Prestige Consumer Healthcare Inc. (PBH) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2013 Prestige Brands Holdings, Inc., Earnings Conference Call. My name is Sonia, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Dean Siegal, Director of Investor Relations and Communications. 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 our website, prestigebrands.com, clicking on the Investors page, the Inventors link, then on the Q4 webcast link. I am also required to remind you that during this call, statements may be made by management of their beliefs and expectations as to the company's future operating results. Statements of management's expectations of what might occur with respect to future operating results are what is known as forward-looking statements. All forward-looking statements involve risks and uncertainties, which in many cases are beyond the control of the company 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 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 it filew with the U.S. Securities and Exchange Commission. Now I would like to introduce Matt Mannelly, CEO; and Ron Lombardi, CFO.

Thank you, Dean. Good morning, everybody, and thank you very much for joining us this morning for our fourth quarter and our fiscal year '13 year end call. We're excited to be here this morning. As Dean said, with me is Ron Lombardi, our CFO. We're going to take you through the fourth quarter, as well as some comments about fiscal year '13 and, as Dean also mentioned upfront, we'll do that the way we typically do, with the presentation that's on the website. So with that, I'd ask that you move to Page 3 of the presentation. As I said -- as we've done previously, I should say, I'll give an overview upfront, just highlighting the quarter and the year. Ron is then going to walk you through the financials. I will then close with a few comments in terms of the year and as we move into FY '14. And at that point, we'll be able to take a few questions. So with that, if you'll turn to Slide 4, please. I think this slide, hopefully you're very familiar with, those of you that have followed us, by now. This is an important slide for us since it really communicates conceptually how we run the company and the idea, in fact, that we really are focused on brand building and driving that core OTC growth through A&P investment and innovative products is really our primary focus. That helps us lead to the second part, which is an exceptional financial profile, which Ron's going to talk a little bit more about today and our free cash flow and all that helps us from a balance sheet standpoint in terms of significantly paying down debt for the quarter and for the year. The third part, which has been critical to our success, which we've spent quite a bit of time on in FY '13, is M&A and the acquisition, specifically, of GSK and the integration of that acquisition -- successful integration of that acquisition into the company. So if you'll turn to Slide 5, please. Just a few highlights for the quarter. We're pleased -- we're very pleased with the quarter. We think it was -- that the results are excellent. Our revenue of $154.5 million, up 15.3%, is quite solid. Our adjusted EPS, and Ron will take you through all the details, of $0.36, which is up 38.5% versus the previous year. And again, I think one of the things that separates us is our cash flow from operations continues to be very consistent and very strong, and cash flow from operations this quarter up almost $37 million. As a result, we paid down about $30 million in debt in the fourth quarter and I think one of the numbers that we, as a team, are very proud of in fiscal year '13 is our leverage ratio when we did the acquisition was 5.25x. In 1 year, we brought that down a full turn to 4.25x. And I think that really speaks volumes in terms of our cash flow operating model, both the consistency of it, as well as, as we grow in size the magnitude of that free cash flow that we generate on the annual basis. So from a numbers standpoint, we're quite pleased with the quarter. I think as importantly, and really what drives the numbers, is our brand building strategy that has been in place for quite some time and our focus and commitment to our core OTC brands, which make up 2/3 of the portfolio. Core OTC revenue organic growth for the quarter was up 9.3%, really an outstanding quarter for us. Our consumption, all right, continues to be quite strong. And our consumption was up 6.4% for the quarter and -- versus category growth of 5.1%, excluding onetime reintroductions of a competitive product, which is noted there. So again, we really focus on driving the business, growing the business and growing alongside and outgrowing the category and we continue to do that. So as a result, we believe the performance has yielded solid financial performance and we try and do that in a way that sustains long-term value creation for our shareholders. Slide 6 shows that in terms of, as I said, for the quarter you'll see core OTC revenue growth up 9.3%. For the year, core OTC revenue growth up almost 6% for the year, which is really outstanding growth in this category when you look at the category growth for the year, which is much smaller. Slide 6 shows this in terms of how we continue to gain market chain -- market share every quarter. And you can see as the result of outgrowing the category in FY '13, in the fourth quarter and for the year, we outgrew the category 8.3% versus 2.9%, which helped us pick