Prestige Consumer Healthcare Inc (PBH) 2006 Q2 法說會逐字稿

Welcome to the Prestige Brands second quarter fiscal 2006 earnings teleconference. (OPERATOR INSTRUCTIONS).

At the request of Prestige Brands today's conference is being recorded.

If you have any questions, you may disconnect at this time.

Now I would like to turn the conference call over to Mr. Dean Siegal, Director of Investor Relations for Prestige Brands.

Sir, you may begin.

Today's call will be hosted by Peter Mann, Chairman and Chief Executive Officer, and Pete Anderson, Chief Financial Officer.

Chuck Jolly, our General Counsel, is also with us this morning.

During this call statements may be made by management of their beliefs and expectations as to the Company's future operating results.

Statements of management's expectations of what might occur with respect to future operating results are what is known as forward-looking statements.

All forward-looking statements involve risks and uncertainties which in many cases are beyond the control of the Company, and may cause actual results to differ materially from management's expectations.

Additional information concerning the factors that might cause actual results to differ from management's expectations is contained in the Company's annual and quarterly reports that it files with United States Securities and Exchange Commission.

Now I would like to introduce Peter Mann, Chairman and CEO of Prestige Brands Inc.

Thanks for joining us.

I hope by now most of you have seen the two news releases that we issued both last night and then the first thing this morning.

If you haven't seen them, both are available at our website which is www.prestigebrandsinc.com.

Of course the main focus of today's call is our financial results, but before we get into those financial results, I would like to make a few brief comments on the accounting changes which we have implemented with this quarter's results.

Later on, Pete Anderson will provide considerable detail on that topic.

But first as an overview, as a part of our internal ongoing process of becoming Sarbanes-Oxley compliant at the end of the current fiscal year, we have reviewed many -- most of our accounting policies, procedures and controls.

As a result of that internal review, in late October management notified the audit committee of the Board of Directors of possible issues concerning certain of our accounting policies.

And based upon that, the audit committee began a review.

Their review consisted of an examination of the Company's revenue recognition policies, and the Company's accounting policies with respect to classification, and certain cooperative advertising expenses, and finally, our calculation of outstanding shares.

As a result of that review, we have made policy modifications and have restated historical results in order to provide proper comparability with last year's figures.

The three areas we changed, first, revenue recognition.

Prestige, like many of the important companies in our industry, has traditionally recognized revenues when a domestic shipment was made to domestic customers.

We have now changed that policy to recognize revenues when our customers actually receive those shipments.

As explained in detail in today's press release, we believe this approach to revenue recognition better conforms to SEC published guidelines.

This change has the practical impact of moving a few days of revenue from one month into the next.

As our business is relatively stable month-to-month, as you will see, the net gain or net loss for any individual quarter is generally small.

Secondly, we changed our accounting for certain cooperative advertising expenses.

Historically Prestige recorded certain trade promotion expenses as a part of advertising and promotion.

But in order to make absolutely certain that we do not include any pricing related activity within advertising and promotion, we are now classifying a greater percent of cooperative advertising expense as a reduction to gross sales.

This has the practical impact of reducing revenues by a relatively small amount, while at the same time reducing A&P expense by the precise same amount.

Operating income and net income are not impacted at all by this change.

And finally, we restated the number of outstanding shares.

The number of shares reported at the end of last fiscal year and at the end of the first quarter fiscal 2006 included some shares that had actually been purchased by management, but which were unvested under the appropriate management compensation arrangement.

As we think about this, of course, any restatement is a serious matter, but from my perspective these accounting changes do not alter the overall shape, the size or the trajectory of the Company.

Our historic shipments in invoices are unchanged.

We have only adjusted the timing of when we actually recognize those shipments and invoices.

Our promotional activities and our promotional spending by our retailer customers also hasn't changed one bit.

We have simply changed the line in the income statement where some of those expenses are captured.

And most important, except for the effects of shifting the timing of revenues caused by the change in revenue recognition, our operating income, our net income, and our cash flow delivery hasn't changed one bit.

We're simply making slightly more or slightly less in a given quarter, depending on how the timing of month end shipments impact that particular quarter.

That is the overview on our accounting changes.

And with that as a backdrop, I would like now to turn to the important focus of the call, the results of the quarter and of the six months.

I'm going to focus particularly on the six month results because they tend to even out some of the short-term variability that has been caused by these accounting policy changes.

Corporate revenues for the first six months of the fiscal year were $136.8 million, which is a decline of 1.4% versus the restated results for the first six months of last year.

We will provide considerable detail by brand and by segment in a few minutes.

But as you know, this year's results include Little Remedies, which we didn't own during the first six months of last year.

So if Little Remedies sales were excluded from this year's results, the six month revenue would have declined 6%.

On an operating income basis for this six month period operating income grew 14%.

But importantly, as you'll remember, the year ago period included a onetime inventory step up charge resulting from or purchase of Bonita Bay.

If that step up charge were excluded from the year ago period, six months operating adjusted operating income would have declined 1.5% or essentially in line with sales.

A&P expenditures for the six month period were essentially even with the year ago numbers.

And finally on net income, net income for the six month period was $12.2 million, or $0.25 per basic share, which is up 21% from the prior year adjusted net income of $10 million.

All of the numbers that relate to that are included in the attachments to the press release.

That is the overview from the corporate perspective.

As we look at results first by segment and then by brand for the first half versus the restated results for the prior year, the results for the first half played out very much as we had expected.

First looking at our segments.

Six months sales for the biggest and key OTC segment were $74.1 million, which was up 3% versus the prior year.

However, this year's OTC results include the strong sales of our new Little Remedies line, which as I talked about a few minutes ago was not included in last year's results.

If those Little Remedies sales were excluded from this year's results, the OTC segment declined by 7% in revenue.

Again, we will go into the brand by brand detail in just a minute.

But virtually all of this organic softness in the OTC segment is related to short-term issues impacting Compound W. And as you'll hear in a few minutes we believe those short-term issues are now largely behind us.

For the certain first six months household cleaner sales, our next most important segment, declined to $48.1 million, or down 3%.

All of this decline is attributable to the Comet line where several onetime events, which we will describe in a few minutes, caused the factory volume softness.

But as you'll hear, retail movement for Comet line was quite strong, suggesting definitely improved factory outlet in the months ahead.

