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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to the Prestige Consumer Healthcare Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this call is being recorded.
I will now turn it over to Phil Terpolilli, Vice President of Investor Relations and Treasury. Please go ahead.
Thanks operator, and thank you to everyone who's joined today. On the call with me are Ron Lombardi, our Chairman, President and CEO; and Christine Sacco, our CFO.
On today's call, we'll review the second quarter fiscal 2023 results, discuss the full year outlook and then take questions from analysts. The slide presentation accompanying 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 to the nearest GAAP financial measures are included in the 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 two of the slide presentation, which accompanies the call. These are important to review and contemplate. Business environment uncertainty remains high due to COVID-19, supply chain constraints, high inflation and various geopolitical factors, which have numerous potential impacts. This means results could change at any time from the forecasted impact of reconsiderations of the best estimates based on the information available as of today's date. Further information concerning risk factors and cautionary statements are available on our most recent SEC filings and the most recent company 10-K.
I'll now hand it over to our CEO, Ron Lombardi. Ron?
Thanks Phil. Let's begin on slide five. We are encouraged by our second quarter results, which continued Q1's solid start to fiscal 2023 that we discussed back in August. Revenues of $289 million in Q2 grew over 5% organically versus the prior year.
Our leading portfolio of consumer health care brands remains well-positioned as consumers continue to seek out their trusted brands in today's dynamic environment. This trend underpinned our ongoing brand-building, which generated Q2's record revenue performance and was the highest in company history for the second quarter in a row.
The strong sales performance was led by our International segment and the Hydralyte brand, along with other areas of strength across numerous brands and categories. Solid sales continued to translate into strong profitability, generating $1.02 in diluted EPS and $55 million in free cash flow in Q2.
Last, our consistent cash flow profile continues to enable our disciplined long-term capital allocation strategy. In Q2, we completed our previously authorized $50 million share repurchase program while still finishing the quarter with lower leverage at 3.7 times.
So, in summary, more than halfway through the year, we are off to a solid start, building off of a record fiscal 2022, thanks to consistent execution of our time-tested business strategy.
Now, let's turn to page six and discuss Dramamine, which is an excellent example of the long-term brand-building that's driven our results. Dramamine's continued success is driven in large part by our principal marketing objective to never stop brand-building. Even for our brands that are synonymous with their category, like Dramamine, we look to leverage consumer insights to continue to meet ever-evolving healthcare needs and look for opportunities to grow the brand. Since acquiring the brand in 2011, we have expanded our leading number one market position via meaningful brand-building in innovation in order to deepen consumers' connection to the franchise.
Our early success was driven in large part by expanding with new forms and flavors, launching products like less drowsy, non-drowsy and chewable offerings that help match consumer needs and increase usage occasions. But we didn't stop there. In our insight work, we also heard from consumers who are treating the symptoms of motion sickness with nausea products. To meet this need, in fiscal 2019, we began addressing the distinctive nausea market with new Dramamine nausea offerings. Most recently, with digital marketing, we've highlighted the launch of Dramamine Ginger Chews, which feature a clinical dosage of ginger for great-tasting, non-drowsy relief. The results of these efforts is continued success for the brand.
Over the last five years, Dramamine grew sales about 10% annually, driving growth across both categories in winning with both consumers and retailers. The proven strategy and resulting growth enabled us to expand on our number one share in motion sickness and in recent months, became the number one market player in the nausea category as well.
Now, let's turn to slide seven for an update on e-commerce. We are pleased with our strong 15% consumption growth in the first half of the year for our e-commerce business. This growth rate, well in excess of our company average, is solid continued growth against difficult comparisons and in an environment where other non-healthcare categories have faced challenges. Our success is driven by a simple yet effective strategy of targeted content and marketing, effectively managing our product assortment and making broad investments across e-commerce partners to better connect with consumers.
For example, we often talk about content for certain ailments like wart treatment and yeast infections, but our investments around messaging stretch beyond these categories. Shown on the lower right of the slide, Goody's headache powders utilize engaging digital marketing to help explain the benefits of fast pain relief to consumers. Meanwhile, a benefit of e-commerce is product assortment and availability, where consumers can typically find the widest assortment of products from their trusted brands.
Shown on the upper right of the slide, you can see our DenTek content, where we have reminders around the broad assortment of offerings that can be used as part of a daily oral care routine. Last, we are making investments across all partners in e-commerce and brick-and-mortar, which positions us well for wherever consumers shop.
So, in summary, we continue to win with consumers across e-commerce through our investments in online content and digital advertising and are well-positioned for further growth.
Now, I'll pass it to Chris to walk through the financials.
Thanks Ron, and good morning, everyone. Let's turn to slide nine to review our second quarter fiscal 2023 financial results. As a reminder, the information in today's presentation includes certain non-GAAP information that is reconciled to the closest GAAP measure in our earnings release.
Q2 revenue of $289.3 million increased 4.7% versus the prior year and increased 5.5%, excluding the effects of foreign currency. North America revenues were approximately flat versus prior year. As a reminder, we continue to face lumpy comparisons in the prior year when we experienced higher sales as consumers' habits shifted, most notably in travel, with increased vaccination rates.
