Prestige Consumer Healthcare Inc (PBH) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the 2006 Third Quarter Prestige Brands Holdings Incorporated Earnings Conference Call.

My name is Minotia, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. Dean Siegal.

Sir, you may proceed.

Good 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 the US Securities and Exchange Commission.

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

Good morning everybody, thanks for joining us.

With me today is Pete Anderson, Prestige's Chief Financial Officer, and Frank Palantoni, who is a Prestige's President and Chief Operating Officer.

By now I imagine most of you have seen the news release we issued last night, which contained our December quarter financial results.

If any of you haven't seen that announcement, it's available right now at our website, which is www.prestigebrandsinc.com.

Before we get into the quarter's result, I would like to take just a moment to comment on the recent additions to our board of directors, as well as some changes we have made to the various board committees.

As you may have seen in a press release from last week, we have added two additional independent directors, [John Byom] and [Ray Silcock]; both John and Ray are experienced financial executives who have held CFO positions in large public companies, consumer product companies.

Just as important, both John and Ray have extensive general business backgrounds, so they will bring much more than financial expertise to our board.

We believe we are very fortunate to have attracted individuals with such extensive experience, and such outstanding character.

Simultaneously with bringing John and Ray on, we have also elected Frank Palantoni, Prestige's President and Chief Operating Officer to the board.

As most as you know, Frank has now been with us for little more than six months, and in that relatively short period of time he has already made significant contributions, both to the operating functions of the company, as well as providing the company and the board with real organizational and administrative insights.

With these three new board members, the Prestige board of directors now totals ten individuals, six independent directors and four directors who are technically classified as inside directors, although only two of them are actually officers or employees.

And finally, we've restructured our three board committees; audit, compensation and nominating and our governance, so that now all three committees are comprised entirely of independent directors.

So in our view, these additions and these changes further strengthen what is, in my judgment, a particularly skilled and involved set of directors.

Okay, turning to our financial results; we are going to focus largely on the December quarter, which as you know is our third fiscal quarter, but we will also briefly summarize the nine month year-to-date numbers.

So for the quarter, corporate net revenues were just under 80 million, which is an increase of 9% over the results of the same period last year.

Of course, a portion of this year-over-year increase is attributable to the acquisitions of Chore Boy and Dental Concepts, which added about eight and six weeks of revenues respectively.

However, importantly, organic growth, which is defined as growth on the brand that we owned in the comparable period last year, was 4%, which is an improvement over the trends as you know we experienced in the first half of the year.

For the nine month year-to-date period, total revenues are now 2% ahead of year ago.

Operating income for the quarter actually declined, largely driven by a very significant 43% increase in A&P spending, as we continue to invest in advertising and consumer promotion to drive our key brands forward.

In addition to the A&P spending, our cost of goods, and particularly the delivery, the freight component of these costs, were up considerably, reflecting continued high prices for diesel fuel.

And lastly, our G&A expenses were higher than prior quarters, reflecting slightly over $1 million in unusual costs associated with the recent accounting and legal review of our policies related to the restatement of our results.

Net income for the quarter was $9.3 million or $0.19 per basic and per diluted share.

This compares to net income for the corresponding quarter last year of $9.1 million.

For the nine months year-to-date period, net income was $22.6 million was 90% greater than last year's reported net income of 11.9 million.

Of course, as you know, last year's results incorporated a number of one time events.

So, after adjusting for all of those unique events last year, nine months adjusted net income is up 13% over last year; and the $22.6 million of year-to-date net income translates to basic earnings per share of $0.46 of fully diluted earnings per share, or $ 0.45.

Lastly, as you know, the company's free cash flow was an important measure of our success; and this year the company's free cash flow for the quarter was higher than net income.

For the quarter we delivered free cash flow, defined as operating cash flow less capital expenditures, that free cash flow for the quarter was $11.2 million.

And the nine month year-to-date our free cash flow of $35.4 million is significantly better than our net income of 22.6.

As you know, the strength in free cash flow is largely caused by the company's long term tax yields, which result in lower cash taxes than the reported books tax level.

In addition, Prestige's very low capital expenditure has also helped ensure strong cash flow.

So that's the general corporate overview;

I am now going to ask Frank Palantoni to take you through the quarter's results in some greater detail.

