Prestige Consumer Healthcare Inc (PBH) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Prestige Brands Q1 fiscal year 2005 conference call. My name is David, and I will be your coordinator for today. At this time all participants are in listen-only mode. We'll be conducting a question-and-answer session towards the end of this conference. If at any time during the call you require assistance please key star 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I'd like to turn the presentation over to your host for today's call, Mr. Peter Mann, CEO. Please go ahead sir.

Thank you. Well, good morning everybody. Welcome to our inaugural conference call. We're very glad you could join us. I would assume that most, perhaps all of you have now seen the quarterly press release that we issued yesterday along with the more detailed earnings statement. If you haven't seen those, both of them are posted on our website where you can view them and download them. The website address is www.prestigebrandsinc.com. I'm not going to reread the press release. It's sort of traditional dry language.

Rather I'm going to talk you through in more plain language what actually happened during the quarter and give you some color commentary so you better understand all the things that are going on at the Company. But before I do that I just do want to remind you that, again, most of you know, within the past few weeks we filed an S-1 Registration Statement with the Securities and Exchange Commission and that has officially placed us into the so-called quiet period which means that we will be particularly circumspect in predicting what's going to happen in the future and things like that. But I think when we go through the quarter in depth and we'll talk a little bit about what's happened since the close of the quarter, I think you'll get a good picture of where the Company is and how things are going.

So, first, briefly, just to recap the financial results, we had what I think is a very good first quarter of operations. Our net sales were up just a little over 7% to just under $68 million. Our reported EBITDA was up 3.3%, but for me, the year on year EBITDA comparison is to some degree impacted by some add-backs in the year ago period, and what I and what Pete Anderson who is with me, look at more is our operating income. Which is basically income from operations and then adding back simply depreciation, amortization, and in this case the amortization of the inventory step up. And when you look at it that way, which is really the true result, operating result of the Company, you see our year on year growth in income of almost exactly 7%.

So for us the quarter was a good quarter. It was a quarter where a lot of activity was going on. We'll talk about that in the form of blending and merging the various organizations. But I would like you to think about a couple of factors also when you think about the June quarter. The first is that this is a quarter which is our seasonal low point in terms of sales in EBITDA. It's tempting to take a quarter's results and simply multiply by 4 to get an annual projection. And if you did that for this quarter that would be significantly misleading.

Over the last couple of years the June quarter has ranged between 19% and 20% of our earnings history, and that is very much in line with this year's plan as well. Secondly, there were 2 specific things that affected our results in the June quarter, both of which were completely transitory but which you should be aware of. The first is that June was the first month in which the Company began taking consolidated orders. And by that I mean orders that combine the former Prestige items with the former Medtech and Spic and Span items. And it was also the first month that we began shipping those orders on a consolidated basis.

In an overview sense, as I'll talk in a minute, that process went extremely well. But during the month of June there were some entirely expected wrinkles that had to be ironed out. And the net result of all of that was that at the end of June, the end of the quarter, we had a significantly larger than normal volume of orders that were - - that had been received but unshipped. The second factor that affected June results, which is a little bit atypical, is in the media area. When we plan our media activities, I'm specifically talking about TV advertising now, we plan it on a very orderly, very finite basis.

But when we actually go into the marketplace to buy the TV time, we to some real degree, adapt to marketplace conditions. As that affected the June quarter we actually ran more advertising than we had planned in June, and correspondingly less in July. The total is the same. It just is a question of which month the actual spots actually ran in. So 2 unusual factors. More than normal unshipped orders and a bit higher than we had planned of our advertising actually fell in the June month. That might well lead you to say, okay, so how was July?

And I'm happy to tell you that July results, which we now clearly know our sales and we have a pretty good sense, albeit not a final calculation of our profit, July results were excellent. Gross sales, which is the way we first look at sales, were a little over $32 million, which is up 20% versus year ago, and is also about 10% better than our expectations. So in large part that's the unshipped orders that we didn't ship in June getting shipped in July plus a very strong July to boot. We do not have final profitability numbers for July, but it is quite likely that our EBITDA will be right around $10.0 million, which would be a very impressive month, up 25% or so versus year ago and almost 30% better than expectations. So July was an exceptionally good month for the Company and is just as you would expect making up for some of those short-term issues we saw in June.

