Okay, good morning, everyone. Thanks for joining us here at ICR. I'm Susan Anderson, one of Canaccord Genuity's consumer analysts, and I'm pleased to welcome here Prestige Consumer Healthcare and, in particular, CEO Ron Lombardi, CFO and COO, Chris Sacco, and then VP of IR and Treasury, Phil Terpolilli. So maybe, you know, to kick it off, 2025 was kind of a crazy year. We had a lot of external events from a new administration to tariffs to government shutdown, you name it, it all happened. Maybe if you could talk about, you know, how you managed through that and how you're well positioned for the future.
Sure. Thanks, Susan. Good morning and good morning to everyone, and thanks for joining us today. Yeah, so calendar 2025 certainly was an interesting year with lots, lots going on. In addition to that, right, we had some announcements on Tylenol and all kinds of other disruptions, whether it's tariff, tariff-related inflation, and lots of other things that really had consumers thinking about where they buy and how they buy things. So lots going on. You know, it also is a good place to start to talk about the attributes of our business and how we continue to hold up during these periods of fluid change, right? We sell products that consumers need to treat an illness or a health situation, right?
So if you wake up and you're ill or someone in your household is ill, you think about going back to those trusted brands, to the products that worked last time you needed them. So kind of no matter what the economic or consumer environment is, right, it really doesn't get in the way of taking care of your health. So our business is made up of a broad portfolio of different kinds of products. So no matter what's going on, you look to it. So it really had us well positioned during the year.
Great. And then maybe if you could talk about, you know, looking forward, you guys have a great brand building strategy that really differentiates you from your competitors. Maybe if you could talk about how you kind of utilize that strategy and, you know, and how it sets yourself apart.
Yeah. So the most important thing we do every day when we come to work is thinking about building and growing the categories that we compete in. And one of the important elements of that is new products and innovation. So when we think about, when we think about bringing in mistreaters or non-treaters or people who can treat more often, having new products that are more efficacious, have claims that make better connection with consumers is an important element of how we think about doing that. So rather than thinking about stealing share, growing our share in a competitive environment, we're thinking about helping consumers take care of themselves better in growing the category that way. So it really is a different thought and a different brand building playbook than you may see in other CPG spaces.
Yeah, great, and some of the examples are, you know, such as like Dramamine, where you guys introduce the G inger Chews and stuff like that, which really kind of grow the category.
Yeah, you know, Dramamine's heritage goes back to motion sickness, and when we talk to consumers, they don't really draw a difference between motion sickness and nausea. All they know is they don't want to throw up, and they trust Dramamine to help them in that, so expanding into nausea was a natural extension for the brand because consumers gave it permission to compete in that space. So if you look at the successful growth we've had in Dramamine over the long term, it's been by bringing people into the category who weren't treating, so they trusted Dramamine, but they didn't want to get drowsy, so we introduced a non-drowsy. If you go way back, if a caregiver wanted to treat a child, they had to take an adult pill, break it in half, and get them to swallow half a pill. We launched chewable, great flavored for kids.
More recently, the expansion into the nausea category with Ginger Chews is a great example of how we've expanded that market and that category.
Great. And then you mentioned, you know, obviously your portfolio is very staple-like and, you know, typically, you know, continues to grow even in tougher environments. Maybe also give the audience an idea of, you know, the makeup of the portfolio, because, you know, lots of times, even like, say, during COVID, some categories did better than others, but, you know, the categories that did well offset categories that, you know, just were not really in favor during that period of time. So just talk about that.
Sure. Chris, do you want to?
Sure, so we have a very diverse portfolio. You know, if you look at the pie chart that's in a lot of our presentations, you'll see a number of different categories where maybe 20% is the largest category within the portfolio, but if you really break that down in the OTC space, it's highly fragmented, so you know, dermatologicals, you'll see a category, right, that can range from. I always use the example, you go into a store and you don't ask for a skincare product, right? You ask for a wart or eczema or rosacea, very fragmented, which also leads to a lot of opportunities in the M&A space, which I'm sure you'll ask about, but to Susan's point, when COVID hit, right, brands like Dramamine almost went to nothing.
But other brands in our portfolio, like Monistat and DenTek for oral care, folks stopped going to the doctor's office. So those brands did very well, right? We came out of COVID and we saw kind of an influx. And so generally speaking, you know, sometimes we have categories or brands that will perform in line with our expectations. Sometimes incident levels will be lower, some will be higher. But when we put it all together, it really speaks to the diversification of our portfolio.