Our International segment revenues of $37.2 million were up over 50% in Q2, excluding FX. The performance included a timing shift of certain International orders of Q3. As a reminder, we experienced these quarterly timing variations in orders and shipment patterns due to the distributor nature of our International business.
The remaining strength was driven by the Hydralyte brand strength Ron highlighted earlier as well as strong growth for our Fess brands driven by higher rates of cough and cold category sales. EPS and EBITDA were flat and down slightly in Q2, respectively in the prior year with higher revenue largely offsetting the inflationary pressures and higher interest costs.
Let's turn to slide 10 for more detail around our consolidated results. For the first six months, fiscal 2023 revenues increased 2.2% versus the prior year on an organic basis. The performance drivers were largely similar to what we experienced in Q1 with the largest benefits coming from our International segment performance, as well as strength of Dramamine and robust cough and cold category growth. We also continue to experience double-digit year-over-year growth in the e-commerce channel, continuing the long-term trend of higher online purchase.
Total company gross margin of 56.7% in the first half declined 170 basis points versus last year's adjusted gross margin of 58.4%. The gross margin change was anticipated and attributable to cost increases, partially offset by pricing actions across our portfolio, which offset the dollar amount of inflationary cost headwinds.
We continue to anticipate an approximate gross margin of 56% for fiscal 2023, including gross margins of just under 55% in Q3. We continue to expect to institute additional pricing actions across our portfolio to offset the dollar amount of inflationary headwinds as necessary. Advertising and marketing came in at 14.8% for the first six months, approximately flat to the prior year on a percentage of sales basis. For fiscal 2023, we now anticipate an A&M rate closer to 13% of sales, reflecting spend at a lower percentage of sales in the second half, owing to the timing of certain initiatives and reduced spending around certain categories due to strong consumer demand.
G&A expenses were 9.4% of sales in the first half. We still anticipate full year G&A dollars to approximate prior year at around 9% of sales. Finally, diluted EPS of $2.11 compared to $2.16 in the prior year down slightly as higher revenues were more than offset by the gross margin compression just discussed. Our first half tax rate of 22.7% was slightly favorable to prior periods due to the timing of certain discrete tax items. For the remaining quarters, we still anticipate a tax rate of approximately 24%.
Now let's turn to slide 11 and discuss cash flow. In the first half, we generated $112.4 million in free cash flow, down versus the prior year due to the timing of working capital. We continue to maintain industry-leading free cash flow and are maintaining our outlook for the year.
At September 30, our net debt was approximately $1.4 billion, and we maintained our covenant defined leverage ratio of 3.7 times. We still anticipate being below 3.5 times leverage by fiscal year-end and now anticipate interest expense of just over $68 million for the year.
Finally, during Q2, we completed the previously authorized $50 million share repurchase program, in total repurchasing approximately 900,000 shares in the first half.
With that, I'll turn it back to Ron.
Thanks Chris. Let's turn to slide 13 to wrap up. More than halfway through the year, we have solid business momentum, thanks to our proven business strategy and leading consumer health care portfolio.
We are reaffirming our full year fiscal 2023 outlook, which anticipates solid growth even in the current supply chain and inflationary environment. For fiscal 2023, we continue to anticipate revenue growth of approximately 3% to 4%, including organic revenue growth of 2% to 3%, consistent with our long-term target. Q3 revenues are anticipated to be approximately $271 million to $274 million and approximately flat to the prior year excluding FX. We also continue to anticipate EPS of $4.18 to $4.23 for fiscal 2023. For Q3, EPS is expected to be between $1 and $1.02, a slight increase versus the prior year.
Our disciplined pricing actions and cost management are helping to offset inflationary headwinds, while the benefits of our strong free cash flow continues to help offset the impact of higher interest rates.
Lastly, we continue to anticipate free cash flow of $260 million or more. We also still expect being below 3.5 times leverage by fiscal year-end as we continue to execute our disciplined capital deployment strategy that includes debt paydown.
So, in summary, we remain confident we have the right business attributes and strategy to deliver results that reward our stakeholders across business environments.
With that, I'll open it up for questions. Operator?
Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions]
Our first question comes from Rupesh Parikh with Oppenheimer & Co.
Good morning. Thanks for taking my question and congrats on the quarter. So, I guess, with the North American over-the-counter growth, you guys had minimal growth this quarter. Was there anything holding back the performance, or is that just a reflection of a difficult compare last year?
Hey, good morning, Rupesh. It's Chris. So, you hit it right there. It really was the comparison. When I look back, this quarter was the highest level of sales that we've ever had for our North American segment. So, we feel good about the performance there. Excluding FX rate, Canada's in there, the segment was actually up slightly year-over-year. And so, when you think about the growth rate, it really was that prior year comp impacting it, right? That was the quarter everyone got activated and got out and returned to travel and things like that and we really benefited from that last year. So, I would say North America was really largely as we expected through the quarter.
