Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2021 Prestige Consumer Healthcare Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host, Director of Investor Relations, Phil Terpolilli. Sir, please go ahead.

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

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 time. 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. I'll now hand it over to Chris to review Q2 financial results.

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. 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…

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 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…

[Operator Instructions] Our first question comes from the line of Rupesh Parikh of Oppenheimer.

This is actually Maddie Stone on for Rupesh. So just as you look at some brands that have been impacted by COVID-19, such as Hydralyte. How are you thinking about recovering these categories? Do you think there could be any permanent changes that could impact the recovery for some of these brands?

Maddie, this is Ron here. So we're still really early in seeing how COVID impacts consumers. But at this point, we don't anticipate any changes to the long-term category sizes. And it's still really too early to tell what to expect in terms of the rate of recovery at this point.

Okay. Great. That's helpful. And then secondly, on cough and cold, so what percent of your business is roughly cough and cold? And then how do you see the current environment playing out? And where are you seeing the challenges here? Is it less mobility that could lead to a softer season?

So cough/cold is about 10% of our sales. And really, the anticipated impact in the second half of the year is expected to be driven by incident levels, right? Consumer habits have changed. People are traveling less. They're out in public less. Kids are spending less time in the classroom or in other activities. So just as we saw in the southern hemisphere, right, they just finished up their cough/cold flu season in the last couple of months here, we anticipate the incident levels to be down significantly versus last year.

Our next question comes from Mitch Pinheiro of Sturdivant.

Question number one is, so Chris, I don't know if I heard this right, but you're going to expect -- you're expecting to increase advertising and marketing back to sort of normal levels in the second half. Is that correct?

That's correct.

And so as it relates to -- your sales guidance just looks like we're going to still see continued year-over-year decline. I mean, are you getting the same bang for your buck? Is this something where -- I mean, you're spending just to maintain or reallocating within your categories. Can you talk a little bit about your strategy around advertising and marketing in the second half and how it relates to sales?

So Mitch, let me start with, I think, some clarity around our outlook for the second half. So our outlook for the second half really is based on the stability that we've seen in our business. In the most recent quarter and really through October, where it gets funky is when you start to compare our outlook to last year. As a reminder, we're going to be comping in the quarter end of March the big COVID lift that many companies and we saw in March last year. So the first thing is that we're really not anticipating a decline, but rather continued stability in our business. And that's, I think, the most important thing to take away. The second is, if you dig into the different pieces of our business, what you'll find is that our consumption was down about 1%, I believe, in the second quarter. If you pull out the COVID impacted categories, so like Dramamine for motion sickness, cough/cold, the convenience channel, you'd see that the consumption level for our business in the second quarter was about 2%, which is consistent with the trends that we've been seeing for a while now. So I think it's important to emphasize really the stability that we're seeing across the vast majority of our business with some disruption for these COVID-disrupted categories. So that's the first part. The second part is then we've been quick and agile to readjust our marketing investments and spend. And I think our results in the second quarter and really in the first quarter and the gains that we've had in e-commerce and the omni-channel, I think are great examples of our ability to understand what's going on with the consumer in being able to line up our investments against those changes. So I hope that provides a little color to your question.

Yes, very helpful. And I guess just one other question is, so you have an interesting portfolio of sales categories, pretty broad. Are -- when you look at your -- the diversification that you have among the categories, do you feel that you -- number one, there is -- are there categories that you're interested in getting bigger in, in the near term, either through M&A or stronger sort of the marketing focus that you just touched on? Or I mean, are you happy with your portfolio and the categories that you're in? It's sort of frustrating just to see how COVID affected some of these categories. Certainly, it sort of came out very unexpected, how this all played out. But is there anything in the portfolio that you're looking to either overemphasize or underemphasize?

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. And 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 5 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. I think it's -- as an example, Summer's Eve has had solid growth year-to-date in the high mid-single-digit growth year-over-year. So we continue to feel good about those big brands as well.

Our next question comes from Steph Wissink of Jefferies.

Three really quick ones. Chris, the first is for you, it's just on the reported quarter. I think you had guided us kind of down mid-single relative to where you came out down just a touch. So if you could just help us bridge where the performance of the business was relative to your expectations kind of either by brand segment or just overall revenue composition? And then, Ron, a question for you on e-commerce because you've talked a lot about it as it's an untracked channel. There's a lot of growth there. Have you done any benchmarking around your market share online versus in bricks-and-mortar? And then how does that factor into your ad spend composition between digital activation versus at shelf activation?

Sure. So Steph, it's Chris. I'll take the first one. Relative to the guide that we put out for Q2, you remember we had broken down kind of consumption expectations to be down in the mid-single digits, low to mid-single digits as well as some expected destocking. While we did see some modest adjustments to inventory in the quarter, it was really owed to better consumption across the portfolio, near flat, in line with our sales performance.