up 0.4 of a share point in the categories in which we compete. Slide 8 talks a little bit, and we haven't talked much about this in the past, in terms of talking about how we do that, and the area that we haven't talked as much about is our digital marketing initiative. And one of the things that we've said is, 3 years ago, 4 years ago, when I came here, we were spending $0 on digital marketing. And today, over 10% of our marketing budget is spent against digital initiatives, which includes social media, includes search optimization and things like that. And I would encourage you, if you have not already gone into our website, we relaunched our corporate website in the last 30 days. And for those of you that had been in our old corporate website, if you go in our new corporate website, I think you'll see a tremendous difference in terms of the website and how user-friendly it is and how much information it provides. And I think it's very consistent with the new Prestige in terms of how we market our brands and how we market the business. Slide 9 just shows you in terms of some of the brands that we're utilizing those digital initiatives on. An example is Little Remedies. When we talk about digital marketing, it's not just search optimizations but we're very involved in terms of trying to connect with moms one-on-one and very involved in some of the mommy blogs and the things that are going on out there. So it's really the way the consumers connect with you today and learn and trust about your brand. So those sort of things are very important for us and we continue to evolve that area of the business. Moving to Slide 10. I think this is an important slide for us. Before I go to Ron with the financials, this is our fiscal year end. As a company, we actually, right now, are in the midst of reviews with all of our employees, and we have about 125 employees. And so we evaluate our employees and we evaluate ourselves for our performance, so this is our attempt to evaluate ourselves in terms of the key initiatives that we've said we were going to focus on at the start of FY '13 and how we performed against them. I think the most important one is the first one. We announced an acquisition over a year ago of 17 brands from GSK in terms of North America brands. That increased the size of the company in terms of -- from a revenue standpoint by 50%. That's by far the biggest acquisition that Prestige has ever done and I'm proud to report that, a year later, the integration as a result of the executional excellence by the 125 members has really been seamless and we are fully integrated, both from a supply standpoint as well as a demand standpoint and are running seamlessly in terms of those brands that we brought in, in the last year are being operated the same way as our core brands were that we've owned for a number of years. So that's been quite successful. I think as important as that, those brands that we've purchased a year ago, we have spent quite a bit of time understanding those consumers, doing due diligence behind the brand, doing market research, quantitative and qualitative research, behind those brands as we develop our investment strategy. We've begun that in '13, but it's really '14 in earnest, based on all that work, that we'll -- you'll really see that in terms of the investment of new marketing campaigns and new products, et cetera, for some of those brands that will come to light. So we're quite pleased with what's happened with those brands from a marketing standpoint in FY '13. The third line is, in terms of M&A, actively participate in -- and again, we've used the line in the last 6 to 12 months that we are going to continue to be very aggressive and very disciplined in our M&A activity. So we continue to do that. We want to make sure that we're doing things that really create value long term for the company and for our portfolio. So we again, as a result of our financial profile, that provides us the flexibility that, should we find the right opportunities, that from a financial standpoint, from an organizational standpoint, we're ready to execute. We just want to make sure that it meets all of our criteria. From a financial standpoint, in terms of the year, if you recall, we went out the year and said we would make between $1.22 and $1.32. As Ron takes you through these numbers, our EPS number of $1.50 for the year, I think we feel terrific about that. I think we take pride in it and I think it's a result of 125 employees that have passion and commitment towards this company that have helped deliver that number for the year. We do that with the intent of not making an individual year, but it's really about not just making this year but what seeds are we planting for future value creation, which we have done quite a few things and you're going to see some things in '14 that come out of the work that was done in '13. And the last thing I would just say that's consistent with that is, we talk about being a marathon not a sprint. For us, it's really not about 1 quarter or 1 year. We look at this in terms of 3-year horizons and are we making progress. I think if you think of Prestige Brands at the end of FY '13 and think of a 3-year horizon, I think we've made significant progress. I'm excited that if you look at Prestige Brands in FY '16, hopefully that the last 3 years of that horizon, that we'll have made as much progress as we have the last 3. So with that I'll turn it over to Ron who'll take you through the financials.