Yeah. You know, this year's example along that is, you know, our GI business is doing well. So Dramamine and Fleet, you know, we're looking to connect with sufferers from the side effects of GLP-1 usage, right, nausea and constipation. So those brands are doing well there. Flu incidences are way down this year. And more recently, we saw a disruption in the pain category with the announcement out of the government on Tylenol. So we saw a dip of that. So, you know, it's one of the benefits of having a broad portfolio and lots of different categories is, you know, some years brands will be above what you would expect them to do over the long term, some will be in line and some will be below. But as Chris just said, you put it all together and we continue to do well in this environment.
Yeah. Okay, great. Maybe if you could talk about your distribution channels, which are very diverse, you know, basically you're wherever the consumer wants to shop, right? And over COVID, I believe, and prior to that, you guys really invested in e-commerce, which you were early to that game. So that was very beneficial and has really ramped, you know, I guess we never would have thought these things that are really very need-based, you know, would be bought so much online, but they are. So maybe just talk about how those are so diverse and, you know, as those channels shift based on consumer preferences, it's, you know, you guys will meet the consumers where they're at.
Sure. You know, I guess the way I'll answer this question is, you know, during 2025, the big thing that we've seen change for consumers is where they shop, and the benefit of having broad distribution for our portfolio is we're catching the consumer where they choose to shop. So as households have dealt with inflation or are being more mindful about managing their budgets, they're choosing to shop where they're getting a better value, so mass is growing nicely. Our Amazon business continues to go well, right? So whether they're looking for, excuse me, everyday low prices or price transparency associated with broad offering, we're catching them there, so our mass business is growing very well this year. Our Amazon business continues to grow double digits, while drug and maybe regional grocery are seeing a decline in shoppers.
So we're catching them, you know, and our pricing and our profit is consistent across channels. So as consumers are shifting, we're not seeing any change in our financial profile.
Yep. Okay, great. Maybe let's talk about the Clear Eyes brand, which, you know, saw some disruption. It's been a while now, a little over a year ago or something like that. So maybe if you could talk about where you're at with that, and then you recently purchased Pillar5 , which is a manufacturing business of the eye care business. Talk about how that's going to help you kind of ramp back up to historical levels.
Chris, do you want to start?
We think about the recovery of Clear Eyes in kind of three stages, right? The first, and we keep concentrating on supply, of course, that comes first. And, you know, back in June of last year, right, our strategy unfolded of, you know, we're going to get primary production out of Pillar , which we'll talk about in a second, but we were going to find two additional suppliers, and these things take years to bring sterile eye care online, right? So we were on a path back when we started to have disruption already. In June of this past year, we brought on one of those two suppliers late in June, and then in late September, early October, we brought the second, which would really be the third supplier overall for Clear Eyes. And then recently in December, the end of December, we closed on Pillar5 acquisition.
So the third piece of that, right, bring on two new suppliers. The third piece is a high-speed line with a lot of additional capacity at Pillar5 that is online, and we'll start to ramp as we move forward. So the supply side of that is kind of underway, and we're moving on that, expecting we talked about sequential improvement in shipments in the third quarter over our fiscal second quarter, and then again expecting our fiscal Q4 supply to be greater than fiscal Q3. So that's the supply side. The next side will be getting our retailers, right? Obviously, we've got to get product on the shelf. We've got to get their DCs filled and their supply chain. And then the third part, obviously, is just within our own, you know, building that safety stock and getting back up. So that's kind of how we think about it.
And then the last would be with the consumer, right? As we get into late fiscal 2027, starting to reconnect with that consumer. You know, we've been focusing on redness and max red and base red, you know, our fastest moving SKUs, and now we'll start to get some of the other Cooling Comfort, you know, dry and itchy sensitive. We'll try to get some of those SKUs back on shelf. So then communicating with the consumer, hey, you know, you've gone back, you've gone to base red, it's, you know, Cooling Comfort is back, and you can get back into that. So that's kind of the last phase that we'll get into. So.
Okay, great. That's a great update. Maybe just looking at the financials really quick. So, you know, there has been some negative impacts on gross margin. You had the tariff situation, the eye care business. Maybe talk about kind of when we start to cycle those and then how you see gross margin longer term?
Yeah, so just to start off, because I know there's some big numbers out there with tariffs, you know, tariffs for us in fiscal 2026 is about $5 million. Think about $10 million on an annual basis, so somewhat modest compared to some others just because of most of our production is, or CMOs are based in North America. You know, from a financial profile, we should see a tailwind with Clear Eyes, which I think is what you're alluding to as we move through fiscal 2027, certainly as we revamped supply. You know, from a gross margin perspective, you know, we went through COVID. We talked about being able to offset inflation dollar for dollar. You know, our brands are holding leading, meaningful, sometimes more than 50% share in the categories, so we were able to take price.
