescription alternatives. On the right side of the page, we have the program focused on consumers. In July, we kicked off new television and digital campaigns targeting women 18 to 24 years of age as well as and effort specifically targeted to Hispanic market for us. We continue to feel very good about the long-term opportunities from Monistat and will continue to make significant investments behind the brand. Before turning to the finance section, we'll cover one last slide that talks about our portfolio management strategy. Turning to slide 11, we will start there. Slide 11 is an important slide for us and shows how we think about our portfolio and how we're focusing on our core OTC brands and the international business in order to achieve our overall growth objectives. Our core OTC and international business is our invest area and makes up about 78% of our sales and is what drives our overall growth profile for the ccompany, strategies about making choices and this is where we're focusing our efforts. On the left side of the page, we see that our invest for growth portfolio grew a solid 6.5% during the quarter and the manage for cash portion declined about 2.5% during the quarter. Over time, we would expect the manage for cash portion of the business to be anywhere between flat to declining 5% of sales so this quarter's results of being down about 2.5% is right in that range of what we'd expect over time. In terms of the overall performance for the quarter, the combination of the two portfolios and portions of our portfolio resulted in solid total organic growth of 3.7% for the quarter as I mentioned earlier which was [indiscernible]. With that, let's turn to page 13 and we'll start the finance section. Before I get into numbers, I thought I would start with a brief update on our CFO search. As I mentioned on the fourth quarter call, we've engaged a national search firm to help us with the search. It's well underway and we hope to have a CFO in place over the next couple of months. So that's where we stand with that. On page 13, we start with a summary of our financial results for the quarter and I touched on most of these numbers already. And as I mentioned at the start of today's call, we're very pleased with the financial results for the quarter which include solid revenue, adjusted EPS and cash flow performance for the quarter as well as strong gains over the prior year's results. Turning to slide 14, we have got some additional detail on the financials. As I mentioned earlier, we had very strong record level gross margins for the quarter, up 58.4% which was largely in line with our 58% gross margin outlook for the year. Our first quarter tends to have the highest gross margins of the year so our gross margin at 58.4% was largely in line with what we would have expected for the first quarter. These gains in gross margin over the prior year which again were up over 2 points, allows us to continue to increase our investment in A&P which was at about 14% of sales for the quarter and about over 38% on a dollar basis from last year. So we continue to be pleased with our increased level of A&P investment for the business. Finally, although not on the page, our tax rate came in at about 35% for the quarter which added $0.01 to our EPS when you compare this rate to the original outlook of 37%. We now expect our full-year tax rate to be about 36% for the year. With that, let's turn to page 15, where we have cash flow. Cash flow continues to be an important driver for Prestige and came in at about $42 million for the quarter which is an increase of about 46% over the prior year. We continue to use all of our free cash flow to pay down debt and we saw our leverage ratio drop to about 5.1 times at the end of the quarter which is down about 0.6 of a point from the peak when we closed on Insight back in September when we were at about 5.7 times. We continue to effect the business to take about 1 point of leverage off each year or so which is helping to drive capacity for our business. With that, let's turn to slide 17 and we'll wrap things up before we open the call up to questions. Our strategy is in place, it's proven, it's repeatable and more importantly, it's driving the momentum that we've realized over the past four quarters and has us well-positioned as we start the second quarter of FY16. We continue to feel very good about the business and how we're positioned going into the second quarter with continued strong momentum and consumption trends. However, we do remain somewhat cautious with some headwinds in the retail environment and with FX rates. Current FX rates are a bit lower than what we originally forecasted for the year and will likely result in sales for the first half to be in the middle of the range. An outlook that we gave for the first half of plus 20% to 23% with no impact on EPS either for the first half or really for the first year. --for the full year. Brand building and new product development will continue to be our long-term focus and it's delivering results for us. And it's also allowing us to take the gross margin gains we've realized in the first quarter and lets us use those to increase our investment in A&P. From an M&A perspective, we will continue to be aggressive and disciplined and focused on our M&A criteria along with continuing to build M&A capacity for future opportunities. Finally, we continue to feel confident in our full-year outlook and more importantly on our strategy that is creating shareholder value. With that, let me turn the call back over to the operator and we'll open the line up for questions. Thank you.

[Operator Instructions]. Your first question comes from the line of Joe Altobello from Raymond James. Please proceed.

The first question I wanted to go to the core-OTC consumption growth you guys saw this quarter. Obviously another strong quarter. How much of that is coming from an acceleration in category growth? Are you seeing an acceleration in your category growth? Or is almost all of that coming from continued share gains?

The consumption increases are really coming from share gains for us for the categories that we compete in again which are very broad. We believe we're continuing to take share and grow outside of the category growth.