Thanks, Matt, and good morning, everyone. We start the financial review with an overview of the fourth quarter results on Slide 12. As a reminder, unless otherwise noted, the financial information we are discussing today excludes certain TSA, integration and other costs to arrive at adjusted results. A reconciliation between reported results and the adjusted results can be found in schedules in today's earnings release. So I'm starting on Slide 12. We're extremely pleased with our excellent financial performance in the quarter that capped off our most successful year ever. Results for the quarter included strong gains in sales, EBITDA and EPS. Our solid revenue and earnings growth continue to be driven by share gains in our core OTC brands, solid performance from the acquired GSK brands and growth in EBITDA and EPS that was well above revenue gains. We also realized solid cash flow from operations during the quarter that was in line with last year's results. I will give you more details on each of these over the next few slides. So turning to Slide 13, we have our detailed Q4 results. Our excellent Q4 results continue to reflect our transformed financial profile. Our net revenue has increased approximately 15% over the prior year to just over $155 million during the quarter. As a reminder, we closed on the acquisition of the majority of the GSK brands in February 1 last year, so we're beginning to comp the results. We realized very strong sales growth and share gains in our core OTC brands during the quarter, with growth of over 9% during the quarter. Cough/cold incident levels were very high during the quarter, resulting in strong performance in our cough/cold brands, but we also realized gains in many of our non-cough/cold brands, as well. The timing of the GSK close in the prior year added about $15 million of sales during the quarter over the prior year. And our total organic growth was 3% during the quarter. Our Q4 gross margins increased by 4.5 points over the prior year to 57%, due to our increase in OTC sales, which are now more than 85% of our total sales. A&P investments increased to over 15% of sales during the quarter as we continue to invest behind new product and marketing innovations to grow sales in our core business. G&A as a percent of sales declined almost 1 full point to 7.3% of sales from last year's level, reflecting the leverage of higher sales. Our adjusted EBITDA, net income and EPS all increased significantly over the prior year during the quarter, and all grew above the sales increase. Revenue increases and EBITDA margin gains resulted in an increase of about $6 million in adjusted net income to $18.6 million during the quarter, an increase of 45% over the prior year. And adjusted EPS grew to $0.36 during the quarter, an increase of approximately 38% and $0.10 over last year's level of $0.26. Turning to Slide 14, we have our full year results. Our full year results reflect the impact of the GSK brands acquisition, which transformed the company in a significant way during the year. Our full year revenues have increased more than 40% over the prior year to about $624 million for the year. Our core OTC brands have grown approximately 6%, which is well ahead of the combined category growth during the period. Our total legacy business realized organic growth of 1.4%, and the acquired GSK brands have added $175 million of revenue over last year. Gross margins at 56.6% for the year are well ahead of last year's level and are consistent with expectations. A&P investment continued to fuel sales growth and has increased 1.5 points and over 60% over last year to 14% of sales as we continue to invest behind our 14 core OTC brands to drive long-term top and bottom line growth. Our adjusted EBITDA, net income and EPS have all increased significantly due to the increase in sales and gross margin. EBITDA outpaced sales growth and has increased approximately 62% to $218 million for the year. Adjusted net income has increased more than 50% to approximately $77 million for the year. And finally, EPS increased $0.51 to $1.50, which is more than 50% above last year's level of $0.99. Moving on to Slide 15. We have a reconciliation of reported net income and EPS to adjusted results. Again as a reminder, our earnings release contains a full set of disclosures about our non-GAAP financials. Reported results for Q4 include the loss on the extinguishment of debt related to the refinancing of our term loan back in February and a gain from reduced state taxes. The total of these items, net of tax, resulted in a gain of $0.01 during the quarter. Full year results included these items, as well as GSK transition and integration-related costs, increased deferred financing amortization and other items. The total of these items, net of tax, reduced reported EPS by $0.23 for the full year. Turning to Slide 16, we have a summary of cash flow for the quarter and full year. Prestige's very strong financial profile of high EBITDA margin, significant tax attributes and low capital spending allowed it to continue to generate significant cash flow during the quarter, which was used to reduce debt substantially during the quarter and for the full year. The business generated $36.7 million of cash flow from operations during the quarter, which was in line with the prior year's level of $38.4 million. The prior year was positively impacted by the timing of the GSK brands acquisition. On a year-to-date basis, we generated almost $138 million of cash flow from operation, which is an increase of over 65% and approximately $55 million above last year's level. Cash flow has been driven by both strong EBITDA margins and reduced working capital during the year. March's net debt balance was $962 million, which was reduced by more than $150 million during the year. And our year end debt to covenant-defined EBITDA ratio was approximately 4.25x. Our industry-leading strong cash flow has allowed us to quickly delever and has reduced our leverage ratio by almost 1 full point since the GSK brands acquisition last year. So with that, I'd like to turn the discussion back over to Matt.

