Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Prestige Consumer Healthcare, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Director of Investor Relations, Phil Terpolilli. Sir, please go ahead.

Thanks, operator, and thank you to everyone that has joined us today. I speak for all of us when I say we hope you and those close to you are safe and healthy. On the call with me today 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 current crisis, review the results of the fourth quarter and fiscal year 2020, discuss our approach and initial thoughts on fiscal 2021 and then take questions from analysts. There's 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. Please remember some of the information contained in the presentation today include non-GAAP financial measures. Reconciliations between adjusted and reported financial measures are included in today's earnings release and slide presentation. On 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, the business environment has changed dramatically over the last quarter. Unfortunately, there's a lot we don't know in the short term about the duration and impact of the COVID-19 pandemic. These items include an uncertain shutdown time frame for many areas of our economy, ongoing changes to consumer purchasing habits, the potential for a disruptive supply chain, rising unemployment and many other economic factors. This means results could change at any time and the forecasted impact of COVID-19 on the company's business results now look as a 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 4. Without question, the COVID-19 pandemic is at the top of mind for everyone, and as Phil outlined, there are numerous uncertainties. We have a proven business model that we believe is capable of managing through this extraordinary period and along with our proven three-pillar strategy that continues to position us well for whatever challenges we find in fiscal 2021. We are an agile and capable organization, which has allowed us to quickly adjust to the change experienced so far. On Slide 4, we have some highlights which are underpinned by our strategy and business attributes. We are putting the health of our employees, partner employees and communities first. We've adapted effective work-from-home plans and have enhanced robust safety protocols across our Lynchburg facility, which continues to operate at near-normal output levels. The comprehensive strategy we've put in place on the first point as well as the benefit of our business model has enabled us to establish strong business continuity plans, which I'll discuss in detail later. Next, investing for growth. We are protecting our brands and our marketing plans continue to advance our brand-building playbook. The environment is unique, but we have the benefit of a leading, diversified and widely distributed brand portfolio that gives us the ability to adapt quickly. We'll talk about this in more detail later. Last on the page is a reminder of our disciplined capital strategy. We continue to benefit from a strong operating model and disciplined capital strategy with an industry-leading financial profile that will enable us to focus on debt reduction and liquidity, while continuing to invest in our brands for the long term. The sum of this is that the proactive approach we are taking positions us well to adapt to marketplace changes in the face of uncertainty. So with that, I'll turn it over to Chris to review Q4 and fiscal 2020 results.

Thanks, Ron. I'll go over Q4 results, give a brief recap on our full year fiscal 2020 and review our cash flow and liquidity profile. As a reminder, the information in today's presentation includes adjusted results that are reconciled to the closest GAAP measure in our earnings release. Flipping to Slide 6, you can see the highlights of our fourth quarter. Q4 was a strong finish to the year, including revenue up 4.6% on an organic basis. This performance was led by continued growth in our international segment and our growing e-commerce business as well as a significant lift from consumer spending in March as we believe consumers stocked up as a result of COVID-19. During the fourth quarter, we continued to benefit from our ongoing investments and focus on e-commerce. Our e-comm business grew over 60% in the quarter as we benefited from consumers shifting to online purchasing. Notably, our consumption growth was about 7%, driven by these factors for the quarter after previously trending at about 2% prior to March, which was consistent with our expectations for the year. Adjusted gross margin of 59.4% was up 200 basis points versus the prior year, primarily as a result of higher volume and geographic mix. For Q1, we expect margins similar to prior quarters of about 58% as we expect a more normalized mix. Adjusted EPS of $0.82 per share was also up meaningfully, increasing approximately 14% versus the prior year as we benefited from higher sales growth, gross margin favorability and a reduction in interest expense and share count. Free cash flow was $52.5 million in the quarter and continued to benefit from our industry-leading EBITDA margins, efficient capital spending and low cash tax rate. We continue to adhere to a disciplined capital allocation approach from this cash generation,…