Okay. Great. And then just given some of the concerns out there recession and concerns on the consumer, any changes in consumer behavior that you guys are seeing, whether tradedown to privately, or anything else to note this quarter?
Good morning, Rupesh. Yeah. So far, we're not seeing any meaningful change in consumer trends. And at this point, we really aren't expecting any that would impact our business outside of what we talked about today. So far, it seems to be fairly consistent for us in our categories.
Great. And then one last question. So, we've seen a number of players call out. Retailers have been aggressively adjusting inventory, especially in the mass channel. Just curious if you guys are seeing any inventory destocking or any similar dynamics to what other suppliers are calling out.
Yeah. Rupesh, not in our categories. And I think I've mentioned this the last couple of these earnings calls is that it seems like, in our categories, everybody is looking for more inventory, whether it's the retailers, us or our suppliers, as we continue to really operate in a challenged supply chain environment these days. So, in our categories, no, we're not seeing any reduction in inventory.
Okay. Great. Thank you. I will pass it along.
Thank you.
[Operator Instructions]
Our next question comes from Jon Andersen with William Blair. Jon, your line is open.
Hey, good morning, everybody.
Good morning, Jon.
Good morning, Jon.
I wanted to follow-up to start on the question around North America. We externally look at consumption data. And I know that, that can be dangerous at times, and there are big disconnects perhaps between consumption and shipments, particularly in any given quarter. This looked like a quarter where that was the case. Our read, it looked like consumption was down mid single digits in measured channels in the quarter. But Chris, as you pointed out, your North American business was up ex constant currency. Could you just talk a little bit more about why that shouldn't concern us, that gap in the quarter? I know you talked a little bit about the difficult comp. But I think anything else you can do there to kind of peel back that onion would be helpful. Thanks.
Yeah. Hi. Good morning Jon. It's Chris. So, we've been saying I think every single quarter since the beginning of time that it's tricky to look at that data, and there's a whole bunch of things that are excluded from that, including some of our fastest growing channels and geographies. And so, there can be fluctuations certainly quarter-to-quarter. I guess compiling on top of that in this lumpy period over the last couple of years, right, are all of the noise and movements around the COVID-impacted brand. So, unusual comparisons. Generally speaking, I think we expect consumption to approximate sales on a full year basis. So that's the way we're thinking about it and how we plan for the rest of the year.
Okay. And how much is e-commerce now as a percent of your overall business? And did that grow at a kind of a mid-teen rate in the third -- in the second quarter, excuse me? I know you commented it grew at a mid-teen rate in the first half.
Hey, Jon. Yeah. It did grow in the double-digits in the second quarter, and that business is about 15% of our sales now. So, rapid growth. I think it was fiscal -- just a few years ago, 1%, right, climbed to 5%. And during COVID, it doubled and now we're about 15%.
Jon, really -- we had some prepared remarks on that topic today. And really, the point was to emphasize we continue to do well in that channel. We make investments around it. We think there's an opportunity to continue to grow well in that channel despite what you're hearing from lots of other players about e-commerce. It continues to be a great channel for us.
Okay. And then, just trade inventory levels, Ron, you kind of mentioned this I think in the response to the first question. You're comfortable with retail trade inventory levels. Are you still playing kind of catch-up? Or are you kind of where you want to be in terms of in-stocks at this point?
Yeah. Both our service levels and I think in-stock at retail, we'd like to see improve. Over time, we expect them to kind of inch forward slowly. Again, we continue to operate in a challenging environment, even though the height COVID is behind us, and a lot of ways the supply chain is still catching up on that. So, in general, I think there's opportunity for improvement of in-stocks at retail and improvements in our service level.
Great. One quick follow-up, well, maybe two. So, on the International business, terrific quarter. Chris, you kind of addressed the fact that there were some timing components to the growth. Do you have a way for us to think about that? How much was kind of organic demand for Hydralyte and Fess? And how much might have been related to distributor order timing?
Yeah. Jon, excuse me, I would say about half a beat timing related, but still strong -- very strong performance from the business, right, as you mentioned. This was a quarter where all of the previous COVID restrictions were lifted. In Australia, folks really got out, and they got cough and colds, and so Fess was up pretty strong, as was Hydralyte.
Okay. And last one on pricing, it sounds like you've taken pricing and you plan to take more pricing. Am I reading that right? And kind of how much have you priced already? And how much more do you anticipate needing?
Yeah. So, at this point, pricing was about half of our growth in the second quarter. We've been able to offset inflation dollar for dollar this quarter and we expect to for the full year. So, a couple of rounds of pricing have been enacted. We'll watch to see what we expect for our next fiscal year. And again, we feel confident that we'll be able, on a dollar basis, to offset inflation should we continue to see the trends worsen.
Great. Thanks so much. Congrats on good quarter.
Thanks Jon.
[Operator Instructions]
At this time, I would now like to turn it back to Ron Lombardi for closing remarks.
Thank you, operator. Thanks again to everyone for joining us today, and we look forward to updating everyone again in February. Have a great day.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.