Thank you, Ron. So what I'd like to do is -- turn to Page 18, if you would, please. Make a few comments in terms of the year and where we're going as we look to '14. And then we'll take a few questions. So as we think about '14, we think -- we believe we have a very solid outlook for '14 and beyond, really. And I think some points I would make is, we had a very strong FY '13 as you can see from the numbers that Ron presented. That strength wasn't just from the work that was done in '13 but it was the work that was done prior and the foundation that was really set up to help us achieve that. I think the good news, we believe, for us is, for '14 and beyond is we have a proven strategy in place that's been working for the last 36 months and now a proven management team to help deliver that long-term value creation to our shareholders. So from that standpoint, we're very excited and we're very confident. In terms of FY '14, our focus. Our focus clearly continues to be on brand building. And so for us some of the key things are the new marketing campaigns that are coming in fiscal year '14 and included among those are Clear Eyes, BC/Goody's and Beano. So you can -- you will see those coming very shortly in the next few quarters and we're very excited about some of those new marketing campaigns. In addition, I pointed out earlier in terms of digital's becoming a bigger part of our portfolio. So we're looking for deeper engagement through our digital marketing, as well as we've expanded into sports marketing assets in terms of NASCAR, SEC, Dale Earnhardt and sports marketing assets like that, but we're really expanding our repertoire in terms of marketing and how we connect with the consumer. So I think we have some very exciting things to come in FY '14 as it relates to some of those new associations and relationships and how we engage with the consumer. And I think the third thing, as we look in terms of '14 and our focus, and it really is #1 for us, is executing against our new product launches, as well as those launches -- new products that are in the pipeline right now. And we often talk internally about the fact that our #1 marketing tool is product and the fact that product really is king. So the new product introductions that have recently launched, just launched, are Fiber Choice Fruity Bites, as well as BC Cherry. And as you look into the first few quarters of FY '14, you're going to see some other major new product launches from Prestige as well. I think some of our challenges for '14 are clear also. And that is I think, first of all, to manage Pediatrics and cough/cold in the marketplace in light of the returning brands and the investments -- the heavy investments that we believe those returning brands will make. The good news for us is we've been building our brands and investing our brands for the last few years. And the second thing that I think is important is we are an organization that is very focused on executional excellence. So we have the entire organization focused on executing against our plans and maximizing those plans for FY '14. A second challenge for us is, as you look at FY '14, many of you, I'm sure, are very aware that the last quarter, which is our fourth fiscal quarter, was a very strong cough/cold season, probably the strongest in the last 10 years. As a result of that strong season, we just need to manage FY '14 accordingly. Meaning, in the first quarter because of the heavy orders in Q4, you would expect Q1 to drop off. And as well, when we get to Q4 of next year, from a planning standpoint, you wouldn't expect it to be as strong as Q4 of this year. So as we think about our challenges and how we manage the business, we keep that in mind. I think the last point I would make is, as we think about FY '14, I think FY '14 is really going to be a transition year. And I think we need to think about it in terms of the way we run the business. It's a marathon, not a sprint. Our current strategy has yielded very strong results for the last 24 to 36 months. And in FY '14, our goal and mantra is really to stay the course. It's stay the course in a marketplace that's going to be transitional in nature because of the number of returning brands, the competitive spending and what that's going to mean for category dynamics. And I think you're going to see, because of those investments, some greater category growth in some categories and our job is to navigate through that and to navigate through it very calmly. So as we think about our business, and we always think about it really starting with the top line and how we grow the business, we expect continued very strong core OTC growth in FY '14. When you look at that growth and as we think about it, and then we have to think about also we sold Phazyme brand last year, so those numbers are out in '14 versus 13, and the impact of the returning brands on a portion of our portfolio, we believe overall that will yield flat to 1% growth for FY '14. So we'll see strong growth in core OTC. With the sale of certain assets and the return of certain brands, we think that will net to flat to 1% growth for the year. I think from our perspective, we're pleased with that. We believe we can manage through it. And the reasons we say that is, we talk again internally about manage for today and lead for tomorrow, and we have done things in FY '13 and we're doing things in FY '14 that are really setting up for success in FY '15 and '16 and beyond. So with that, the last thing I would call out is on Page 19, to remind people that we have our first ever Investor Day on May 22, at 10:30 a.m. and we have a -- it will be webcast and the information is right there. It provides you the information about how to access that webcast. So we're very excited to embark on our first ever Investor Day next week and look forward to seeing and hearing from many people at that time. So with that, I will open it up to any questions that Ron or I can answer for you.