And finally, our smallest, Personal Care segment, declined to $14.6 million.

In order to get behind the dynamics of the segment results, let's look at individual brand performance for all of our key product lines.

First, within OTC virtually all of the year-on-year declines for the first six months were attributable to Compound W. Those of you who were on our call last quarter, we discussed the drivers of this short-term softness in some depth.

But just to refresh your memory, there are several contributing factors.

First and most important, have been declines in the wart remover category where we're measuring against very high category sales in the year ago period.

Specifically, now during this quarter the wart remover category, as measured by IRI, declined 11% from the peak levels of last year, and Compound W was unmistakably impacted by this category correction.

However, I think the most important thing for all of us to keep in mind is that the category volume this year 2005 is still 47% higher than it was two years ago in 2003.

So this is a robust, growing category in a longer-term perspective.

During the quarter while the category was down 11%, Compound W consumer sales declined slightly less than the category, resulting in a small share improvement for Compound W.

And then the second factor that impacted Compound W volume this quarter, again as we told you three months ago, Compound W still had some excess inventory in a large key customer, which continued to impact factory shipments to that customer during the September quarter.

I can tell you now that happily those inventories at that customer are now largely normalized, and shipments to them should very much mirror consumer movement.

While for Compound W it has certainly been difficult living through these two unusual events, we now believe that there is real light at the end of the Compound W tunnel.

Several reasons lead us to that belief.

The rate of decline for Compound W consumer sales slowed considerably from the June quarter results.

In fact, as I said before, the overstock at that key customer is now pretty much behind us.

Thirdly and perhaps most importantly, category declines are now clearly abating.

And we are now actually seeing modest growth in that same retailer's weekly Compound W point-of-sale data, i.e., the sales that they are moving through to their consumers.

And Compound W is continuing to modestly grow share, meaning that it is performing modestly better than the category.

So we believe that for Compound W the trends this important brand has stabilized and gradually continue to improve.

Turning to New Skin.

As was the case in the June quarter, our New Skin line also experienced weakness in this September quarter.

And as we told you before, the softness has been caused a highly unusual and significant decline in the liquid bandage category.

That decline was caused by key competitors eliminating most of their consumer advertising support.

So during the quarter the liquid bandage category declined a quite sharp -30%.

But there is actually good news in all of this, and the good news is it appears that our competitors in the liquid bandage business are declining more rapidly than New Skin, and many are losing much of their existing distribution.

And that is played out by the fact that during this most recent quarter New Skin's consumer sales decline was considerably less severe than the category.

In fact, our decline was half of the category, down 15%, which actually resulted in a market share gain for New Skin.

Specifically during the quarter New Skin grew to a 44% unit share of market.

And that is a 5 point share improvement versus the same share last year.

Looking forward for liquid bandages and for New Skin, we expect that the category will continue to stabilize.

And we expect that New Skin will continue to grow its share as competitors lose distribution and lose overall market presence.

Compound W and New Skin were the issues, or the problems, during the quarter and during the half.

But on the positive side, our other key OTC brands had good performance during the quarter.

Chloraseptic revenues grew fueled by strong consumer sales trends, and good early trade acceptance of our new item.

For example, during the quarter IRI consumer sales for Chloraseptic grew 4%, which was meaningfully better than the sore throat category which actually declined slightly.

Our U.S. and Canada Clear Eyes business grew, driven by the success of the new Dry Eyes items, plus heavy advertising and promotion support featuring Ben Stein advertising.

Specifically for the quarter, Clear Eyes IRI consumer movement grew 7%, which was quite a bit better than the category, which was up a more modest 1%.

Our international eye care business, and we have talked a lot about expanding our international business, internationally we market our eye care products under both the Murine and the Clear Eyes names.

And that international eye care business grew factory revenues in the double digits during the quarter.

And lastly our relatively recent acquisition, Little Remedies, continues to delight us.

This quarter the brand's revenues -- factory revenues grew double-digit when measured against the year ago period when we did not own the business.

And this factory revenue growth was very much in line with 18% IRI gains, and was fueled by a combination of expanded distribution on existing items, increasing trade and consumer acceptance of new items, and increased consumer and physician advertising.

When you look at the OTC segment the short-term issues impacting Compound W and New Skin offset an otherwise very good OTC performance, both in consumer sales and in factory revenues, with consumer movement showing even greater strength.

Turning to household cleaners, factory revenues for the key Comet brand declined during the quarter, but these declines were largely driven by what we believe to be onetime events.

First, the year ago revenues for Comet included about $1 million in discontinued items like the Clean & Flush disposable toilet cleaning brush.

And importantly during the quarter Comet's largest single customer implemented a new just in time system for their inventory management, which resulted in a, we believe, onetime adjustment to their inventory level.

This adjustment in their inventories resulted in factory shipments to that customer being down, despite the fact that their POS movement to consumers was up during the quarter a quite sharp 10%.

Going forward we expect factory revenues to that customer should be generally in line with that consumer sales growth.

For Comet we believe these two factors are basically isolated, aberrational events that are now behind us.

And the overall Comet consumer sales trend is very positive.

Specifically during the quarter for all outlets where we can track consumer movement.

And that consists of IRI trends for food, drug, and mass merchandisers and point-of-sale for our Club and Dollar customers, Comet consumer sales grew 4% during the quarter.

And quite obviously, if that trend continues it bodes very well for revenue strength in the second half of the year.

On our other major brand within household cleaning is Spic and Span.

Spic and Span revenues were essentially flat during the quarter.

This Spic and Span performance was influenced by the timing of orders from several large Dollar store customers.

We received very significant orders towards the end of the quarter, that because of the change in revenue recognition practice which I discussed earlier, now fall into October revenues.

As a result we expect that Spic and Span will have very strong topline revenue growth during the December quarter.

And finally, in our small Personal Care segment, Cutex had a disappointing quarter, largely driven by quite weak category trends.

And Denorex also continued its factory revenue softness during this off-season quarter.

As I said earlier, on an overall basis the revenues for the quarter and for the half were generally very much in line with our expectations when we talked to you at the conclusion of the June quarter.

At that time we said that the issues which were impacting Compound W and were impacting New Skin would continue throughout most of the September quarter.

And that is pretty much exactly what has happened.

However, as we also had expected, the trends are clearly beginning to improve.

And one way for that is to look at our revenues by month.