We took price and offset inflation dollar for dollar, which of course doesn't help your margin. So we're on a path to get our gross margin back. Nothing structurally has happened within our categories or our brands. But for us, it's going to come from obviously cost-saving initiatives. And a lot of times how we get price, and if I go back to pre-COVID levels, how we moved margin and will continue to, is really through innovation. You know, all of our brands, you know, our dozen and a half or so strategic brands have three-year paths of innovation. You have to. That's about how long it takes. They all have them. And it's important, right? It's what Ron was talking about in terms of brand building. How do we get consumers into the category who aren't in? And so a lot of times that comes with innovation.
You know, why aren't you in? Well, I don't want to get drowsy when I'm taking, when I'm on vacation. So we launch a non-drowsy or a less drowsy. And that comes with gross margin accretion. Each brand has an edict that their gross margin of new products have to be accretive to the brand. And so that's how we'll march the gross margin. But we do like to remind folks that, you know, with a 33%-34% EBITDA margin, we think we're at strong levels of profitability. So to the extent we can get gross margin, we would look to bring that back into the advertising and marketing line.
Okay, great. And then I don't think we can leave here without talking about the cold and cough season, which is always a great timing for an update. But maybe if you could talk about, you know, what you're seeing this year is a slow start. We saw some activity over holiday. Maybe you're not as exposed as some others, but talk about maybe your exposure there, you know, what brands are exposed and how you're seeing it play out for the rest of the year.
Sure. You know, I like to describe that we play in the, you know, sore throat and candy element of the cough cold, right, with our Chloraseptic and our great tasting Luden's. So first of all, it's like 8% of our revenue. It really doesn't move the needle one way or another each year for us. But it's always a topic people like to talk about because you hear about it from so many other big players. So this season seems to be later. It was smaller earlier on, and it came on with gangbusters. It seems to be more flu-like, or ILI, I guess, is how they describe it in terms of symptoms. The other thing we're hearing from bigger players in the category is that because it started later, they think retailers have enough inventory so that they don't expect big rebuys in the quarter ended March.
You know, that's kind of the background. It really doesn't mean much for us other than, you know, it seems to be a lower level of incidences, particularly sore throats. So sore throat incidences.
Okay, great. And then let's move on to the capital allocation strategy. If you could give us an update there, how you're prioritizing. You know, you guys do generate a lot of free cash flow, like you said, EBITDA margins, you know, low 30% range. So I guess talk about, you know, what are your plans there? What are your priorities from share repurchases, potential M&A?
Yeah. Phil, do you want to?
Yes. So one of the benefits of having the strong financial profile that Chris highlighted, coupled with the low levels of leverage that we're at today, which is the lowest in the company's history, is it gives us the ability to do a lot of those capital allocation priorities at once. So that waterfall we've described to people is, hey, the first opportunity would be M&A. We still continue to see consumer healthcare as fragmented globally. We think there's going to be opportunities to buy brands and portfolios over time. So constantly looking and doing diligence efforts around those opportunities to add to the portfolio over time. Second piece is share repurchases. So we've been opportunistically buying back our stock this fiscal year. We've done it again in Q3. And moving forward, that would be an element of the strategy as well.
We think it's an excellent return for shareholders, particularly at these levels, and then four is balancing sort of cash build and debt reduction. Although we have debt today that's largely fixed, we look over time if we do have more variable debt to be reducing that, so the fortunate part is where we are from a leverage standpoint is we can do a lot of those things at once. We don't have to be exclusive to one of those buckets, and the strong cash flow position that we're in, we expect to generate $1 billion in free cash flow over the next four years. That's a lot of opportunity to create sort of incremental value for shareholders beyond just sort of the organic algorithm of the business, so that's how we think about things.
Okay, great. And then I guess maybe just on the M&A market itself, like how are you seeing things? Are you seeing a lot of brands up for sale? You know, how are valuations? Or maybe talk about how you look at potential acquisitions, what you're looking for in an acquisition.
Yeah. So from a criteria perspective, and we'll take them in reverse order, we tend to be very disciplined and know what we do well. So we're focused on sort of historical, traditional OTC products that have a well-established heritage connection with consumers. We're going through a screening process where we're really looking to identify, does this brand or portfolio have the ability to grow long term? Could be differentiation versus competitors. Can we turn on innovation, improve marketing, et cetera, versus the prior owner? 90% of deals, due diligence stops there because that's a very sort of disciplined criteria. From then, it kind of moves to operational fit as there is the ability to capture synergies over time. And then finally, financial returns. We're looking for brands and portfolios that can be ROIC accretive to our business and in excess of our WACC.