August, we're about half way through August, and sales are tracking right on or slightly ahead of expectations. So in summary the financial performance of the Company was good in June. It might have been a little bit better if those 2 factors hadn't happened. And July was excellent, and August is so far tracking very well. Now to talk a little bit behind the numbers as to what has happened in the 3 months since the Company was formed and we have been operating as a combined entity. The main activity of the quarter really focused upon the process of merging and integrating the Prestige Brands organization with the Medtech Spic and Span organization and as an overview comment I would say that that process has gone extraordinarily smoothly and well.

Of course, there have been small issues, problems that we had to address and solve during the quarter, but in a macro sense it couldn't really have gone more smoothly or better, just to give you some highlights of that. We had a planned headcount reduction where we were going to realize some significant G&A synergies by merging the 2 organizations. That headcount reduction is now complete. All of the people who were going to be reduced have been reduced, and all of the staff are now merged into our Irvington, New York, offices. We have closed the Florida office, and we have closed to New Jersey office, both of which were former Prestige Brands' offices, they're closed, and some of the space is already being sublet.

From an order processing and inventory perspective we have now consolidated all of the Company's inventories into 1 distribution center in St. Louis. It's quite an impressive facility. I've visited there now twice, and when you see all of the Company's inventories in 1 place, it makes you realize what a large Company we truly have now. All of those inventories are consolidated and we are now shipping all of our customers on a consolidated basis, which is providing greater service to our customers. They are now placing - - instead of placing an order with Spic and Span, an order with Medtech, and an order with Prestige, all customers are now placing 1 order and are getting 1 delivery as opposed to 3. And of course that is now delivering very significant, as we expected, freight and warehousing synergies.

In addition, if you remember, back when we were just talking about the Company, we said that there would be additional significant synergies in the marketing and sales area whereby we would consolidate advertising agencies, we would be able to use our leverage with the food broker and drug representative industry to obtain reduced commission rates. All of those things have now happened and are in place. Most of them actually came into play pretty much at the end of the June quarter. So that the synergies were not largely reflected in the June quarter results, but they - - all of those synergies are now in place and are contributing going past the June quarter to improve Company profitability. Very much as we had predicted. A word on 1-time costs. We had told you that there would be about $2.6 million of 1-time costs associated with merging the 2 companies.

Those would be things like penalties to get out of existing warehousing contracts, costs in closing down offices and so on. And I'm happy to report that that is now all done. Those 1-time costs came in somewhere between $600,000 and $700,000 less than we had expected which has a corresponding effect on our cash. Now turning to a little more in-depth look at the various products within our product portfolio. Like all companies with a many brand portfolio we had some brands that performed well, some brands that performed at our plan, and a few brands that were disappointing to us during the quarter, and I'll talk about each of those.

And leading with the good part, our Compound W business has been remarkably buoyant. Most of that is buoyancy and growth is attributable to the new FreezeOff wart freezing product, which you know we introduced now about a year ago. And it continues to astonish us as to how well that item is performing. The overall Compound W business during the June quarter more than doubled versus a year ago and that trend through today is still continuing. Our Clear Eyes business had a very good quarter growing just over 20% year on year. And that is being driven, we believe, in large part by the success of the advertising campaign that features the comedian Ben Stein and our Clear Eyes business is remarkably buoyant.

One of the things that we had told many of you when we were contemplating this merger was that we thought one of the brands that would benefit the most from being part of a bigger organization would be the Spic and Span brand. Which before the merger was really a 1-brand Company, and that prediction happily seems to be playing out. Our Spic and Span business was up just under 30% during the quarter year on year. And a great deal of that is attributable to now being partnered with the Comet brand which has basically universal distribution. Speaking to Comet, the sales during the quarter for Comet were almost exactly flat year on year. But Comet was one of the brands that had a particularly high amount of unshipped orders. And if you looked at the Comet volume through the end of July you'd see that that brand is up almost 10%. And that is very much in line with consumer sales trends on Comet where the old reliable Comet powder is enjoying a remarkable, I'll call it resurgence, thanks to some improved claims, thanks to improved sales focus and some very good advertising activity behind the bathroom cleaner spray brand.

On the other side of the coin, we have 3 main brands which didn't perform as well as we had hoped to. The first of those was Chloraseptic. Chloraseptic is, as you know, a sore throat remedy. And Chloraseptic is very much driven by the number of people in the country who are sick at any given point in time. And at the tail end of fiscal '04, January, February, March, and now into the first quarter of our fiscal '05, the entire cough-cold category has been somewhat depressed. It's awful to say, but unfortunately people have been healthier than we would like to see.