[Operator Instructions] The first question comes from Joe Altobello, Oppenheimer. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Just first question on gross margin. I mean, obviously, up very nicely year-over-year. You did mention that a lot of that had to do with mix, particularly the inclusion of the GSK brands. But you did have the GSK brands, or at least most of them, for 2 months of the 3 months in the base period. So I'm curious if there's anything else that was happening to drive the gross margin expansion in the quarter besides just mix? And then as a related question to that, is 57% still the right long-term target for your business, given that you're basically there now?

We talked about, on the last quarterly call, that we do have some seasonality in our gross margin because of some of the merchandising and promotional activities that we do in quarters 2 and 3. So if you take a look at our gross margin in the fourth quarter, it was close to what we realized in the first quarter of last year. So that certainly is one of the contributors to the nearly 57% gross margin this year. In terms of what we would see going forward, about a year ago, at the time of the GSK acquisition, we gave an overview of our financial profile and pointed to 57% gross margin. So that's what we've given for direction on that in the past. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay. So you're sticking with that?

Yes. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay. And just turning to A&P spending. You said in the past that you would continue to increase the investment behind the core OTC brands until you begin to hit a wall in terms of ROI on the incremental dollar. Do you feel like you're approaching that wall? Or are you still seeing good returns on the incremental investment?

Joe, I think it's a good question for 2 reasons. One, if you look at core OTC -- you look at our spending this quarter versus last year, we're up significantly. And look at our core OTC growth. It was very strong at plus 9.3%. So we think we're continuing to see that return on investment. I think the second thing as it relates to '14 on that, Joe, is with the competitive activity and the return of a number of products, I think we as a company are prepared to demonstrate our marketing skills and protect and defend our brands so that I think we will continue to be aggressive from an A&P and a marketing standpoint. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay. And just one last one, I guess, more of a less -- more or less a housekeeping question. You gave sort of the top line outlook for fiscal '14, flat to up 1%. Should we expect to hear something on the bottom line at the Analyst Day next week?

We don't -- Joe, at the Analyst Day next week I think we're going to focus on long term kind of what our expectations are. So I think that's how we're planning on looking at it next week.

The next question comes from Carla Casella, JP Morgan. Carla Casella - JP Morgan Chase & Co, Research Division: This is Carla Casella. You mentioned the strong cold season. Did that trail into the follow quarter? And then have you -- can you just talk about how allergy season has been in -- I guess, it exists [indiscernible] the current quarter?

On cough/cold, Carla, it doesn't really trail into the following quarter. And in fact, because of the heavy cough/cold -- what you typically have in most seasons is, is retailers winding down their cough/cold purchases in late February, early March. They didn't do that because of the strong cough/cold season this year so we had solid growth throughout the quarter. But that means they're going to wind down their purchases in April this year instead of March, which means you're actually going to see a deceleration in the first quarter, we believe. From an allergy standpoint, it's interesting that you asked that. Last year, we saw an early start to allergy season. We haven't seen that so far this year in terms of translating to orders for allergy season.

I would now like to turn the call over to Mr. Mannelly for closing remarks.

Okay. Again, we're -- we appreciate everyone's time and commitment on the call. We're very pleased with the results. We're very proud of the results for the quarter and the fiscal year. And we're proud of the 125 leaders in the company that helped deliver that. We look forward to speaking with you on the next call, and we hope you'll also join us on the webcast for our first ever Investor Day next week. Thank you very much.

Thank you.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.