Thank you Peter, in terms of our divisions, performance of our two largest segments; household cleaners and OTC drugs, was generally good.

Reviewing that in more detail beginning with household products, revenues for our household segment grew 26%, with part of this growth attributable to Chore Boy, which came on stream at the end of October.

Our two core brands, Comet and Spic & Span, grew factory revenues by 17% for the quarter.

For the year-to-date, total segment volume in household is up 6%, with the organic component registering a 3% gain.

Several factors contributed to this improved performance; first, on Comet, the retail consumption of powder and bathroom sprays is up, with factory revenues closely mirroring those growth trends.

During the quarter, powder consumption as measured by [IRI] and major retailer point of sales data, was ahead 6%, with spray consumption growing faster at 8%.

For Comet Cream, a relatively new entry for us, IRI trends were up significantly, over 50%; driving this growth is an increased distribution based an IRI measured channels; in addition, distribution is also increasing in non-IRI measured [club] outlets.

Spic & Span also grew revenues significantly during the quarter, driven in part by expanded distribution at Wal-Mart, growth on several new items in the line, and additional promotional support.

For both Comet and Spic & Span, our business with Dollar Stores continued to grow, driven by expanded distribution and promotional support.

Our recent acquisition of Chore Boy is now completely integrated.

We achieved our revenue goals last quarter for Chore Boy, and are now focused on expanding distribution and new item introductions.

So now we turn to the over-the-counter segment.

Revenues for the segments during the quarter grew by 3%, which is very much in line with the nine months year-to-date trend of 2%, with growth primarily attributable to Dental Concepts acquired in mid November.

Revenues for the balance of the OTC division were down slightly for the quarter.

The two brands, which have been at the root of our softness during the first half, Compound W and New-Skin, both continue to show improved performance.

While Compound W revenues for the quarter were below a year ago, the most recent retail data shows consumption approaching year-ago levels.

For New-Skin, the situation is improving even more rapidly.

Factory revenues for the quarter were flat, and retail movement was slightly up, with the most recent four weeks period showing a market share gain.

Little Remedies had a strong quarter, growing factory revenues almost 50% versus last year, lapping the first quarter of our ownership of the business.

Driving this growth is increased consumer and professional advertising on an expanded distribution base, particularly in the cough/cold category, as well as a variety of new items listings.

Many of our mid-sized brands such as Dermoplast, Percogesic, Momentum, Mosco and others also saw growth during the quarter.

Dental Concepts, which we acquired in mid November, is off to a strong start.

The integration is now largely complete, factory and consumption trends are strong, and distribution is growing.

For the third quarter IRI consumption grew by just under 10%, which will give us momentum going into the March quarter and beyond.

However, two brands had disappointing results;

Chloraseptic recorded single digit factory revenue declines for the quarter.

Most of this softness is attributable to temporary supply issues of our Chloraseptic strip products.

Despite these supply issues, which are now largely behind us, retail consumption for the entire Chloraseptic line was about flat for the quarter.

For perspective, on a year-to-date basis, both revenues and consumption for the Chloraseptic line are up mid single digit.

Clear Eyes also registered a revenue decline for the quarter; however, retail consumption for this same time period was up, driven by new items and year-on-year increases in advertising support.

For the year-to-date, both factory revenues and consumption are ahead of a year ago.

Now turning to the personal care division; total personal care revenues continued to be soft during the most recent quarter, declining about 8%.

Cutex experienced a modest trend improvement, which we believe is attributable to our print advertising campaign.

Factory revenues for the quarter were essentially flat, with month to month trends improving.

Denorex also showed less of a decline this quarter, although the brand is still affected by a highly competitive market.

So with that, I am now going to turn the review over to Pete Anderson who will give you additional details on the financial results, and then following that Peter Mann will come back to talk about activities for the balance of the year, and what we see ahead in general for the balance of the year, as well as our fiscal year 2007.

Thank you Frank, and good morning.

As Peter mentioned earlier, third quarter net revenues were $79.9 million, 6.9 million or 9% ahead of last year's net revenues of 73 million.

The December 2005 quarter results include the results of Chore Boy for two months, and Dental Concepts for approximately six weeks.

Had we not made the Chore Boy and Dental Concepts acquisitions, net sales for the quarter would have increased by 2.8 million or 4%.