So during the quarter, July, which is the peak month for Compound W and for New Skin, was quite soft in factory revenues, down double digits versus last year.

The turnaround in factory revenues began in August with a small gain versus year ago.

September recorded a stronger gain, and October continued that September growth trend.

The factory revenues, if you look at it month by month clearly show an improving trend.

Finally, during the quarter we made excellent progress on the acquisition front.

As you know, we closed the Chore Boy acquisition at the end of October precisely on time.

Orders for those items are now flowing routinely through our system.

Our people are directing the marketing and sales activities for the Chore Boy business.

And we continue to be quite optimistic about the future growth potential for this brand.

And then as you saw last night, at the very end of last week we completed the acquisition of Dental Concepts LLC, which as you know is a marketer of specialty OTC dental products.

The two main product lines within Dental Concepts, The Doctor's NightGuard, and The Doctor's BrushPicks, with interproximal cleaning devices are exciting, rapidly growing OTC brands, to which we believe Prestige can and will add meaningful value.

In combination, these two acquisitions should add more than $30 million in net revenues annually, with profit margins that are entirely consistent with Prestige's historic profitability.

Looking forward in acquisitions we continue to be aggressive in what we see as the continuing active deal marketplace.

We are engaged in a number of interesting opportunities.

And we have hopes that one or more of these will come to fruition.

So that is the review of the first half and the quarter.

I'm now going to turn the call over to our Chief Financial Officer, Pete Anderson, who's going to give you a considerable additional detail, both on the accounting changes we made, and on the financial results for the quarter and for the half.

Following Pete, I will come back and talk about activities for the balance of year, and how we see our results unfolding during that balance of the year and beyond.

Good morning everyone.

I would like to begin my remarks by commenting on the changes in accounting treatment.

And what I'm going to talk about will directly relate to the numbers found in Exhibit A. of the news release which went out this morning.

First, our new policy for treating sales.

Because the new policy results in shifting a few days of shipped orders from the end of one quarter into the following quarter, there is an effect on most quarterly results.

For fiscal year 2005, previously reported sales of 303 million were reduced by 5.6 million.

And this is related only to the revenue recognition piece of the change.

That was 1.8% of sales.

And the corresponding reduction in net income was $2.1 million.

If you look at the most recent four quarters, the June of 2006 quarter and the three ending quarters from fiscal year 2005, you'll see that the sales impact of this change ranges in any quarter between $500,000 and $1.9 million.

And that would be from .6% to 3% of sales in any one of those quarters.

Over those same quarters the net income impact ranged from a reduction of $20,000 in one quarter to an increase of 775,000 in another.

The one quarter which shows a significantly larger change due to the sales cut off was the first quarter of fiscal 2005.

And that quarter saw a decline in reported net sales of $6.1 million, and net income of 1.8 million.

This large change is a function of the timing of when we acquired Bonita Bay, which was as you recall at the beginning of April 2004.

So the effect of that was to move the last few days of sales from the much smaller predecessor Medtech and Spic and Span Co., and those sales totaled $2.4 million.

At the end of that quarter, June 2004, we had of course acquired Bonita Bay and were a much larger revenue Company.

So the amount of sales that shifted at the end of the quarter were $8.5 million.

Ironically, as a result of this large sales cut off change in the first quarter of fiscal year 2005, you'll see when we restate quarter one of 2006, the previously reported sales change was a decline of 6.2%.

Because of the strangenesses in the first quarter of 2005 it looks like there was actually a gain of 8% quarter to quarter.

The important thing to remember, and as Peter said it before, is that this change in the way that we are accounting for sales at the end of any month or quarter does not affect the daily operation of our business in any way.

We continue to ship goods to our customer customers under exactly the same terms and conditions that we always have.

Turning to the cooperative advertising change, the reclassification of certain co-op advertising expenses from trade promotion expense in the advertising and promotion section of the income statement to a gross to net sales reduction is again a dollar for dollar movement from one section of the income statement to another.

In no way does it effect brand contribution, operating income, net income or cash flow.

The Company has always accounted for off invoice allowances, new product listing fees, and coupon redemption expenses as reductions of gross to net sales.

This reclassification we're making is to move a portion of trade cooperative advertising, which could relate to pricing given by our trade customers, the ultimate consumer.

As you can see on Exhibit A., the effects of this reclassification resulted in the movement of approximately $8.6 million from trade promotion expense for fiscal 2005 to a gross to net sales reduction, and $2 million for the first quarter of 2006.

The changes result in a reduction of net sales of approximately 3%, both of fiscal year 2005 and the first quarter of 2006.

And the corresponding decrease in gross margin is approximately 5.5%.

This decline on the gross margin line, however, is completely offset by a reduction in advertising and promotion expense.

Again resulting in no change in any period of brand contribution, or any of the lines on income statement below brand contribution.

This change does results in a decline for gross profit and advertising and promotion expenses as a percentage of sales.

The amount of the expense being reclassified each quarter is relatively constant, so that there is no big change in sales velocity as a result of this change in treatment.

In other words, sales for any quarter would change by a couple of tenths of a percent as a result of this change.

Gross margin as a percent of sales declines between 1 and 1.5 points in any quarter from an average of 55% to an average of 53.5%.

Although the reported A&P declined as a percentage of sales from 12.7% to 10.2% of fiscal year of 2005, and from 16.9% to 13.7% in the first quarter of fiscal year 2006, it is important to note that our total spending behind our brands has not changed.

Management has always looked at the combination of media, consumer promotion, couponing, and trade promotion, whether above the net sales line or in the advertising and promotion section, when determining if our level of brand support is adequate to drive the business.

We have previously told you that our objective is to increase our overall advertising and promotion spending as a percent of sales, with the bulk of the that increase being focused behind the consumer.

This change in accounting policy does not change that strategy at all.

And finally, a word on the share counts used to calculate our basic earnings per share.

The share count formerly used for both basic and diluted earnings per share was 50 million.

As Peter said before, that included all shares of management stock since those shares were purchased by management.

Since not all of those shares are vested, the unvested portion of those shares should not have been used in the primary DS calculation.

The number of shares involved were approximately 1.6 million at the end of March 2005.

And that has been reduced to 1.3 million at the end of June 2005, as those management shares vest.

Now let's take a look at reported results for the second quarter.

Our second quarter net sales of $73.3 million were 6.6 million, or 8%, below last year's restated net sales of 79.9 million.