The good news for Chloraseptic is that while the entire category is softer than we would like Chloraseptic within the sore throat segment has been consistently gaining share. And this is an absolute phenomenon that will reverse itself. The cough/cold category is very normally up and down with seasonal highs and seasonal lows. And the fact that we have grown share for Chloraseptic during this low consumption period bodes well for the upcoming cold/cough season when the business will rebound. Cutex, our business on Cutex was also soft attributed to 2 things. 1, the general nail polish remover category is a relatively low growth, or in this case actually no-growth category. And the introduction of our very exciting Twister item which many of you may remember is the sort of small little container that women can carry with them and remove nail polish by simply putting their finger in the container and twisting.

The launch of that occurred a little bit later in the quarter than we had originally envisioned due to a little bit of slowness in manufacturing start-up. And we believe that Twister, which is now off to a very good start in the second quarter, will reverse itself. And our final brand we wish had done better is Denorex. Denorex has not kept pace with the dandruff shampoo category. We have a major - - you'll see news about this in the next few weeks, we have a major, major relaunch of the entire Denorex brand. With new bottles, greater ounces for the same value, new packaging graphics and new advertising. That will all hit beginning in about October. Which is the start of the heavy dandruff season. So we have high hopes that the Denorex brand will enjoy renewed vitality as a result of that effort.

On the new item front, in the quarter we either launched or put significant emphasis behind 3 new items. The first, I've already talked about, which is the Twister item. Twister comes in 2 forms, acetone and non-acetone. It is a premium price, selling for retail $3 item. Which lasts for 10 to 20 uses. And so it's not only a premium price item but it is a much faster use-up item. Both of which are very beneficial to this basically low-priced slow use-up category. Wal-Mart was a very early adapter stocker of Twister. It had been in their stores now for about 2 months.

It is selling very well at Wal-Mart. Basically all other retailers are now either on board or coming on board. And we have very high expectations for the Twister item going out into the future. The second item we launched really at the start of the quarter was our New Skin Scar Therapy. Again that has particularly gone early and well into Wal-Mart. Distribution has been a little bit slower in coming on New Skin Scar Therapy than we like. But we're gradually picking off the customers one by one. And it is every month increasing in volume. And we think is going to deliver on its promise to be an important part of the New Skin business.

And then lastly, we are right now in the process of launching 2 new items under the Chloraseptic name as line extensions to the highly successful Chloraseptic Relief Strips that we launched last fall. You may remember that these relief strips are like the Listerine breath freshener strips. You put them in your mouth and they dissolve almost instantly . Bit in the case of Chloraseptic item , they contain a pain relieving ingredient which goes to the sore throat and relieves the pain instantly. We're introducing 2 new flavors. The first is citrus, simply as a flavor - - a line extension to people who don't like cherry. And the second is a lower dose active ingredient in a grape formulation which is particularly targeted at children. So those are the items that are being introduced now.

We have a number of additional launches including the Denorex restage which will occur over the next 6 months. We're not going to talk about the specifics of what those launches are. But the next 6 months we'll see a number of new items coming from Prestige into the marketplace as we keep building upon the momentum that our very excellent brands have. So I think in summary that's a recap of what went on during the quarter. Very good activity and ultimate results on the synergy process. And at the same time we kept focusing on the blocking and tackling of the Company. Which is marketing our brands well, putting great sales focus on them, adding new items, supporting them with very targeted, very efficient advertising. And the results not only for the quarter but the results in July I think are testament to how that model works. So with that, I think we'll turn it over to questions. Pete Anderson, our CFO is sitting right next to me, and the 2 of us will try to answer any and all questions that you may have.

Thank you, sir. Ladies and gentlemen, if you have a question or comment at this time please key star 1 on your touchtone phone. To withdraw your question or if your question has been answered please key star 2. Once again, that's star 1 for questions or comments. We'll pause just a moment for questions in the queue. Thank you. And our first question comes from Ronald [Phyllis] from Bank of America. Please go ahead sir.

Hi, guys. Want to take a little bit more time than usual just to sort of build the core base of understanding on a couple of points because it's been so long since we've talked to you all. Can you talk to us a little bit about the Nielsen and IRI data and how it might compare or not compare to the actual sales trends you've experienced historically and what you're experiencing now? Because I do recall that there are some differences.