Operating income for the quarter ended December 31 of $24.8 million was 1.5 million or 6% below last year's quarter.

The decline in operating profit from prior year was due to increased cost of sales, increased advertising and promotion, and increased G&A expenses.

Gross margin of 41.1 million increased by 1.3 million or 3.3% over last year, due primarily to the sales increase, and that was partially offset by a higher cost.

As a percentage of the sales, total cost of sales for the 2006 quarter was 48.5%, and that compares to 45.5% last year.

The increase as a percent of sales was driven by a combination of increased costs resulting from the rise in oil prices over the last year, and product mix.

As a result of the well publicized rise in crude oil prices, freight expenditures were approximately 500,000 more than the previous year's quarter.

Unfortunately, after decreasing in November and most of December from the post hurricane highs reached in October, diesel fuel costs are on the rise again.

Crude oil prices also resulted in pressure on product cost, particularly plastic bottle pricing, as resin cost continued to increase during the quarter.

The unfavorable sales mix resulted from the strong performance for the household product segment in the quarter, as revenues for that segment, which has the cost of sales as 61.5%, contributed 39% of total sales in the current year's quarter, compared to 33% last year.

Conversely the OTC segment, which has a cost of sales of 37.4%, accounted for 53% of sales this year compared to 56% last year.

As Peter mentioned before, our advertising and promotion expenditures of 7.4 million were 2.2 million or 42% higher than last year's expenses;

Dental Concepts and Chore Boy A&P expenses for the quarter contributed 500,000 of that increase.

If we exclude the two acquisitions during the quarter, A&P expenditures grew by 1.7 million or 32.7%.

The drivers of the increase were increased expenditures of both media and consumer promotion were Comet, Chloraseptic and Cutex, plus increased broker commissions which reflected a sales increase.

G&A expenses for the quarter were 6.2 million, a $500,000 increase over the prior year, as Peter had said before the increase was primarily due to accounting and legal expenses of approximately $1 million related to the restatement of our historical results.

For the quarter, net income was 9.3 million or $0.19 per basic and diluted share.

Net income of 9.3 million for the quarter increased by $200,000 over last year's 9.1 million net income.

As Peter mentioned earlier, the company's free cash flow for the quarter was greater than earnings driven by a long term tax yield net operating loss carried forward and low capital expenditures, free cash flow for the December quarter with $11.1 million.

Now during the quarter as you know we made the two acquisitions, and the purchase price totaled just under $53 million.

Consistent with our previously stated policy, we funded these acquisitions with a combination of cash on the balance sheet at a $30 million draw on our revolver.

By December 31st we had repaid 5 million of the revolver draw and in January we paid an additional 12 million leaving 13 million to be repaid as of today.

As a result of these acquisitions, total debt as at the end of December was $517.6 million that is since declined to 505.6 million at the end of January.

Now let's take a closer look at results by segments.

Net revenues of 42.1 million for the OTC segment, were $1.1 million greater than last year.

Dental Concept contributed 1.7 to the quarter, if we exclude the Dental Concepts result, OTC net revenues of 40.4 million were down 1.5% from last year's third quarter.

As Frank discussed in some detail earlier, strong gains from Little Remedies and several of our middle sized brands were offset by declines on the Chloraseptic, Clear Eyes, and Compound W brands.

Gross profits for the segment of 26.2 million, decreased by $200,000.

Total cost of goods sold increased by 1.2 million as a result of the sales increase and an increase in freight costs.

Total OTC AMT expenses of $4.9 million, increased by 1.5 million or 44% over last year's spending of 3.4 million. 400,000 of the increase was attributable to Dental Concept.

In addition media and consumer promotion spending behind Chloraseptic, Clear Eyes and Little Remedies saw increases compared to the third quarter of 2005.

The decrease in gross profit combine with the increase quarterly spending per AMT resulted in an 8% decrease in contribution margins for the segment, from 23.1 million last year to 21.3 in fiscal 2006.

Turning to Household products, net revenues for the segment were $30.8million in the quarter.

That represents an increase of 6.3 million or 26% from last year's third quarter revenue of 24.5 million.

Chore Boy accounted for 2.3 million of the sales for the quarter results.

The increase excluding Chore Boy was 17% for the quarter, both Spic & Span which was plus 20% and Comet plus 16%, showed very nice sales gains compared to last year.