The September quarter results, like those of the June quarter, include Little Remedies' business for this year.

But as Peter told you, there was zero reported for last year due to the timing of the Little Remedies acquisition in October of 2004.

Had Little Remedies been owned by Prestige for the entire second quarter of 2005, the year-to-year sales decline for the quarter would have been 12%.

Operating income for the quarter ended September 30, 2005 of 20.8 million was $6 million, or 22%, below last year's second quarter.

The decline in operating profit from prior year was due to the sales decline, a slightly less favorable gross margin as a percentage of sales, and a substantial increase in advertising and promotion expenses compared to last year's second quarter.

The gross margin decline was the result of higher transportation costs, combined with what we believe is a onetime $300,000 warehousing expenditure related to our August change in logistics providers.

Those increases were partially offset by a favorable sales mix due to the year-over-year decline in the Compound W Freeze Off business, while Chloraseptic and the Clear Eyes brands posted sales increases.

Advertising and promotion expenditures of $10.2 million were 1.8 million, or 21%, greater than last year.

As we mentioned on last quarter's conference call, we had projected that the second quarter would indeed have higher advertising expenditures than the previous year.

The largest increases in A&P took place in media, which was up $1.2 million compared to last year, and consumer promotion, which was up 300,000.

Again, our intent was to increase spending focused on the consumer for the major advertised brands.

For the quarter, net income was $7.4 million, or $0.15 per basic and diluded shares.

That net income of 7.4 million was a decline of 2.5 million from last year's second quarter results.

Now we will take a love closer look at results by segment.

Net sales of $40.8 million for the OTC segment in the quarter were 1.9 million below last year's net sales of 42.7 million.

Again, if we include Little Remedies in last year's second quarter results, our $40.8 million of sales this quarter would have shown a decline of 11%.

As Peter discussed earlier, strong gains for the Chloraseptic, Clear Eyes and Little Remedies brands were offset by the continuing weakness in the quarter on Compound W and New Skin.

Gross profit of $25.2 million decreased by 1.1 million, and that was principally due to the sales decline.

Total OTC advertising and promotion expenses of 7.1 million in the quarter increased $1.3 million, or 22%, from last year's spending of 5.8 million.

For the quarter all of our advertised brands Chloraseptic, Clear Eyes, Compound W, New Skin, and Little Remedies had increases compared to the previous year.

The decrease in gross profit, combined with the increased quarterly spending increase for advertising and promotion, resulted in a 12% decrease in contribution margins for this segment from 20.5 million last year to 18.1 million this year.

Net sales for the Household Products segment were 25.2 million in the quarter.

This represents a decline of $2.3 million, or 8%, from last year's second quarter sales of $27.5 million.

As Peter mentioned earlier, the sales decline was largely the result of the decline in the Comet brands.

Spic and Span sales for the quarter were flat with last year's second quarter sales.

Gross profit for Household for the quarter of $9.7 million was 1.2 million, or 11%, below last year's gross margin.

The decline was primarily due to the sales decline.

As a percentage of sales, gross margin declined from 39.5% to last year's second quarter to 38.5% in the current year's quarter.

This increase in the cost of goods as a percent of sales reflected the increased transportation costs due to the increase in oil prices.

Advertising and promotion expenses in the second quarter of $1.7 million were $500,000 greater than last year.

The increase in spending occurred for media, with the other components of A&P being flat year-on-year.

Contribution margins for the Household segment of $8 million for the quarter was $1.7 million below last year's $9.7 million due to the decrease in gross margin, combined with the increase in advertising.

Personal Care segment net sales of 7.3 million were 2.4 million below last year's sales of 9.7 million for the second quarter.

Gross profit of 2.9 million was 1.9 million below last year's gross margin of 4.8 million.

The decline resulted from the sales decline, combined with cost of goods increases, again driven by increased transportation costs.

Advertising and promotion expenses for this segment of $1.4 million were essentially flat with last year's spending.

And that resulted in a $1.8 million decrease from the contribution margin of $3.3 million last year.

During the quarter the Company's cash position continued its strong growth.

Cash on the balance sheet increased from $13.9 million at June 30 to $27.6 million at September 30.

And as I mentioned last quarter, this allowed us to fund the Chore Boy acquisition from cash on hand.

At September 30, 2005 our accounts receivable balance was $32.6 million, our inventory balance was 32.9 million, Accounts Payable was 22.7 million, and accrued expenses were 12.1 million.

Just briefly commenting on the six month results, as Peter mentioned earlier, net sales for the first six months of fiscal year of 2006 of 136.8 million were 1.9 million, 1.4% below last year's results.

If we exclude the Little Remedies results from this year in sales, the decline would have been 6%.

Operating income for the six months of $39.1 million was 14% greater than last year's $34.4 million.

However, when we adjust for the inventory step up related to the Bonita Bay Holdings acquisition last year, our operating income declined by 1.5%, very much in line with the sales decline.

Gross margin improved slightly from prior year as a percentage of sales due to favorable product mix.

Advertising and promotion expense was essentially even with last year for the six months.

Net income for the first six months of fiscal year 2006 was 12.2 million, or $0.25 per basic share and $0.24 per diluted share.

This represents an improvement over the same period last year for which reported net income was 2.8 million.

But last year's results are adjusted to remove what we consider onetime expenses arising from the acquisition of Bonita Bay, adjusted net income was $10 million.

The results for the first half of fiscal year of 2006 of $12.2 million represents a 21% improvement over prior year adjusted net income.

With that I would like to turn it back to Peter.

That is a fairly lengthy look backwards at the quarter and at the first half.

Now let's look forward.

As we look ahead for the balance of the fiscal year and beyond that, we believe that the Company's revenue and the Company's profit performance will improve considerably.

As we noted earlier, that improvement is becoming quite evident in the month by month results over the past few months.

And during this first half of the year, we have continued to do what we think is ultimately at the heart of Prestige's long-term success.

And that is to focus our efforts on extending our well-known brands by new items, by category extensions, by geographic expansion, and by increased distribution here in the United States.

So I'm now going to give you a list of just a few of the new items, the new programs, and the new distribution you'll see from Prestige over the next six months.

First a brand-new poison ivy treatment being introduced from Dermoplast.

This new and quite unique formula not only provides immediate itch relief, it actually reduces the severity and duration of the poison ivy lesions.