Yeah, Ron, the primary difference between IRI and Nielsen, but IRI is the service that we use, the primary difference is that IRI does not measure Wal-Mart and they do not measure dollar stores or clubs. So they don't measure Dollar General, they don't measure Family Dollar, they don't measure Sam's, they don't measure Costco and the like.

And you're particularly strong in --.

Yeah, I was going to go on to that. For many of our - - well, for all of our brands, Wal-Mart is an important component. And Wal-Mart can represent anywhere from 20% to in some isolated cases 40% or 45% of a brand's sales. And so the Wal-Mart component of that is not included in every brand we sell. As a more than a generalization I think it is true in every brand that we sell, we do better at Wal-Mart than we do in the rest of the retail trade. So the fact that Wal-Mart is not part of the IRI data makes our consumer sales trends look a little bit less good than they otherwise would. Then in the area of dollar stores and clubs, that particularly affects our household brands. Comet and Spic and Span, where the sum of those classes of trade, dollar stores and clubs, represent a very significant - - from memory, 30+% of the volume that those brands do. And so when you take, for the household brand, which, of course, is a 1/3 of the Company, when you take the combination of Wal-Mart and dollar stores and clubs, IRI is measuring something like 40% or maybe even a little less than that, of our total volume.

Okay. And one might conclude from that, that the trends that are seen in both the Nielsen and IRI data in which certain categories appear negative is, in fact, very different than the sales trends that you've experienced historically, right?

In some cases, very different, and in some cases just somewhat different. I don't want to overstate it, Ron. For the health and beauty care brands, the IRI data is reasonably representative of the trends with the exception of Wal-Mart. And so if you look at the health and beauty care brands and you say that the overall trend, including Wal-Mart, would be a bit better, that would be a good generalization.

Gotcha. Now, in terms of the synergies that we all sort of looked at and scrutinized way back when, when the bond deal was done, do you feel pretty good that those things are going to come through?

We have now done everything that we told you we were going to do, and all of the numbers are coming in so far exactly where we thought they would. So the answer is yes.

And way back when we also were, you know, kind of having discussions with you when you were on the road talking to folks, about, you know, getting to like a $100 million EBITDA number. I'm not sure, given the, you know, the IDS sort of regulations that you're sort of under right now, whether you can talk about that, but is that something you sort of feel comfortable with?

I think we can't talk about that but I would just repeat what I've said, that so far through the year our sales and our profits are slightly ahead of our expectation, and the synergies that we expected to realize so far have all been realized.

Thanks a lot, guys. Have a good day.

Thanks, Ron.

Thank you. Our next question comes from Reza Vahabzadeh from Lehman Brothers. Please go ahead.

Good morning.

Good morning.

Can you - - I know with the IDS you're limited, but can you talk about the pace of cost savings that was in your plans when you combined these Companies? I mean, how much of the cost savings would the, you know, realized, say in one fiscal year versus another one? I'm talking about your beginning plans as opposed to necessarily a new projection.

Yeah, the original plan, excuse me, called for about $400,000 to $500,000 of the annualized 11.7 million that happened in the quarter that we just finished, and we are virtually right on.

Okay.

And as, you know, we roll forward, obviously since the first quarter we only realized 400,000 out of 11.7, you know, would be reasonable to expect that we're going to realize somewhere in the 11.3, you know, magnitude this year.

So in the next 12 months?

Uh-huh.

Okay. And you said - - I couldn't hear the cost to implement that would be 2 million or 2.6?

No, we originally anticipated 2.6. The current look is that it's going to be about 1.9 million.

Okay. Got it. Of the overall growth in sales for this quarter, how much of that was from New Skin and Compound W?

Very little of it was from New Skin. A significant piece of it was Compound W. I would say more than half of the growth was from Compound W.

Okay. And the new Compound W was - - the FreezeOff was launched when?

July of last year.

Okay. Do you expect sales growth for Compound W to remain at the pace you saw in the second - - I mean, in the second calendar quarter , yeah?

The growth will now not because we're starting to measure against a year ago's that had the new item. But the sales rate of the new item continues to expand and is sharply greater than the sales rate last year.

Right. Can you talk about any competitive issues in any of your brands, whether, you know, pricing has changed, a competitor has introduced a new product, anything of that nature that would be meaningful to your results by brand?