Thanks, Chris. Let's turn to Slide 11 to recap the year. Fiscal 2020 was a successful year in many ways, owing in large part to the continued execution of our strategy. First, we continued to invest behind our core portfolio, which led to growing categories and market share for many of our leading brands. I'd also like to highlight the success in our International segment, which had a great year as we grew many key brands meaningfully, including Hydralyte. Second, our cash generation and free cash flow conversion remain best-in-class. As Chris highlighted, we generated $207 million in free cash flow, driven by strong EBITDA margin and low cash taxes. Finally, our disciplined capital allocation allowed for multiple areas of investment in fiscal 2020. Importantly, we continued to focus on debt reduction, reducing our leverage to within our long-term targeted range of 3.5 to five times. We also used roughly one-quarter of our free cash flow to opportunistically repurchase our stock. Even in a challenging environment, we delivered excellent results in fiscal 2020, and our strategy leaves us well positioned for future success. This three-pillar strategy is highly adaptable and will be our guide as we approach fiscal 2021. Turning to Slide 12, you can see the ways we expect to do this. We believe our proven three-pillar strategy and the building blocks shown here position us for success as we navigate this pandemic. First, our business continuity plan is robust and critical to executing these strategies that tieback to each of our pillars. We have a diversified leading portfolio that's a key strength in many economic environments, including this one. Our company is nimble and we are able to adapt quickly and refocus efforts around targeted brands and opportunities. We'll share some real-time marketing examples of this shortly. We…

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

Thanks for taking my question. I guess, just going back to some of the consumer stocking up activities that you saw in Q4. It sounds like it's clearly going to be a headwind in Q1. Do you expect any lingering impacts post Q1?

It's really hard to predict what's going to happen past Q1 for us. We're in the same boat as pretty much everybody else as we try to figure out what will happen in the future. I think if you go back to what we saw in Q4 and then into the early weeks of Q1, Rupesh, is that we saw a pretty significant spike in consumption. We then saw it tail off as people began to stay home and observe the shelter-in-space. And then during that time frame, we saw the retailer order pattern pick up a bit in early April as the retailers began to catch up to the spike in consumption.

Okay. Okay, that's helpful. And then just and this is probably another one that's maybe difficult to answer. So obviously, you guys have had some destocking headwinds in recent years. And now you're also hearing about retailers wanting to keep safety stock. Just any thoughts in terms of, I guess, what the impact could be from retailers wanting to carry more carrying more safety stock and if you expect to see inventory destocking headwinds this year.

Yes. Hard to predict. In a lot of ways, the retailers are still trying to catch up with all that's happened over the last number of weeks. But if you go back to fiscal 2020, over the course of the year, we did see about a two point disconnect between consumption for us, which was about 2% for the year and then sell-in, which was up about 1%. So actually, I think consumption was in the high 2s during the year fiscal 2020. So far, in Q1, we've seen a pretty steady level of dollars of inventory for the retailers, so it's hard to predict what they'll do going forward, Rupesh.

Okay, great. Thank you.

Thank you.

Our next question comes from Stephanie Wissink of Jefferies. Your line is open.

Hi, good morning, everyone. Thanks for taking our question. The first one we wanted to unpack was just the A&P investment. You've certainly been fueled by your gross margin expanding over time. Help us think through how much more opportunity is there in gross margin, and therefore, how much opportunity to continue to advance A&P. And can you talk a little bit about what you're seeing in the channel in terms of private label versus branded? How much are you willing to put A&P on the table to really defend your branded position?

So Chris, why don't you take the gross margin part of the question, and then I'll follow up with the private label question.

Sure. So Q4's gross margin obviously coming in pretty high at 59.4%, right? We talked about it being roughly split between volume and mix. So we are expecting, as we move forward to Q1's outlook, for that to return to a more normalized level. That said, we've always said that to the extent we can realize gross margin savings, that we intend to reinvest those back into higher levels of A&P, with an objective of maintaining a mid-30s EBITDA margin. So that's exactly what we did in Q4. We spent back against opportunities that we saw under the current environment, and we'll continue to look to do that as we move forward.