We are introducing a third item into the highly successful Clear Eyes for Dry Eyes line.

This new one will provide allergy relief.

We are introducing a new multi-symptom item under the Clear Eyes brand.

This rounds out the basic Clear Eyes line, and will compete in the fastest-growing subsegment of the redness treatment market.

We are also introducing a new eye care item from Murine.

This one to compete in the redness category.

During the quarter we have achieved really remarkable new Comet distribution in Sam's Club stores.

This very major customer has now expanded distribution of Comet from around 225 stores to all 500 or more of their clubs.

And has also selectively added a second flavor or fragrance of Comet, lavender fresco.

And this new distribution in Sam's alone should have a meaningful revenue impact.

During the quarter also Wal-Mart has sharply increased the number of stores selling Spic and Span, resulting in a corresponding increase in volume through this key customer.

And quite recently Ace Hardware added Spic and Span Classic Powder, that is the one that is in the box, to their 4,000 stores, giving that, we call it our heritage item, a nice boost.

We have also added two new Clear Eyes SKUs to one of the largest Dollar store customers.

We have achieved new distribution of Comet cream.

That is one that competes in the cream abrasive segment.

We achieved distribution at Food Lion, which as you know, has over 1,000 supermarkets.

And we have also put the same item into Target where it is already selling quite well.

Speaking of Target, they have made Little Remedies a focus item in their cough cold section by adding two new cough cold items, and giving the brand a continuous offshelf display for the entire cough cold season.

And those displays are up now in Target stores.

Dollar General made Comet and Spic and Span their key featured items during their annual household cleaner promotion, which runs in January.

We have already received a very large order for this promotion, which will ship in the third fiscal quarter.

Dollar Tree, a very major customer for us, has added three new household items, our Comet lavender powder, our Comet cream, and our Spic and Span lavender surface spray.

As an aside, and speaking about the Comet lavender powder, it is selling far better than our expectations currently in its limited number of test stores, which include many of the Kroger outlets.

So we're going to be moving aggressively in the future to broaden distribution on that Comet lavender powder.

As most of you know, indications are that this flu season will be stronger and will be earlier than last year.

And this obviously bode well for both the Chloraseptic and our Little Remedies business.

In addition to that fairly extensive list, there are a number of new items which will be launched in the second half of the year, which we have not yet presented to all of our customers.

So we're going to hold back on the details on those items until we have completed those presentations.

What does all of this mean for the future performance of the Company, both from a revenue perspective and for future net income?

While we're going to maintain our Board approved policy of not providing detailed or quarter specific guidance, we do what you all to understand how we think the Company will perform, both for the balance of the current fiscal year and over the upcoming 12 months.

First for the balance of this year, our fiscal 2006, as we told you in June, we believe that organic revenues and organic profits, excluding the impact of acquisitions, will be essentially flat compared to now restated prior year numbers.

And looking a little bit more on a longer-term basis, here's what we see.

We see organic revenue growth, also without the benefit of any future acquisitions, will begin to return to the Prestige historical growth rate.

And our two recent acquisitions, Chore Boy and Dental Concepts should be largely incremental to that organic growth.

We expect that net income will grow more rapidly than red revenues.

And that is despite the current upward pressure on costs, particularly on delivery costs.

And finally, speaking of acquisitions, I would be again disappointed if our program did not yield an additional one or two strategically sound deals over the next twelve.

But importantly you should know, we're not going to make deals just to make deals.

We will continue to be selective, highly selective, not only in what we buy but in what we pay for it.

That is the story, both for the first half of this year and for the outlook over the balance of the year and the next 12 months.

And the bottom line of all of that is that we believe that the really unexpected difficulties of the past two quarters, largely attributable to Compound W and to New Skin, have simply delayed the growth which we all saw in Prestige's future.

And as we look forward, we believe that the Company is poised and ready to resume that growth.

So now we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) Bill Chappell from SunTrust.

First, just trying to understand on the -- I guess on the guidance.

I think last quarter you actually expected revenue and profits to be flat to down versus last year.

Now you're saying flat.

Is that primarily just because of the pushover with the restatement of profits and earnings from I guess fourth quarter of last year to first quarter of this year?

Precisely.

Second, just trying to understand on Spic and Span.

I was under the impression in the June quarter that part of reason for the shortfall was timing of Spic and Span shipments that were pushed out of that quarter to this quarter.

Have they been delayed even further, or is it just an inventory issue, or what can you --?

The shipments that were delayed from the first quarter took place in the second quarter.

And the shipments that would have taken, or would had been recorded in the second quarter, because of the revenue recognition change are now being recognized in the third quarter.

And then also just to make sure I understand on the guidance, in terms of organic revenue, you're not including the Chore Boy or Dental Concepts in kind of the organic growth?

That is incremental for this year's numbers?

That is correct.

I think that is all I had right now.

One other.

On cash flow, the cash flow from operations for the quarter was 15 million.

Is that correct?

Hold on.

I just want to make sure that I give you the right number.

Yes, 14.9 to be exact.

Karru Martinson from CIBC.

I was wondering in terms of the Denorex, what are the issues that we are seeing?

We have repackaged and we have restaged the product, so to speak.

Are we losing shelf space?

Is this a competitive issue?

And how do you envision that line going forward?

Denorex competes in a highly competitive market.

We have done a number of things which we phased in during the last dandruff season.

As you probably know, the dandruff category, and the intensive dander care for people who have very bad dandruff is quite seasonal.

It is seasonal to the winter months.

And so the things that we have done didn't really get into the marketplace for the full season last year.

They will be in place for the full season this year.

And so we are modestly hopeful that those well have a positive impact on the brand.

But I would tell you it is a very competitive marketplace with very aggressive competitors.

And we are not overly optimistic about the outlook for Denorex.

On Cutex, in the terms of the trends that you referenced, is that more of a shift to private-label brands or just a general category being down?

It is a general category issue largely.

Not surprisingly, nail polish removers follow the trends in nail polish sales.

And nail polish trends are driven by fashion, whatever that exactly means.

Women are now today less likely to use nail polish, and are particularly less likely to use strong bright red or strong colors, which are the ones that require more nail polish remover to take off.

So that is affecting Cutex.

In actual fact, Cutex within its marketplace is holding up very well, and is actually taking a little bit of share from private-label, but the overall category is quite soft.