Sure. The 2 biggest competitive activities are, 1, that our competitor from Schering-Plough has introduced a wart treatment product a freezing wart treatment product that competes with our FreezeOff. I would add that our partner, from whom we have the technology, Scholl'sTechnologies has filed suit against Schering-Plough alleging patent infringement. But the Schering competitor, is a meaningful competitor. And then in the liquid bandage category, 3M has introduced a line of liquid bandages that is also a significant competitive activity. Those are the 2 biggest competitive activities.

Any competitive issues say in the Comet segment?

No. In a way, the Comet segment is curiously uncompetitive, that the main competitor, Ajax, from Colgate, markets its brand largely on price. That has always been the case. And Comet has been and is doing very well, vis-a-vis Ajax, by offering a better product with better claims and some advertising support.

Alright. How is Comet doing in the liquid cleaners or the non-abrasive side? I know it's a smaller presence for it.

Comet is doing okay, and we have plans on that to do much better. That the main competitor in that arena is Soft-Scrub from Clorox, which has the lion's share of the cream abrasive cleaner. Comet introduced last fall a cream cleaner. It was not given the support last year because of the simultaneous launch of the Clean and Flush Disposable Toilet Brush. We are now placing significant, both sales and marketing, focus against the Comet cream cleaner because we believe that it represents a great opportunity in stores that carry that item now. It has a very significant share of that category. And so we believe that expanding that is a great opportunity.

Right. And then can you talk about the ear care category where Murine operates in?

Yeah, the ear care category is a relatively small part of our business. Murine offers 2 items within the ear care category. One is a kit that has both a cleaning liquid and a syringe and the other is just the liquid. Murine, there is competition. But we believe that the Murine name is far and away the best known name. And we are having actually quite good results with the Murine ear care line.

Got it. And then on the contribution margin side, can you talk about which brands were up, which ones were down or flat?

For the most part, I don't actually have the brand by brand contribution data in front of me. For the most part, the contribution margin would follow sales generally, because the spending year to year was not appreciably different. So the brands that I commented that had particular strength would have had particular strength in brand contribution. The brands that were in the, you know, plus or minus 5% would be like that. And the brands that were weaker simultaneously would have had weaker brand contributions. We have that data available, obviously, I just don't have it in front of me.

Okay. Have you moved the manufacturing of any products to any third parties? Has there been any change in your third-party manufacturers at all?

No.

Okay. Thank you.

Thank you. And our next question comes from Alexis Gold from CIBC World Markets. Please go ahead.

Hi. Good morning.

Good morning.

Just a couple questions. Is it possible to get pro forma revenue and EBITDA on a quarterly basis for the remaining 3 quarters of '04? I know we have full year.

I'm sorry. Say the question again.

I was wondering if we could get on a quarterly basis just pro forma revenue and EBITDA for the 3 remaining quarters of fiscal '04 for last year?

I think so. I mean, I can't -- that is in the documents.

On a quarterly basis? Because when I went through I have full year, I know that you just gave us, you know, we now have June of '04 on a quarterly basis, and I think we have the 9 months December, and we have a 12-month pro forma, but I don't think we had quarterly.

We definitely have that, and unless there's a reason why we can't release that, which I can't think of what it would be, we'll be happy to do that.

Okay. Should I just follow up with you after the call, or can you post it on your website?

If you've got a pen handy, I'll give you the EBITDA.

Okay. Great.

So the quarter ended June 30, '03, 17,568. Quarter ended 9/30/03, 22,847. And the quarter ended 12/31/03, 27,358.

Great. Thank you.

With this quarter, 18,533. And so that gives an LTM of 86,306.

Great. Thank you very much. It's really helpful. You talked a little bit about repackaging Denorex. Are there any other brands where you think you may do that in the next year or so?

I'm sorry?

Are there any other brands where you expect to do repackaging, any sort of new kind of relaunches? I know you talked about that with Denorex.

I would say that in the next year we expect to do significant things on all of the brands. I mean that ultimately is the nature of our business. And that's how our Company has and will be successful in the future, is by constantly innovating, refreshing our brands. And so we have plans to revitalize, either by a line extension or by formula improvement, or by packaging innovation or new packaging graphics or better advertising, or all of the above, basically for every major brand we have.