So Steph, let me, I guess, jump on your second and third questions, which were around e-commerce. And I guess, we'll start with our market share. We do get information on our performance in e-commerce and omnichannel. And I think in my prepared remarks today, I commented on, in many categories, we see actually larger market shares in e-commerce and omnichannel than we do in brick-and-mortar. And some of it is due to just the expanded offering of our brands that we have online. And certainly, some of it is due to the early investments we made in positioning ourselves to be ready when the consumers showed up in increasing numbers to make their purchases online. So it's an important part of our growth in some areas that we're focusing on. In terms of around managing our advertising and marketing mix, we really make the decision on a granular basis, brand by brand in terms of what's the best mix and best return for the different options that we have, whether it's digital, at shelf along with many other options that we have to connect with consumers. So we make it brand by brand. But clearly, there's been an ongoing shift to digital over time as it's playing a bigger role in connecting with consumers.

All right. That's great. And then just one follow-up. Ron, you had made a comment earlier, just reminding us of that big lap in the fourth quarter. So I'm curious, as you look at your back half guidance or the implied back half guidance, Chris, can you give us any scope around Q3 versus Q4, just to make sure we're weighting those quarters correctly relative to that comparison effect?

Sure. So I guess I'll preface it with Q3 is always the most difficult quarter to call with the holiday season approaching. But when we think about Q3, we would expect top line to be down a few million dollars sequentially versus Q2. And that's really due to the cough and cold impact that Ron talked about a little earlier. It's important, I think, just also to just remember everyone that while we're providing a second half outlook, there's still a lot of uncertainty out there. So in terms of Q3, a little bit heightened because of the holiday season, but again, I think if you think sequentially down a few million dollars from where we landed Q2, I think you'd be in the ballpark.

Steph, this is another opportunity to reinforce some of the detail behind our outlook for the second half, right? It's really based on our business continuing to be stable and consistent, and we feel good about that. We saw the trends from Q2 continue into October. And then we reflected the anticipated decline in cough/cold year-over-year. And then as a reminder, we really have that odd Q4 comparison. So for the quarter ended March last year, we saw a benefit as consumers rushed to the stores at the beginning of COVID and stocked up and retailers replenished their inventory. So unlike many other companies that maybe have a year-end, who aren't facing that COVID comp yet, our fiscal year has a comping against that, which is really driving the year-over-year decline. But again, it's important to remember that we believe that our business is pretty stable here.

Our next question comes from Joe Altobello of Raymond James.

This is Adam on for Joe. You've given some good color on the top line. So I don't want to belabor it too much. I guess the one thing I wanted to follow-up on was, is there any destocking at all baked into that guidance? That will be helpful. Or is it mostly just reflecting the cough/cold, the incident levels and kind of tough compared 4Q and kind of how does it trend North America versus international? And in terms of how we're thinking about the back half?

Yes. So in terms of retailer inventory activity, we're not seeing any signs at this point, Adam, that we would anticipate changes in inventory levels at retail. One of the comments we made during the prepared remarks today was that we've seen stability in consumption levels and retailer order patterns. And we actually review inventory for levels for our top customers every other week with our sales organization. We're not seeing any indication that we would expect that at this point for the remainder of the year. And Chris, I think there were some other questions maybe that you want to comment on for Adam?

Sure. Adam, so as I noted in my prepared remarks, we're expecting international headwinds to continue in the back half, some real difficult comps, as Ron mentioned. But if you think about absolute dollars, perhaps for international in the back half similar to the first half, essentially, the impact of Hydralyte is pretty significant, right? Hydralyte is a brand to think about being impacted by COVID by the way Dramamine is. So great share, still doing really well, but really impacted by COVID. So again, the advantage of our diversified portfolio, when you put it all together, and we're essentially flat for the period, but international on a comp basis should be hit a little harder than North America.

That's helpful. If I could kind of tack on one more here. I was curious, you guys gave the impressive, I think, it was 122% e-com POS growth. Just kind of your updated thoughts on where you think e-com can be as a percent of revenue, where it is now, perhaps where it could be end of the fiscal year, and then maybe a few years out, unless it's just too difficult to forecast. And then I know you also mentioned the priority will remain debt reduction as you continue to make good progress. Is there anything brewing on the M&A side? Or if not, if you look to share repose?

Yes. So let me comment on e-commerce and omnichannel share trends and thoughts, and I'll let Chris comment on M&A. So first of all, I'll start with -- we really don't care where consumers choose to buy our product. As you've seen in our financial profile and gross margin profile over the last few quarters, no matter where the consumer chooses to buy the product, our financial profile holds up. And we've talked about that for a long time. And certainly, the proof is in the pudding over the last couple of quarters here. But from a bigger picture, it's likely that the convenience and the offerings that consumers are finding in terms of e-commerce and omnichannel purchasing will likely stick over the long term. And our focus will be to continue to connect with consumers so that they understand that the products are available and ready for them in those channels or whatever else they may choose to buy them. So likely to stick. But at the end of the day, it really doesn't matter to us.