Just with the news in terms of the gains for the Comet brand.

We just kind of see that Clean & Flush discontinuation work itself through, and continue to see growth in that brand going forward?

Yes, the quarter that we're currently in now last year had the -- about 400 to 500,000 of Clean & Flush.

The comps are definitely going down compared to the quarter that we just past.

Importantly, you should take note of the thing we said about the inventory adjustment at a major customer.

That had -- it was a significant impact on our shipment to that customer whose sales of Comet to their consumers is very strong.

That adjustment is now completely behind us.

And so our shipments to that major, major customer should be sharply improved in the December quarter, which will bode very well for the overall outlook for Comet, not to mention the sharply increased distribution in the Sam's Warehouse Clubs.

Walter Branson of Richmond Capital.

A couple of things.

First on your guidance, I actually was a little surprised to hear you expect organic revenue to be flat for the balance of the year, since it seemed like all of the problems that you experienced in the past two quarters are behind you.

And you had a lot of initiatives, new products into distribution going forward.

Can you give us a little more color in terms of what you expect to be down and what you expect to be up, and potentially what issues still are in front of you in the current quarter?

What we're saying is that the sales revenue decline of the first half will not be more than offset by sales gains in the second half.

We do expect revenue gains year-over-year in the second half.

And those revenue gains more or less, hopefully more, will offset the declines in the first half.

So you're expecting flat for the year organically?

Flat for the year, yes absolutely.

Flat for the year and the second half to offset the first half.

Just a question on New Skin.

Do you think that potentially part of the problem there is that the liquid bandage category might be a little bit of sort of a fad that is fading a little bit now?

I would call it a fad so much.

I think what we have is that a large number of consumers were attracted to the concept of a liquid bandage via the advertising that New Skin ran as well as its competitors ran.

Those consumers went to the shelf.

They bought New Skin or they bought one of the competitors.

Brought them home and tried it.

And for some of them liquid bandages were not a satisfactory answer.

Those would be particularly for people who had larger cuts or wounds where they need a physical bandage to protect the wound.

But what our outlook for the liquid bandage category is that, while it will decline from its highs of a year ago, when it settles out and begins growth again, it will settle out at a level that is considerably higher than the two year ago number.

And for New Skin the good news in that is that -- I don't want to say that New Skin will be the last man standing -- but New Skin is going to enjoy share of market increases in a category that, while smaller than last year, is meaningfully bigger than it was a few years ago.

Finally, I apologize if you said this, I didn't quite hear it.

Can you tell us the impact of the accounting changes on revenues and EBIT for the full year last fiscal year and for the first quarter of fiscal --?

Pete will give you the numbers/ It is in -- it is detailed in the press release.

Okay, never mind then.

But we will give you the top one.

For fiscal year 2005 formally reported sales were 303.3.

The revised in 289.1.

That is a 4.7% decline.

And you were asking for EBIT?

Yes.

How about if I give you EBITDA?

Even better.

103.4 to 100.2, minus 3.1%.

Q1 of '06 net sales, 63.6.

Reported -- previously.

Previously reported.

Revised 63.5.

And EBITDA 19.6 reported, revised 20.9.

Homer Alsauson (ph) from Piper Jaffray.

Your advertising and promotional expenses they are taking us across the board and you gained market share in many of the categories.

Can you talk about the strategy in this going forward?

Our strategy has been, is, and will continue to be to take every available dollar and invest it in advertising and promotion.

And that can either be advertising and promotion that shows up in the reported advertising and promotion line, or advertising and promotion that shows up in the gross to net reduction.

The increase in spending in this most recent quarter, the September quarter is -- I think you should really look at our advertising and promotion spending over the first half, because we adjusted year to year the timing of some of our advertising promotion so that we spend a little bit more during the second quarter and a little bit less during the first quarter this year than we did in the prior year.

But we are regularly working to increase our advertising and promotion, and we're doing that by funding it by efficiencies in other parts of the income statement.

And those efficiencies also will show up, or actually won't show up, in the gross to net calculation that we are affecting the efficiencies there as well.

Reade Kem from Banc of America Securities.

Judging by your comments about the margins at the Chore Boy and Dental Concepts businesses should we model approximately 10 million in EBITDA from those businesses?

That is in the right range.

Could you give us a little bit more detail on the distribution opportunities there?

I have seen the Chore Boy product in Wal-Mart.

If you could just tell us where they are today and where you look to expand them this coming year?

I'm not sure we have time for my answer on that.

The opportunities are fairly significant.

First, talking about Chore Boy, Chore Boy was -- for us is a very important brand.

For its former owner (indiscernible) it was a nonfocused item.

They did not work hard to build distributions.

So just to talk about Wal-Mart, for example, right now Wal-Mart carries one SKU of Chore Boy, which is the stainless steel scrubber.

In the overall scheme of Chore Boy things the stainless steel scrubber is an important, but less important item.

The biggest selling Chore Boy item by far is the copper scrubber, and Wal-Mart does not carry that.

So that becomes an immediate and we think very appealing opportunity.

And as you look at individual retailers below Wal-Mart, there are -- most retailers carry one or two Chore Boy items, but if you look across the line there is a great opportunity in virtually every food retailer and in every mass merchandiser retailer to make a meaningful case that they should be carrying more Chore Boy items.

Lastly, Canada, as you know, Canada for most consumer products companies represents 8 to 10% of their North American revenues for Chore Boy.

That number is 1% or less than 1%, and so we are aggressively moving to expand distribution in Canada for Chore Boy.

Turning to Dental Concepts, as you know, there are two major brands within Dental Concepts, The Doctor's NightGuard and The Doctor's BrushPick, which is a proximal cleaning device.

The Doctor's NightGuard is far away the most important brand with roughly two-thirds of the revenues, or maybe a little less than that.

And The Doctor's NightGuard has generally very good brand distribution in drugstores, particularly chain drugstores, but it has very limited distribution in food outlets.

And it also has limited distribution in mass merchandisers other than Wal-Mart.

Secondly, Dental Concepts are right now the process of introducing new sizes to the Doctor's NightGuard product line, medium and small.

And we see a great opportunity to broaden both the availability and the shelf impact of The Doctor's NightGuard by getting those additional sizes into more drug outlets.

On the Doctor's BrushPicks, and if you haven't tried one of these, I would urge you to do it, it is quite a remarkably good product that is a very effective cleaner of your teeth.