Okay. So no meaningful improvement in category trends the last couple of quarters here?

Right. For us. That's correct.

And then going back to your commentary regarding the retail environment. It sounded like you are still a little bit cautious this quarter. I think last quarter you had expressed some optimism about the retail environment. Are things getting better or have they kind of plateaued here as we enter the fiscal 2Q?

I think our anticipation is that things in the retail environment will continue to improve slowly. We continue to see the retailers focus on their bottom lines which can impact our business. We're continuing to see some continued reductions in inventory during the environment as well. So that's kind of our outlook.

Okay. Just one last one on Monistat. Obviously, you saw a very nice acceleration in growth for that brand. Have you started seeing impacts from the new TV ads and the fact that you are now marketing to healthcare professionals or is that still to come?

That is really still to come, Joe. We really just kicked that off in July at this point.

Your next question comes from Frank Camma from Sidoti. Please proceed.

Could you talk a little bit about PediaCare and what you're seeing, what you are expecting there? Obviously, your core brands overall were up pretty strongly so just wondering if you could talk about the cough and cold segment?

Sure. For PediaCare, if you go back to the fourth quarter, we talked about how we're going to focus our pediatric efforts around the Little Remedy brand and its point of difference and feel that, that brand is very well positioned for long-term growth. And we deemphasized PediaCare. It's no longer in the core-OTC portfolio although we do have initiatives for it with some new products, some new marketing and some targeted programs aimed at the Hispanic market. We do have some initiatives underway for that brand. But as we said, we're going to be focusing on Little Remedies for the pediatric segment.

Okay. And last year, just remind me, it was for you as well as everyone. It was a relatively strong cold-cough period. So is that going to be a headwind?

Last year, the cough-cold incident level, Frank, was back in line with the historic normal levels. For us, FY '13 was at a low level of incidents if you recall. I think down 12% to 15%. It's tough to predict what this year will hold. But last year, was again back at more of a normalized level.

Okay. Just a final question on the timing of FX because of the market sharing. Is it mostly a Q3 issue or can you just add some color to that? I know it depends on the year-to-year comp. So if you could just give us some timing sense of that?

Sure. We're going to see bigger FX impact in the first half of the year as compared to the second half at least based on the current rates.

[Operator Instructions]. Your next question comes from Linda Bolton Weisler from B. Riley.

Perrigo said the other day on their earnings call that actually they thought the extension of the cough-cold flu season just being a little bit longer in the U.S. this year benefited their quarter a little bit. Would you say the same thing was true of your quarter?

We saw a good performance in our Luden's, Chloraseptic and mixed brands during the quarter-ended June. There was some kind of virus going around that was causing sore throats and coughs. So we realized some of that as well.

Okay. I know there's some seasonality to your A&P spending ratio. It kind of goes up and down based on the seasons of the cough cold and all that. Can you just remind us what that seasonality is like and do you expect the same pattern this year? Or is it like a consistent year-over-year increase in A&P each quarter? Is that the pattern you expect for the year?

A&P spending quarter to quarter can vary based on the initiatives, the timing of new products and some other factors. What we've said for the whole year is we anticipate full-year A&P to be above last year. The first quarter was up quite a bit as a percent of sales. I think over half a percentage point in terms of spending. So we may get some variability quarter to quarter but the full year we anticipate to be above last year, both as a percent of sales and certainly on a dollar basis.

And then, finally, just a question on the M&A environment. As you've seen, Perrigo is involved in all kinds of M&A things including a hostile takeover attempt on itself. But it continues to be very acquisitive and one of the things that recently bought was a portfolio of branded OTC in Europe from GSK. They just bought the brands because they already had the infrastructure. But you, of course, will need infrastructure to get into Europe. Am I thinking that correctly or is there some way that you could somehow just buy brands? It seems to me that you need to have an infrastructure as well to enter into Europe. Can you comment on that?

Sure. What we've said Linda over time, is that our M&A priority starts with North America and then it's followed by Australia where we have scaled businesses in both of those regions that we can add to. We've also said in the past that Europe would be a distant third in terms of areas that we would look into is the first part of my response. The second is, there's more than one business model in terms of being able to enter a market. We already do have a presence in Europe with Murine and Chloraseptic in the UK as well as those brands being distributed in other markets. There's more than one way to enter a market. Again, in terms of priority, North America and Australia are where we would start

Do you use distributors there in the UK?

We do, yes.

That was our last question. I would now like to turn it over to Ron Lombardi for closing remarks.

Okay. Thanks everyone for joining us today and thanks for the call. Take care.

Ladies and gentlemen, thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.