Yes. And then, Adam, just to comment on the M&A environment. We continue to evaluate opportunities in the arena. Our strong and consistent free cash flow generation really gives us a lot of flexibility. And we've actually resumed share repurchases in the second quarter, as you'll see in our 10-Q, which has continued into the third quarter now. So -- and we continue to evaluate effective capital allocation to maximize value. And with the visibility we discussed today, we feel comfortable of reinitiating the repurchase program that we had in place prior to COVID.

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

I was curious if you could comment on -- in terms of the rapid e-commerce growth of your brands. Which brands are benefiting most from a market share perspective because of the e-com -- the rapid e-commerce growth? So are any of them able -- are any of the brands able to, say, broaden their demographics or attract a new category of consumer or anything like that, but which brands would you call out most is benefiting from that?

So Linda, for starters, I point to our power core brand. So Summer's Eve, Monistat and DenTek are seeing nice share gains online as consumers are finding, in some cases, more broadly available product offerings. And a slightly different maybe competitive landscape than what they may face in brick-and-mortar. That's helping us grow share there, but that, in a lot of ways, plays out across our broad portfolio.

Our next question comes from Anthony Lebiedzinski of Sidoti & Company.

So yes, I appreciate the color as far as the Q4 -- Q3 and Q4 revenue, kind of how you're thinking about it. Is there anything to call out as far as gross margins or A&M expenses or G&A expenses as we look at updating our models between Q3 and Q4 given your full year guidance?

Yes. Anthony, this is Chris. So A&M spend should be higher in the third quarter, both as a percent and in absolute dollars. And then G&A is probably going to be consistent in the third and fourth quarters...

Got it. Okay. All right. And then as far as the supply chain, I think, Ron, you mentioned it's a tight supply environment. Are you seeing this across all -- most of your brands? Or just -- is this isolated to just some of your brands?

It really is -- so the kind of tightness we're seeing could potentially impact really any of the brands in our portfolio. We're seeing some tightness in general packaging and other kind of commodity-type products. For the most part, the API supply chain has been fairly good, and we work with our suppliers over the long term for them to carry safety stock, if you will, of API and other critical components to ensure that disruption and that wouldn't impact our ability to produce finished goods. So our focus is to make sure that we don't have any meaningful out of stock at retail, so that we can continue to support our share and our share growth over time. And that will be the way that we continue to manage the supply chain over time. But knock on wood, at this point, we've been able to get through the current environment in such a way that we're in a really good position at retail.

Got it. Okay. And my last question is you mentioned that the convenience store channel is challenged. It has been challenged here because of COVID. So what is your exposure to the convenience store channel?

I believe our total sales are in the high single digits as a percent of total company sales. Although it's concentrated in a couple of key brands. BC & Goody's, Clear Eyes with our Pocket Pal business, Dramamine and Luden's, to a lesser extent. And again, we've seen trends improve a little bit from the trough at the end of kind of June. But in a lot of ways, even though consumers are out and about more now than they were in the quarter ended June, they're filling up their car with gas, but they may not necessarily be heading into the actual store and making those impulse purchases around BC & Goody's or Dramamine or Clear Eyes kind of thing. So we anticipate a slow recovery in that space, Anthony.

[Operator Instructions] Our next question comes from the line of William Reuter of Bank of America.

In the earlier question about e-commerce penetration, I think one component of it was that kind of lost in the shuffle. Your first quarter penetration was 10%. I don't think -- I think I missed what it was for the second quarter. Did you give that?

Chris, do you want to comment on that?

Yes. So the first quarter, we highlighted that because in our Q, as you know, there's a filing requirement that anything that noses over 10% needs to be disclosed. So that's why we don't ordinarily give out individual customers or channels. But the growth that we're seeing in e-com is still significant with triple digit. You'll note in the deck that we put -- we talk really consumption around that. So again, still very consistent and strong e-com growth in the second quarter as well as the first quarter. That's why we didn't highlight it.

Okay. Sounds good. And then while consumption across the board has been kind of flattish, there obviously been certain categories impacted by COVID. I guess, do you anticipate that any of your brick-and-mortar retailers may change shelf space allocation to some of these categories, given the risk that COVID may continue to impact behavior for the next year or who knows?

Yes. 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. And that's just another example of it.

Okay. And then just lastly for me. Last time you'd highlighted a leverage target, it was 3.5 to 5x. You're kind of slightly above the midpoint of that. Does that continue to be your target? And then, I guess, given potential M&A, have you spoken about how high you would take that leverage up given certain opportunities?

Yes. So 3.5 to 5x continues to be our target, you're right. We've now hit the midpoint of the target. We we've talked about likely our ability with our strong and consistent free cash flow, our variable operating model and financial profile, stepping slightly above 5x, I don't think would be out of the realm with our ability to quickly get back in within the range within a quarter or 2.

Thank you. At this time, I'd like to turn the call over to the Chairman, President and CEO, Ron Lombardi, for closing remarks. Sir?

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.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.