There is still relatively limited distribution of BrushPicks outside of a few chain drugstores and outside of Wal-Mart.

We are very -- going to very aggressively work to broaden food distribution, to broaden mass distribution.

We think there is a great convenience store opportunity.

So there you go.

In terms of if you hit on all those opportunities do you think the growth contribution in terms of sales would -- care to give us a range or an idea of how we should think about that?

If we hit on all those opportunities, the growth of both of those lines would be very significant.

In terms of the expanded distribution, primarily in your cleaning business, all those gains you were talking about, new doors and so on, what sort of contribution do you think that is going to have to sales, if you could put a number around it for this year?

I don't want to put a number around it because that is a very complicated calculation.

When you get new distribution, while most of revenues from that new distribution is incremental, some of the sales that go to that new customer will hurt sales across other customers.

But the Sam's distribution for Comet powder has a multi-million dollar annual revenue potential.

And the promotional order at Dollar General has more than $1 million impact.

Those are all very meaningful things.

You should not take away from my comments that we haven't had distribution gains in the OTC line also.

It is just that the distribution gains in household are so much more dramatic in their immediate impact.

But we have been very successful in broadening distribution across our OTC line.

We work at it hard every day.

We pick off new distribution points for new SKUs every day.

Moving over to changes just a little bit to your third-party manufacturing, I was curious if you could update as on as of today how many suppliers are you using right now?

And with the two acquisitions where to you think you're going to take that?

Are you consolidating at all?

And what are you seeing in terms of the pricing environment there?

I can't give you the exact number of third-party manufacturers that we work with today.

It is in the 30s I believe.

The two companies that we purchased will move into that -- well, in the Dental Concepts case they are already using third-party manufacturers, and we will continue those relationships, because those relationships appear to have great efficiency and great goodwill associated with them.

In the case of Chore Boy, most of the Chore Boy items were made at an existing Reckitt Benckiser factory.

They, Reckitt Benckiser, part of our deal with them was that they provide interim manufacturing services to us.

We have already identified where we will ultimately move the manufacturing for those SKUs.

The change will actually generate efficiencies, lower cost of goods, which we are pleased about.

And that is part of an orderly process to migrate the manufacturing from Reckitt Benckiser to third-party manufacturers.

The other part of your question was are you trying to consolidate.

To the degree possible, we will consolidate if that gives us greater efficiency.

But if it does not, we won't.

In terms of pricing?

Just given the environment, what are you seeing there?

Our pricing from our contract manufacturers has not been under pressure.

And in fact, we have been able in many cases to work with them to drive contract manufacturing costs down.

Where the cost pressures are coming is from both delivery costs and from packaging components, which have petroleum as a key raw material component.

And so far we have been able to largely offset those packaging costs by efficiencies with our contract manufacturers.

And then just a couple of last ones and I will get going.

Have the banks granted the amendment for the change in the reporting requirement?

Yes.

Under the bank agreement how much -- what these two acquisitions assuming post closing do you have under the feature that allows you to, I believe, take out more term loans -- what is your --?

We funded the Chore Boy acquisition entirely from cash on the balance sheet.

And we funded the Dental Concepts acquisition from our revolver.

We haven't used the feature that you're talking about at all.

That feature permits you to borrow up to how much at this point?

200 million, assuming that debt to EBITDA doesn't rise on a pro forma basis over 5.5%.

And there is an additional $30 million on the revolver.

Reza Vahabzadeh from Lehman Brothers.

The grand contribution from Little Remedies in the quarter was how much?

I think it was 1.7 in the preceding quarter that you mentioned on the call.

Was it about --?

We don't give individual brands.

Are you 1.5 million or that type number, does that sound about right?

I tell you, Reza, I don't have it in front of me.

Okay that is fine.

Any comments on your inventory levels?

They look higher than most of last year.

And I don't know have the reclassified numbers yet, but $33 million --?

Inventories are up a bit seasonally.

As you know, the September 30 date is sort of right before customers start buying heavily for cough cold season.

And we made what I think was a wise management decision that because of the likelihood of a more intense and earlier cough cold season we wanted to have additional inventories.

And that was augmented by the fact that we believe that our brands, Chloraseptic and Little Remedies, will particularly benefit because they were not impacted by all of the Sudafedrin issues.

And so we wanted to make certain that we had adequate inventories of our cough cold items so that we were able to supply what we hope will be, think will be, meaningfully increased retailer demand.

I am showing that you are at 33 million of inventories versus 18 last year.

Is that all cough cold inventory?

No, no.

Last year at this point in time, first of all, we didn't have -- at the end of September we didn't own Little Remedies.

Right.

But that is a small brand.

The other thing is there is definitely still a -- in our warehouse there is still more Freeze Off inventory than we would normally have carried, because typically Freeze Off takes -- because as you know it comes from the Netherlands.

And so we are always three months out to be able to get deliveries of Freeze Off.

And because of the softness in the Freeze Off shipments there definitely is a larger amount than we would ideally have of the Freeze Off product.

But generally that is the buildout for the cough cold season, Little Remedies which didn't exist last year, and Freeze Off being higher than it otherwise would have been is the reason.

Of the $15 million year-over-year increase in inventories, how much of that would you attribute to Chloraseptic versus Freeze Off and so forth?

In terms of absolute dollars and percentages as a year-over-year comparisons you don't standout.

I will you what, I'm going to have to get back to you, because I haven’t done that in-depth analysis.

Our months of inventory on hand are about 3.8 months on a restated basis.

And as I said that definitely 00 driven by the Freeze Off that is a little higher than certainly we would like.

Fair enough.

And then on the inventory levels at retail customers for your products, how would you characterize inventory levels for your products -- your top customers versus this time last year?

Similar.

Really the only inventory issue we've had with retailer inventory is the Compound W inventory at a major customer that we talked about extensively.

Those inventories at that customer we can read that through their system have now normalized back to the number of weeks supply that that customer wants to have in the stores.

On the A&P spending I know it moves around by quarter, but for the entire second half should it be around the same level as a percentage of sales as last year?

As a percent of restated -- yes, of the restated.

It should be.

Yes.

And then, on gross margin you mentioned fuel cost.

Is that a continuing factor going forward?

Yes, it is.

Fortunately over the last couple of weeks oil has come down a little bit.