Okay. Great. And just, you know, maybe I missed it, going through the press release I have, I think you say there may be a more detailed one but did you give a balance sheet data?

If you go to our website there is - - it's like a Q. We actually didn't file it, but there's a complete data package there which has all the balance sheet and cash flow information.

Okay. Perfect. Thanks very much.

Thank you. And our next question comes from George Chalhoub from Deutsche Bank. Please go ahead.

Hi. I was wondering if you would still not mind posting the full quarterly numbers either on your website or via an 8-K? Given the EBITDA is helpful. But for purposes of having the quarterly breakdown of the business, to forecast the quarterlies for fiscal '05 I think it's obviously much more valuable to have the full breakdown of the P&L, if you don't mind?

I think we can do that.

Great. My question is mainly on the mix issue. Obviously the mix has been one of the reasons why your gross margin has declined in the quarter. The shift, if you will, in sales into July and into the fiscal second quarter of '05, does it have the same mix component to it? Or should we see the mix correcting, and therefore maybe your gross margin increasing going forward? What exactly is going on in the mix situation please?

Until Chloraseptic hits its seasonal period, which really will probably start in the month of September/October, you're going to continue to see a slightly worse gross margin than you would have seen the year before. And that really is driven by the fact that FreezeOff, which although it started shipping in July and August of last year, it constituted a small percentage of the total sales. FreezeOff has got a gross margin which is definitely less than the average of the other OTC personal care brands. So Chloraseptic, which has a very good margin, as that is still a small proportion of the total sales, you're going to continue to see an erosion compared to last year until Chloraseptic sales get stronger.

And when does that exactly happen? Because, you know, in Chloraseptic, while the category overall has been soft, you've been gaining share. So as the seasonal pickup happens, if the category improves my guess would be that your benefit of that should be disproportionately higher because of the higher share that you have.

In fact I mean - - when the sore throat category is off season, it is - - the sales are substantially lower than when you get into the fall when people are stocking up for the cold and flu season. So even though we're gaining share, we're gaining it, you know, off a low base period for the entire category. We would expect that in September/October, when the big, you know, the heavy sales of that product in particular kick in, that that will constitute a bigger percentage of the overall sales. And then you'll start to see the margins coming up.

Okay. And that's on a year over year basis, right?

Yes.

On Cutex, the category has been soft, but it seems to me that the private label has been making some inroads there. What's your outlook on that category and your position in terms of, you know, trying to pick up some share there?

You're absolutely right. Unlike really any other category that we compete in, in nail polish remover the competition is private label. And that is what is driving all of our efforts behind both our essential care items and now our Twister item. Which is to provide product differentiation, unique products that are not copied, not available in private label and to drive the price of the premium brand Cutex up. So that we have higher margins. And that's exactly what Twister is all about. Is to provide a unique, in this case patented, item that private labels can't copy.

Okay. My next question is, obviously Twister you mentioned that's one of the main launches that you have going, you have like 3 or 4 that you mentioned. Can you give us a little bit of the time line as to when you think those launches would start having a significant benefit to your- -? I know you said you're launching those product so they should be benefiting the numbers even as we speak almost. But when do you think they'll be picking up good enough volume for to us see the year over year, new product contribution being significant? At what time frame?

Of course, Cutex as a brand is a relatively small percentage of the entire Company's revenue and profit. But within the Cutex brand, Twister is now being sold aggressively and in the quarter that we're in it is contributing to better Cutex performance.

I'm sorry, my question was more general, not only on Cutex. I'm talking about all of its launches that you mentioned for us earlier.

Well, the Cutex and the New Skin Scar Therapy are contributing to the growth of those brands as we speak. We've just begun to ship in the last week or so the 2 new flavors of the Chloraseptic Relief Strips. Those will have an impact in the cough/cold season, so you won't see that for awhile. All of those - - all 3 of those items are important launches in total they are not a huge percentage of our growth. The main growth is coming from the existing items.

Okay. And inventories as you have them right now, obviously you had a little bit of a backup in orders, and you cannot seem to have caught up all of that in July. And as look at where you are in August, your order rates and your inventories and your shipped in, are they now more in line, or are you still playing some catch-up in August?

We're playing no catch-up in August but August sales through yesterday are running strong and slightly above our plan. And so that's just a replenishment of product that the consumer is taking away.

But without a timing issue this is purely -- the core business being strong.

I beg year pardon?