Gross profit for the segment in the quarter of 11.8 million was 2.4 million or 25% ahead of last year's gross margin.

The increase was primarily due to the sales increase.

As a percentage of sales, gross margin declined slightly from 38.6% last year to 38.5% in this year's quarter.

The increase in cost of goods year-to-year, was primarily due to increased transportation cost and that was partially offset by favorable sales mix.

Advertising and promotion expenditures for the third quarter of 1.7 million were $700,000 greater than last year.

The increase in spending was attributable to an increase in media spending on Comet, an increase in broker commission through the sales increase and spending behind Chore Boy.

Contribution margin for the Household segment of 10.1 million for the quarter was 1.7 million greater than last year, due to the increase in gross margin, partially offset by the increase in advertising.

Personal care segment net revenues was 7 million, were $600,000 below last year's revenue of 7.6 million for the quarter.

Gross profit of 3.1 million was 800,000 below last year's gross margin of 3.9 million.

The decline was relative from the sales decline combined with cost of goods increases which were primarily driven by increased petroleum prices.

Advertising and promotion expenditures of 700,000 were $100,000 lower than last year, resulting in brand contribution for the segment of $2.3 million, an $800,000 decrease from contribution margin of 3.1million last year.

At December 31st our cash balance was $9.6 million, accounts receivable was 36.1 million, inventory 33.7 million, accounts payable 20.4 million and accrued expenses 12.8 million.

In addition, our total intangible assets increased by 43.7 million from 911.2 million at September 30th to 954.9 million as a result of the two acquisitions.

And now, I would like to turn it back to Peter Mann to discuss recent initiative.

Okay before we take your questions, I want to take a few minutes and look ahead now, [go] through the final quarter of the current fiscal year and on a preliminary basis to our fiscal 2007.

Going into the March quarter, as you've seen our issues with Compound W and with New-Skin [have] clearly abated.

Growth on our Household products continues to strengthen.

We have generally positive retail consumption trends for most of our brands in the past quarter.

The March quarter as you know has traditionally been our most profitable quarter.

During the quarter, we have a number of new items which will record their first shipments, we will begin recording income under the common license to Proctor & Gamble during the March quarter.

And lastly we hope to benefit from selected price increases which we have already announced to the trade and which will become effective towards the end of the quarter.

A little more detail on some of those, first the new items.

We are launching a new Clear Eyes item called Clear Eyes Triple Action.

This line extension will give Clear Eyes another [shelf] facing in the red segment, and will allow Clear Eyes to compete in the fastest growing sub segment of that redness category.

Murine will launch three new homeopathic items in both the ear and eye cares categories.

The ear item is specifically targeted at sufferers of ear ache, while the two eye care SKUs offer a unique consumer eye care benefit.

All three of these innovative new items compete in the fast growing homeopathic products category, which is an entirely new market for the Murine brand.

Little Remedies will begin shipping a new items to treat Colic in a natural and gentle manner.

In addition, Little Remedies will introduce a variation of its very popular parent gift kit into food drug and mass retail outlets.

Dermoplast is launching an innovative and highly effective dual action treatment for poison ivy.

This unique formula actually stops the poison ivy lesions from developing, while simultaneously stopping the itch with a proven medical ingredient.

Comet Cream which is continuing to grow handsomely will continue to expand distribution at a number of retailers including one major wholesale club.

In early January, we announced to the trade selective price increases on certain OTCs and personal care SKUs.

Depending upon the specific item, these increases range from 2% to 5% and all will be effective in mid March.

And lastly, affective January 1st we begin earning a loyalty on all Comet volume done by Proctor & Gamble in Eastern Europe.

For this arrangement, essentially every dollar that we take in effectively falls straight to the bottom line.

So, what does all that activity mean for the up coming quarter?

For those of you who have been following Prestige for sometime now, you may remember that last year's March quarter was a particularly strong one; so the comparison base for this year will be tough.

Nevertheless, we expect that the company will post mid single digit revenue increases with both net income and earnings per share growing more rapidly.

And we expect to deliver free cash flow, which is higher than the reported book net income.

So that's the story for the quarter.

Looking ahead now on a preliminary basis to fiscal 2007, which is the year that ends March 31st 2007.