And of course the transportation cost is -- if there's an increase in fuel prices, we get hit with a surcharge.

Assuming that the current trends hold as they are, the surcharge will be slightly less than it was.

But what we have calculated based on where we were about three weeks ago at the end of the quarter that looking out over the rest of the year that that fuel surcharge, assuming that things don't go up or dramatically go down, would cost us about $1 million more than the comparable period last year.

For the second half or the year?

The second half.

What about packaging costs?

How is that shaping up?

What is the impact of higher packaging costs on your P&L?

Minimal.

And those higher packaging costs, as I said, had been largely offset by improvements or efficiencies in contract manufacturing rates.

Amet Anum (ph) from Axial Capital.

On your sales items for the second half, I just want to get a sense of what sort of visibility you have?

Is it based primarily on what you see as declining or easier comps for the categories that were declining?

Or is it based on your belief that some of your new product introductions will catch on and take hold with your retail customers.

What is your level of confidence in visibility.

It is based -- our outlook for the balance of the year it is based upon several important things.

First, it is based upon the consumer sales trends.

At the end of the day for Prestige or for any customer product company our sales ultimately over time reflect sales of our products through to consumers.

And we see our consumer sales trends good on most of our items.

And on the two items that we have been troubled by, Compound W and New Skin, we are now measuring against year ago's that are more normal.

And so that the combination of those two things suggests to us that our outlook for consumer sales performance over the next six months and beyond will be positive.

And therefore factory sales revenue will reflect that positive consumer sales trend.

Secondly, some of the onetime issues like the Comet inventory adjustment at the major customer and the Comet measuring against the discontinued item, those are washing out over time.

Thirdly, we do have very real, very specific in hand new distributions, like the Comet and distribution at Sam's, like the new Dollar Store distribution.

And so we have conservatively factored the impact of those into our forecast as well.

Of course, we have included the new items that we have launched.

We have been, I think, generally conservative in our outlook for those items, but they are included as well.

And then on the inventory -- revisiting the inventory question, can you give us a sense in your business what is the markdown risk if you -- say you plan for a very tough flu season and it ends up being milder, can you hold onto that inventory until the next year or -- (inaudible).

As you have said, typically we are caring in our OTC line three months of inventory, and in our household lines way less than that.

And so if -- and we, as I am sure we have told you before, we review that very regularly, monthly.

And because we are not obligated to keep any factories churning we can reduce our purchase orders really at a moment's notice.

And so three months of inventory, if it became four months of inventory, which is the sort of scenario you are describing, would not be a long-term problem for us.

And then finally, I just wanted to get a sense of how you are thinking about capital allocation in light of acquisition opportunities out there, but also in light of how your stock has performed over the last couple of months.

I suppose at some point the return on incremental capital you're getting from either spending more money in advertising, either doing an acquisition and getting the related synergies, or whether it is just buying back your own stock for the free cash flow yield, all becomes sort of interesting analyses.

And --.

We would if we could.

Our bank covenants for, at least a couple of more years, preclude us from buying back our stock.

In terms of capital allocation between the invested -- the return you get on incremental advertising versus trying to spend more money on acquisitions, how do you think about that?

Of course, they impact different parts of our overall financial statements.

We look at incremental advertising, which of course comes as a part of the income statement, that that needs to have a reasonably rapid return in order to -- we're not going to invest heavily for several years in the hopes that it will generate long-term gain.

And the good part about our business is that that usually is not the way it works.

That advertising investments for our brands usually have a fairly -- fairly rapid return.

We test higher levels of advertising all the time.

In terms of acquisitions, as we told you, we intend to only make acquisitions that will be immediately accretive.

That remains our overall objective.

Certainly Chore Boy and Dental Concepts hit that criteria.

And as we look at transactions going forward, we're going to apply that discipline rigorously.

Revisiting your response to the stock buyback question, and I understand that there's a bank covenant limitation, but say one day you wake up and your stock is trading at a 15% free cash flow yield or a very high return, is there -- are you basically saying there's nothing you can do about creating value for the shareholders?

(multiple speakers) that all the time, because what you are saying is true.

You may have seen I'm involved with my own personal stock buyback program, but it is a topic of great discussion for us.

And that is really all I can say on it at this time.

James Adams from Scotia Capital.

Most of my questions have been answered, I just had a couple of clarifications.

On the gross margin you talked about the transportation impact, also some benefit from mix, given less Compound W. Did you mention a couple of other items that I might have missed or are there any other factors there?

There was one in the quarter that just past, and that is that we changed our logistics providers for one provider in St. Louis to another.

And there there was about $300,000 worth of costs that were related primarily to moving product from the former warehouse to the new one.

And that obviously is a onetime cost that will not be repeated.

And then when you were talking about the distribution opportunities.

All of those things were things that are happening in the current we're in right now or going forward -- none of those had a beneficial impact in the quarter that you just reported?

Distribution opportunities, that is entirely correct.

Henry Cabion (ph) from CIBC.

I just wanted a little more clarification on the acquisition pipeline, if possible, in terms of where -- what sort of categories you're looking in terms of prices for these enterprises and multiples that you're seeing in the marketplace?

Our first priority in acquisitions is OTC products like Dental Concepts.

That is not to say that we won't aggressively be involved in household product acquisitions as well.

There are a number of opportunities that are active now.

During the quarter, in addition to the two that we closed, we looked at -- in other cases passed on -- opportunities because they were either strategically, in our judgment, not good fits and/or were priced too aggressively.

As we have told you, I think told you, our overall process is to evaluate the business that we're buying.

Take the trailing twelve-month results for that business, and then make a pro forma adjustment to put the business on the grounds as if we had owned it for that period of time.

In some cases that makes the pro forma numbers more profitable.

That would be in the case of a company, maybe like Dental Concepts, where we think there'll ultimately -- there are synergies that we will realize.

And other cases, that would make the pro forma numbers less profitable.

An example of that would be Comet or Chore Boy where the current owner was not spending, in our judgment, adequate A&P funds in order to support and grow the business.

We make that pro forma adjustment, and then our objective is to buy the business for a multiple of seven times or less that trailing EBITDA.

So far we have been quite successful in that endeavor.

Thank you.

Okay, I guess that is it.

Thanks everybody for your time, for your attention, for your good questions.

We look forward to talking to you again in three months.

That concludes today's conference call.

You may all disconnect at this time.