Without the timing catch-up on the order rates this is just the pure core business being strong, you're saying.

Yes, exactly.

Great.

You mentioned inventories, and I would add a word on our inventory management. When I look at the balance sheet numbers, you'll see that at the end of the quarter our inventories were down considerably from where they were 3 and 6 months ago. And that's the direct result of very close scrutiny and management that the entire organization has been placing upon our inventories, our manufacturing schedule, in an effort to bring our inventories down, particularly on the former Prestige items from what were, in our judgment, unnecessarily high levels. And I think we've done, you'll see over the 3 months we've reduced inventories by north of $3 million, and that trend continues through July and to date.

Great. Thank you.

Thank you. And our next question comes from Matthew Armice from Goldman Sachs. Please go ahead sir.

Thank you good morning. Just a couple quick questions on the cough side. If you could touch a little bit on your anticipated advertising and promotional expense, in the sense talking about it as a percentage of sales as you launch the new Denorex and put some spending behind that brand? Can you talk about whether you anticipate seeing that bending, flat quarter over quarter, or are you going to see relatively large growth in that as we go into second and third quarter?

Our spending does vary month by month and quarter by quarter, entirely because of the seasonal nature of our businesses. Happily with the merger of the Companies we now have brands that are both seasonal to the summer months and brands that are seasonal to the winter months. We traditionally spend, in terms of total marketing spending, about 17% of gross sales, about 20% of net sales. That will vary a little bit month by month and quarter by quarter but it's generally fairly consistent.

And just to specifically talk about Denorex, although we are having a restage, the advertising plan that we put together as went into the year, basically calls for the spending to happen during the dandruff season. So rather than advertising, against the old product, we're going to spend the same money advertising against the product we launch.

Okay. So as far as the full year spending it should run in line as a percentage of sales at historic levels?

Definitely.

We control that very closely.

Okay. And my next question was on the G&A line, and then also on the synergies . As I understand, and I might be a little confused, but run rate synergies that you should be receiving starting this quarter annualized, did you say it was roughly 11 million?

Correct.

And you expect full realization of that in this upcoming quarter?

Yes.

Okay. And is there anything that's going to be offsetting that? Say you had mentioned you're going to be putting a lot of emphasizing and re-emphasizing the brand portfolio. Is there going to be additional spending that's going to offset some of that synergy realization?

no.

Okay, thank you very much.

Thank you. And our next question comes from Shannon Warrant from AIG. Please go ahead.

Hi good morning. Couple of questions. I think I must have written this down wrong but just wanted to clarify. You said that July revenues likely around $10 million, and you said that was up 25% year over year?

No, did you write it down wrong.

Okay, thank you.

July revenues were - - if they were $10 million I wouldn't be bragging about it. July gross sales, which is all we have precisely now, were just slightly north of $32 million, which up 20% versus a year ago. Our estimate not a precise number, but our estimate of EBITDA for July, EBITDA was $10 million.

Okay, so that was the EBITDA number?

Yes.

And the EBITDA number was up 25% year over year?

Correct, and even better than that versus our expectation.

And therein lies my question. It was a bit of a surprise to me that you would have your plan actually below your year over year number.

That's largely due to advertising spending. And again as Peter said before our advertising certainly changes month by month and quarter by quarter. So depending upon when you have planned a heavy spend that could certainly impact a month. But it's obviously is more pronounced if you're only looking at a monthly period as opposed to a quarter.

Okay. But I thought you said your ad spend was heavier in June and less in July.

Correct. And that's one of the reasons why the actual results are up better against the plan, because the plan had that spend happening in July. The actual spend happened in June, so the actual spend in July was less than the planned spend.

Okay. But still down over the prior year.

In terms of advertising spending?

Well maybe I'm just getting confused, but if you're looking just at July, you're saying July was 30% better than planned but only up 25% over the prior year. So your plan was for it to be below the prior year.

Correct.

And I guess that's the part that surprised me, considering that, you know, in that month you would have recognized a lot of the cost savings that you're planning on recognizing.

We believe that we're recognizing the cost savings. In fact it's driven by the year ago and the vagaries of year ago spending. We'd have to go back and - - and I don't have the data , we'd have to go back and look at the brand by brand spending a year ago.

So maybe it's that the year ago spending on advertising was higher?

Exactly. Which could have been just the timing of one flight of advertising.