We expect first, organic revenue growth will start heading back towards our average historic growth rate of 5% to 7%, and we expect total revenues to be growing in the high single digits.

We expect net income growth in excess of revenue growth thanks to deleveraging and modest operating profit margin improvement.

And again we expect free cash flow to be better than reported net income.

And that -- all of that is organic, any acquisitions will be entirely incremental to that out look.

So in short, we expect fiscal 2007 to be both a better and a more stable year.

In order to put that outlook for 2007 into additional perspective for you, we've compared our internal expectations to the average of current Wall Street estimates for fiscal 2007.

And I want to draw your attention to the following general points; our anticipated fiscal '07 revenues are generally in line with the Wall Street expectations.

In addition, our anticipated gross margins, our anticipated operating income and our anticipated EBITDA are also generally in line with the average of those Wall Street expectations, with the exception of G&A where we foresee higher expenses than most Wall Street estimates.

This difference is driven by additional staffing both to support our recent acquisitions and to drive our new product programs.

We also expect that D&A will be higher than most Wall Street estimates, really as a result of additional amortization coming from the recent acquisitions of Chore Boy and Dental Concepts.

And finally, while the average of Wall Street estimate show fiscal year '07 interest expense to be declining on a year to year basis, we actually expect interest expense to be up in fiscal '07.

Our fiscal '07 assumptions, account for the dead impact of acquisitions made in fiscal '06 as we used excess cash to fund those acquisitions as Pete explained earlier.

So, in sum for fiscal '07 we're expect the operating portion of our incomes statement excluding somewhat higher G&A expenses, will be generally in line with Wall Street estimates.

But we also expect a higher interest and higher D&A expense will result in net income which will be below current Wall Street estimate but up versus the current year fiscal '06.

So to conclude, we're looking to the future with a high level of optimism.

Driven by our expectation that the trends we're seeing in the second half of this year will continue out into the future.

Our core brands are performing well; we have a series of new item launches scheduled throughout the up coming year.

We are continuing to work hard to find ways to drive certain cost out of the P&L.

We're developing new sources of revenue, we believe we have growth opportunities for a newest acquisitions Chore Boy and Dental Concepts.

And we continue to see a robust pipeline of potential acquisition opportunities and we believe that that pipeline will actually grow as the year progresses.

So that's the story, now we'd be happy to take your questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Bill Chappell of SunTrust Robinson Hump please proceed.

Good morning.

I guess first going on a quarter looking at Chloraseptic, I had expected, and I think we had expected a pretty easy year-over-year comparison.

Now was the decline off because of the supply in strips or was there something else going on with the overall brand?

As most of [current clientele] was associated with the strips, just about all of it indeed we attribute was.

So excluding that, would the brand been up year-over-year?

Would have been, yes slightly up.

And then looking to Compound W being down is that just tougher comps, I mean from the problems back in last summer or, is there anything else going on with that business?

We've continued to say were improving trends in both the category and our performances is returning especially in the cryogenic segment to flat about even with year ago performance and we expect that will continue.

What -- again I want to point out, and we've pointed out earlier calls; that if you look at our three year performance you take out the anomalies of last year, we are up significantly in the category is as well in the 40% range.

So on a three year basis, were growing sort of 20% and 20% at last year's base that doesn't allow that comparison to be made.

I guess the other question is, have you seen over the past few months Freeze Off stabilized?

Tending towards the stable trend, yes.

And then, I guess looking bigger picture on a go forward, are you still seeing a lot of acquisition opportunities?

Is it thought to maybe integrated some of the ones you've made recently before moving forward?

Can -- what's the theory going forward from there?

The -- Bill the Chore Boy acquisition is completely integrated, that's behind us.

The Dental Concepts acquisition is largely behind us, we are now shipping Dental Concepts orders with our other OTC brands.

There is a little bit of tidying up to be done, but I anticipate that by the end of the month that we're in now the Dental Concepts business will be completely integrated.

So, we are not going to hold back on acquisitions because we are busy integrating things.

Having said that, obviously we are going to continue to be deliberate and careful and strategic in our acquisition of evaluation and it's a little difficult to predict exactly - in fact it's very difficult to predict a timetable that will unfold on.

But, if an acquisition presented it self to us today, we would not shy away from it because of being too busy on other things.

And one last question just on A&P.