So Stephanie, in terms of private label, the first place I want to start is fiscal 2020 was another very successful year for us in terms of continuing to grow our share, in winning against the majority of our competitors, whether they're branded competitors in the categories we compete in or private label. So that trend continued in fiscal 2020 and it's continued into the early stages of Q1 of fiscal 2021 for us. So even in this highly unusual environment that we've seen in March and into April, we continue to do well and are successful in the categories that we compete in. Now there's been some discussion around private label gaining share during this unique environment. But again, it's really, I think, concentrated in the spaces that strategically we avoid, so the more commoditized space is like tablet analgesics or cold medicines or flu medicines, where private label has a different position and a different connection with consumers. We've come in to work every day thinking about differentiating ourselves against any and all competitors, whether it's branded or private label and do that through our marketing initiatives, through new products and innovation and that trend we expect to continue going forward.

Okay, that's great. And one final question, just on the e-commerce margin and A&P. Help us think through your go-to-market strategy? Any differences in and bricks-and-mortar sales versus e-comm sales and how you measure, either through dashboard and KPIs or how you think about the return on marketing investment in the dotcom environment?

Yes. So in a lot of ways, we approach e-commerce the same way we do with traditional brick-and-mortars, which is we listen to the consumers and find out how they're thinking about shopping and the kinds of products and the best that they're looking for and the best way to connect with them. And we adapt our marketing vehicles based on that input. So that's the first part of it. The second is that the financial profile of our online business is pretty consistent with brick-and-mortar. So although we have different tactics, the overall cost of connecting and winning with consumers is fairly similar for us.

Thank you very helpful.

Sure. Thank you, Steph.

Our next question comes from Joe Altobello of Raymond James. Your question please.

Hey guys, good morning. This is actually Adam on for Joe. I hope you're all staying safe. I was kind of curious if you could maybe quantify the impact, I know it might be difficult at this point, just in 1Q of that pantry load you alluded to. Just looking at the outlook, if we can break it down at all. And then also maybe how has COVID-19 impacted the way you do business in terms of sanitization, social distancing? What kind of things are you doing on that front?

So Chris, do you want to take the sales question? And I'll come back and talk about business continuity plans.

Yes. Adam, so the way to think about the Q1 outlook to bridge it for you is we talked about retailer reordering patterns as they catch up after the March consumption increase. That's going to be around 2% to 3% in our estimation. I got about a 1% decline from an FX headwind anticipated and then the consumption continuing to trend negative at approximately high single digits. So I think if you walk that math from the 2.32% in the prior year, you'll get to the down five for the outlook for Q1.

So Adam, in terms of the impact of COVID-19 in terms of how we do business, so back on March 13, we actually moved to a work-from-home environment for the vast majority of our office-based employees. And that's working well. In terms of our Lynchburg facility, we've rolled out expanded sanitation and cleaning procedures. We have social distancing in place where people are keeping six feet or more between each person in the facility. And then we've also put up partitions and other physical separators to help keep the workforce safe there. This is many of these same procedures have been rolled out by our suppliers to ensure that we have a good continuity of the supply chain.

I appreciate the commentary. And if I could ask one more. I know you guys touched on capital allocation quite a bit. I just wanted to reiterate, given the obvious focus on maintaining cash on the balance sheet and staying conservative, would you say the likelihood of M&A has gone down over the past few months, both in terms of your appetite and the quality of potential targets? Or is it something that you would still consider if the opportunity was right?

So in the near term, without great visibility in terms of what to expect, clearly, M&A is going to be on the back burner for the near term as we understand what the business environment is going to be like going forward.

Great. Thanks, Ron. Good luck guys, and stay safe.

Thanks, Adam.

Our next question comes from Mitch Pinheiro of Sturdivant. Your line is open.

Mitch? Let's try that again.

Okay. Let's try that again. Mitch, your line is open. Please make sure your line is unmated.

Hello.

Hi, Mitch.

Hi, Mitch.

Good morning. Can you hear me?

We can.

Okay, good. I got on a little late. If I am asking a question that you've already talked about, I apologize. But in terms of A&P spending, is there any change to the dollar level in Q1, given the circumstances?

So Chris, why don't you take this question?

Sure. Yes, Mitch. So we talked about expecting an A&P spend for Q1 below that of the prior year as we look to shift dollars into the future obviously related to COVID-19.

And how I mean, how substantial would that be? I mean, are we talking a couple of percentage points, a couple of million dollars or could it be larger?