So that's kind of the overarching measure we use. So that is very disciplined, and we view that as the right criteria for us. And one of the reasons we've had, we think, a high batting average with success with M&A over time. In terms of the environment overall, I would tell you in general, we continue to see opportunities through three buckets. Big public companies, pharmaceutical companies continuing to sell brands that they view as non-core for them. It's not a criticism, but they're focused on capital allocation to their largest and biggest opportunities. For us, that creates opportunity given our size. So continue to look for those. Private equity and private equity platforms continuing to buy and sell brands just like we've seen historically. We'd expect that to be an opportunity over time. And then the third element is actually families as well.
There can be family-owned businesses, both here in the U.S. and abroad, where we can connect with a founder or owner that may be looking to cash out and acquire a business as well. So an example there is a couple of years ago, we had a family manufacturer down in Australia that was strategic to supply for our Hydralyte business. They said, "Hey, we're thinking about sort of selling this business. Are you interested?" And we ended up purchasing that. So that's one example of that.
Great. And that reminds me on the international front, maybe if you could talk about what % of your business is international, you know, what brands, Hydralyte's obviously a big part of that business. Maybe just give the audience an idea of what that looks like.
Yeah. So the international business has really performed well for us for a number of years, growing well above our long-term outlook of 5% plus. I think they've had growth of double digits or more during some of those years. And it's really the same model that we have in North America, which is building out a portfolio of well-positioned brands that we can grow over the long term. Hydralyte is the great example of that. But it's also true for brands like FESS out of Australia and Murine in the U.K., an eye care product for us. It's north of 10%, you know, 12% or more of our total revenue that's been growing nicely. And we continue to look for places to invest. We've expanded our Hydralyte footprint. We acquired the rights for the rest of the regions except for the U.S. in recent years.
That'll play out over time as we expand, largely through distributors and regions close into Australia.
Okay, great. And then looks like we have a couple of minutes here. I wanted to touch on private label. I always get the question from investors, you know, do you guys see trade down to private label? How exposed are you? Maybe if you could talk about, you know, your niche brands and how that kind of plays with private label.
Yeah. Do you want to start with this?
Sure.
So private label is nothing new in our categories. It's been around a long time. The category depends on the category, right? A brand like Monistat, it's basically Monistat and private label. A brand like Clear Eyes maybe has a much lower private label penetration when you think about the barrier of trust of putting a drop in your eye every day. So it's been around forever. Generally speaking, over time has held or lost share, private label in our categories. And you know, we think about that as we diligence brands in the M&A process, right? We're looking for brands that are leading, have leading positions often very meaningfully in niche categories, right? So what does that mean? It means that these aren't, you know, billion-dollar categories maybe where a retailer is going to spend the money or the time to put a claim to do the work.
So you think about our Clear Eyes brand that talks about redness relief for 12 hours. The next leading competitor of a larger company has an eight-hour claim. Private label doesn't have a claim. So we will invest the time and the effort. You know, innovation is key. Ron always says, you know, we're a marketing company. If the only thing we compete with private label on is price, we failed as marketers. So constantly innovating and trying to differentiate our product is how we play against private label. And we often, I think once we got up after Perrigo presented and Perrigo had just come up and said, "We're doing great." You know, our private label business is doing great.
And then we got up and said, "We're doing great on our branded business." And we tried to highlight, you know, the difference in those ginormous categories like a smoking cessation type of thing versus where we strategically play so that we're not positioned against that.
Yeah. And typically most of the trade down is in those big categories. So maybe we could squeeze in the women's health business did really well during COVID, struggled a little bit after. You guys have gotten it back on track. Maybe talk about the two brands there and the opportunity for growth going forward.
Yep. Summer's Eve and Monistat, right? Two very different product offerings. And they had two different challenges that we were managing through. Monistat was really around a change in the shelf offering. Everybody in the category had to go from horizontal product to vertical. And it really disrupted the category in terms of retailer order patterns and managing through the inventory changes. And then the confusion at shelf to the shopper. So that's a bit behind us. You know, the brand itself was at all-time share highs at 55% or so, a little bit more on a dollar basis. So that continues to do well, although we'll have some comp issues around the shipments and to retailers based on that shelf change. So continue to feel good about that and the extension of that brand into the care offerings.
So we've got a Boric Acid Wash that is really doing well under the Monistat brand. And then Summer's Eve, right, was a, you know, fix our marketing and product positioning. We tried to move it to a different place than it had performed well, that it had been placed at historically. And the ultimate odor protection launches that we've had over the last couple of years has done well. So both of those brands are positioned well for long-term growth. We feel good about their situations.
Great. Well, thank you so much for joining us today.
Thank you, Susan.