Okay. Staying on the advertising for a second can you talk about the cost of your ad campaign and what it's focused on, network versus cable? Where are you spending most of your money, and also how you're buying cost wise versus what you expected? In other words, are you getting better bargains than you expected or is it more expensive than you would have thought?

No we're doing better than we expected. And that sort of relates to what I was talking to. When we go into the marketplace to buy TV, and we use both network and cable, we use relatively little spot TV but we have about a 50/50 mix of network and cable. When we go into the marketplace we have buying guidelines that we've established. But we allow the buying agency to take advantage of opportunistic opportunities to move a flight forward a week or backward a week, or to move a little bit more, only for example, out of network into cable or vice versa. And as a result we have consistently been delivering more rating points for the budgeted spending than we planned.

Okay. Thanks. And then a bit on the IDS situation. It seem surprised given that you've just put in place cost protected debt that you would decide to do an IDS at this point. Can you talk about what this does for you, why you chose to go this route?

We've been advised that that's not an area we should get into. Suffice it to say that the IDS offering, if it happens, is believed to be in the - - would be in the best interest of both the existing shareholders and new shareholders. And obviously we recognize the factors that you just mentioned.

Okay. And I'll try not to stay too much on the IDS, but can you just give us an update of what the status of IDS securities is from a regulatory standpoint here in the U.S.?

I definitely can't do that. As far as I know, a number of companies have filed registrations for IDS securities and a couple of those have been approved and the rest are working their way through the Securities and Exchange Commission. But beyond that it is a highly complex area which I don't pretend to have in-depth understanding of.

So there's no way you can give us any sense for timing, even just broadly?

No, I mean, it's a question I ask every day, and I think it is a rather unclear how long this timing will take.

Okay. Thank you.

I'm sorry to be so un-forthcoming but it's both a complex issue and an area we're really not supposed to talk much about.

Thank you. And our next question from Steve Eckardt from Citigroup. Please go ahead sir. Sir, your line is open. Go ahead.

Thanks. I appreciate that you're in a quiet period with respect to the recent S-1 filing, but can you comment on what might be the minimal firm valuation that the Company would consider in proceeding with the IPO IDS transaction?

That is something we have specifically been told that we cannot talk about.

Okay. Thanks.

Once again, ladies and gentlemen, if you have a question or comment, please key star 1. And we have a follow up question from Reza Vahabzadeh from Lehman Brothers. Please go ahead.

Can you talk about what is your LTM kind of pro forma cash taxes at the level that you're running at right now?

Our cash taxes right now are virtually zero because of favorable loss carry forwards that came from primarily the Medtech Companies.

Okay. And is that going to continue for awhile?

Yeah that will continue through the - - through this fiscal year definitely. And into next.

Okay. Just on the AC Nielsen data and how accurate it is, in the abrasive cleaner category it seems to suggest that that category has been in decline more years than not in the last couple of years, last 3 years maybe, even. Has that category been performing better in the other channels, such as club and mass? And to what factor do you attribute any divergence in volume performance?

The category of abrasive cleaners, even though we don't get it, the category of abrasive cleaners has been performing much better in Wal-Mart, dollar stores, and in clubs than in the traditional food and drug retailers. So what is happening, in simple language, is that more and more consumers are buying their Comet or their Ajax in Wal-Mart or in Dollar General or in Sam's than they used to. And so the decline that you're seeing in Nielsen, and we see in IRI in food and drug, is being at least from a Comet brand considerably more than offset by growth in those other channels.

But for the category in total would you say that the overall category is flattish?

I would say - - because we don't, for Wal-Mart and dollar stores and Sam's, we don't get category data. They don't release it. So all we know is our own brand. But since our brand is a very dominant share within the category, and since our business is not flat but growing, it is probable that the category is also growing modestly. We are taking share. But nevertheless I believe the category, if we had the data, would show modest growth.

And in that category how much of your sales do you think that AC Nielsen represents?

I think it's less than 40%.

Okay. Thank you.

Thank you. Once again, ladies and gentlemen, if you have a question or a comment, please key star 1. And there are no further questions at this time, gentlemen.

Okay. Well, I'd just like to thank everybody for joining us. It's happy to be able to report good news and we look forward to doing lots of that in the future. Thank you for your time.

Thank you, sir. Thank you, ladies and gentlemen today for your participation. This concludes your conference call. You may now disconnect. Have a great day.