Is there now a new goal that you -- in terms of percentage that you want to have for overall company or, is it just on a case by case basis you're stepping up some advertising?

As we said Bill, our goal is to gradually ratchet up the amount of advertising as a percent of sales on a gradual basis.

What you are seeing in this quarter, is a deliberate decision for our winter seasonal items, to move some of the advertising, particularly for Chloraseptic earlier into the season to have it have the opportunity to benefit the brand for the entire winter season.

And so, there was a little bit of front loading of our spending seasonally in the December quarter which will be balanced out to some degree in the March quarter.

There's no set 15% sales, 20% sales, no set targets at this point?

No because it really it is a brand specific decision.

We don't stand identically by brand and so it is bottoms up what is the appropriate amount of money to spend for Chloraseptic added to the appropriate amount of money for Comet and so on.

Okay, thanks.

And your next question will come from the line of Amy Chasen of Goldman Sachs please proceed.

Couple of things, first of all can you quantify in the Household segment what the core growth excluding acquisitions would be if you would also exclude distributing gains?

Certainly not in my head.

I'm not sure we have a number on --.

But it would have been -- well excluding this distribution gains it's very hard to get at.

Because as you know distribution is an ebb and flow, but we are seeing some good examples of that would be Comet at a major mass merchandiser.

Where there has been no distribution up or down and we're seeing Comet volume both on the powder and of the spray growing.

There has been relatively little IRI food and drug distribution chain -- change and we're seeing good growth on Comet IRI trends without the benefit of distribution.

Then distribution gains are on top of that.

Distribution gains contributed to the Spic & Span increase, because we have sharply expanded number of stores in Wal-Mart for Spic & Span.

Comet Cream is growing in part, from increased take away and in part from increased distribution.

So it really is a mix, but it would be not accurate Amy, for you to think it was all this distribution by any means.

Okay.

Can you just talk a little bit about your margins and your leverage?

I think in the past you've always said that you should have less volatility in your margins and in your operating profit your increases or decreases based on the fact that you do so much outsourcing and as a result you're less exposed to commodity cost?

And yet, this quarter we saw your significant gross and operating margins decline.

Can you talk a little bit about that and along those same lines you mentioned, adding staff, and I'm a little bit confused about that as well?

Okay, those are two different questions.

The first one growth margins; the lower percentage growth margin this quarter was really driven by two factors.

The first is product mix that Household products, which have inherently lower growth margin this quarter accounted for a higher percentage of the sales.

And then the second factor, which affected the growth margin is delivery cost, freight cost.

We saw as I think almost anybody, everybody in our business is experiencing.

We saw meaningful increase in our freight cost particularly freight to customers, but also freight into our warehouses.

You are absolutely right, and if you look at our raw cost of goods excluding freight, you don't see much variability at all.

We weren't hurt very much by that, but we were hurt by freight costs.

Okay.

And last but not least, when you talk about your longer term goals de-levering is always a part of that and yet it sounds like in FY '07 we are going to see an increase in interest expense.

What's the disconnect between the short term and the long term strategy?

There is no disconnect.

I think it may just be that many Wall Street estimates were not taking into account that, this year we used most of the excess cash we generated to fund the acquisitions as opposed to pay down debt.

So, our overall debt level didn't go down as much as -- or didn't go down whereas the modeling had had it going down.

Is that making sense to you?

Well yes, but I guess the question is I think over time you were looking for something like five points of growth from delevering.

Should we no longer assume that in the longer term models?

No, I wouldn't say that because we've essentially added two businesses Chore Boy and Dental Concepts with slight oversimplification.

Essentially no increase in debt which is another if you will, higher EBITDA, no increase in debt is a form of deleveraging.

Okay.

All right, thanks.

And your next question will come from the line of Alexis Gold of UBS please proceed.

Hi, good morning.

Morning.

Just a few questions.

And I think you said that your goal is to ratchet up advertising as a percentage of sales, and trying to get a better sense of what this means for longer term margins.

Are you just trying to drive that higher margin business?

And what are you -- what's your thought process there?

We've said from the get go that we would continue to increase our advertising ratios.

I think if you look in the historicals you see them in the high tens.

We've also stated that on year-to-year basis, those would go up fractions of percents and we see no reason to do anything different than what we stated previously.

Okay.