I think a couple of percentage points, a couple of million dollars is more accurate. Remember, we're actually increasing A&P spend in certain areas like digital and certain products or brands that we think would respond to where it would be an efficient use of our spend. The example we like to use is Dramamine, right? If folks aren't traveling, we've obviously readjusted our plans from an A&P perspective in the near term and either reallocated those dollars or pushed them out marketing plans for that brand into the future. So it's all playing into the numbers for Q1. And obviously, that's pretty much what we have visibility to or we're offering to today.

I think Mitch, the important point on A&P spending that's anticipated for Q1 is that we're in the middle of a pivot period, right? We're looking at our marketing plans. We're figuring out what's best and making changes on the fly here. So the level of A&P that we have in Q1 is going to be a function of this pivot, not us cutting back spending, waiting to see what sales or protecting the bottom line. It's really adjusting our marketing plans and getting them going again.

When I look at the gross margin, I know you had you talked about the gross margin being a combination of mix and volume benefiting your fourth quarter. Given that you're mostly I guess, it's mostly mix, given sort of your variable cost type of outsource model. Is that correct?

Chris, you want to take that?

Yes, Mitch, it's roughly split actually between volume and mix. You're right, we do have a variable cost model that we talk about. However, we do have some fixed costs that we can leverage, right? We have our Lynchburg facility. There are some warehousing costs that are largely fixed so that contributed on the volume side. And geographic mix, International being a larger percent of our sales but also just the brands in International that are really performing in Hydralyte and Fess, two of our largest or our two largest brands in Australia. Those two brands, in particular, have gross margins well above the company average even the International segment margin. So a number of factors that contributed to Q4. But again, we're calling for it to normalize in Q1 as we sit here today.

Okay. And then just one other thing is, when do you anticipate filing your K?

Likely tomorrow, maybe Monday the latest but just a couple of days from now, they wrap up documentation.

Okay. Thank you very much. Appreciate it.

Thank you much.

[Operator Instructions] Our next question comes from the line of Anthony Lebiedzinski of Sidoti. Your line is open.

Yes, good morning. And thank you for taking the question. So I may have missed this, but what was the e-commerce penetration for the fourth quarter and for fiscal 2020?

Chris, you want comment?

Yes. So e-comm was up 60% in Q4, was up 50%, 5-0, in – for the full year. And at the end of the year, it approximated about 5% of our net sales, which is a little bit above what we had been anticipating obviously as we headed into Q4.

Got it. And then as far as the International segment, you mentioned that some of the revenue increase came from the timing of orders and shipments. Is it possible for you to quantify of the impact of the timing shift?

Chris?

No, the reason we say that, Anthony, really is just it's a distributor business. And so the orders can be a bit lumpy, which is why when you look comparatively historically on a comparative basis, you'll see a lot of movement. It's difficult to predict, difficult to tease out. Remember that our International business also benefited somewhat in Q4 from the pandemic so there's a lot of moving parts. But generally speaking, we feel very good about our International segment's ability to grow. We talk long term about wanting to grow that segment 5-plus percent. Obviously, this year, they just had an outstanding year for a number of reasons that over 15% growth on a flat FX basis. And so International has been consistent for us, and we feel good about the long-term growth opportunities for it.

Got it. And then last question for me is, you said that you successfully transitioned to your third-party logistics provider. Can you just remind us as to what your expected benefits will be from this new logistics provider? And also how should we think about the benefit from a gross margin perspective as well?

It's still – I'll take that. Yes. I'll take that one, Anthony. So the expected benefit, we talked about a two- to three-year payback period and about $10 million in onetime costs, and you see those stripped out in our fiscal 2020. As Ron mentioned earlier, we largely completed this at year-end, but the expected timing of the cost savings really doesn't begin to the second half of fiscal 2021 as you really get ramped in terms of the efficiencies.

Got it. Thank you for that. Best of luck.

At this time, I'd like to turn the call over to Ron Lombardi for closing remarks. Sir?

Thank you, operator. To recap, we are in an unprecedented environment but believe we are set up for continued success. This is enabled by multiple factors, including our portfolio of leading brands, financial profile and continued capital allocation optionality. However, the largest enabler of our success is all of our employees, which I'd like to recognize for their tireless and continued commitment since the pandemic began. So thank you for your continued interest in Prestige, and we look forward to updating you in the future. Have a good day.

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