And just on the Comet Cream, it sounds like it's continuing to grow and you mentioned that expansion to major club.

What percentage of your distribution basis picked up the product at this point and should we expect to see that selling then in the March quarter did you say?

We -- the distribution continues to grow quarter to quarter.

And one thing I would like to point out is that when we look at our quarter to quarter performance back in as we said, deviate from our year-to-year performance.

So our distribution base continues to grow on Comet Cream, our shipments may not exactly linearly parallel that.

But we expect that to be in line where we want the business to come out by the end of the year and very consistent with what we have given for indications for the whole year in the Household division.

I want to go back to the question that was just asked.

I don't know if you guys answered the staffing question.

You mentioned that there is additional staffing due to the acquisitions.

And why would that be I mean were there -- I am just trying to understand what -- was the company that you acquired understaffed or did you pick too many cost out of the business that closed?

What happened there?

No, it's when we make acquisitions we basically build it from the ground up.

And add the staffing to Prestige that we feel is appropriate to run the business.

And so both for Dental Concepts and for Chore Boy, we've added a handful of middle managers in the marketing and in primarily the marketing and operations area.

And that increased cost along with the additional product liability insurance and additional office space and travel and entertainment and so on.

All is just -- it was very much in our modeling but it accounts for what will be a rise in G&A next year as we have those costs in the P&L for the full year.

In addition to that, we are making a conscience decision to modestly increase our operations and product development staff, to make certain that we have the necessary human resources to drive the very aggressive new product program that we have laid out for the upcoming year.

Okay.

And then just lastly, talk about deleveraging in '07 primarily through EBIDTA growth or, I mean I think we only have what at least 17 million or so to repay on the revolver right now anyway?

As of today I think there is $13 million to repay on the revolver, and things go the way we expect them to be that should be paid completely off in the relatively near future.

Okay.

But next year you expect the majority of your deleveraging to come through EBITDA growth is that fair?

I think Alexis, if we made no acquisitions next year, then the vast majority of the free cash would be used to pay down debt which would clearly and unmistakable deleveraging.

Having said that I hope that that's not the reality.

I hope that again we find suitable acquisitions to use that excess cash to fund those acquisitions, which will then increase the EBITDA, will increase the brand contribution and is another form of deleveraging.

Alright great.

Thanks, very much.

Okay.

And your next question is from Joe Altobello of CIBC World Market, please proceed.

Thanks.

Good morning.

Good morning, Joe.

Just first question on the guidance.

How would you guys characterize it?

Is it realistic, is it a little conservative.

Where do you stand at this point?

Our goal is to not surprise anybody in the upcoming year.

Except on the upside I would assume.

Absolutely.

Okay.

And then second, in terms of the response in the OTC drug segment; you guys increased A&P spending pretty good there, but you really didn't get the sales boost that I would have expected and you explained some of that by the Chloraseptic situation.

But were you guys a little disappointed in terms of the sales boost from the A&P increase?

I think Joe what you have to discern is where we are in IRI and where we are in factory.

And again let me point it out that again quarter to quarter factory is up and down and we look at a year overall.

Because especially the seasonality of our business.

If you look in December in IRI we mentioned the Chloraseptic, was a little bit soft on the shipment basis.

So the volume of our business, the huge amount of that is in liquid basis.

And in IRI basis what we are doing in the market place impacted by A&P is up in high single digits and more recently in double digits.

The medicated lozenges business is the other big piece of that that has both the actual lozenge and the strips.

Again you may not see the data, but if you tease that out it's the medicated lozenge segment which is growing.

And so too, is the part of our business which consists of the lozenge and not necessarily the strips.

So that's one answer to your question in terms of sore throat.

On the other side in eye care, similar story there we have launched new products.

We've supported those with advertising, and if you look at the aggregate of the segments in eye care.

Our total IRI is up mid to high single digits as well, quite in line with our business model.

So yes we are pleased at the retail performance of those currently.

Okay.

And then in terms of Compound W correct me if I am wrong, but I think you guys have a pretty tough comp again in the March quarter, so I would imagine you are expecting that business to be sort of similar in terms of year-over-year change to what you saw in December quarter.

If you are looking at factory you'll probably see a challenge there.

We continue to believe that our IRI trends will continue to stabilize and hopefully go positive.

Okay.

And then lastly, share buybacks, any opportunity there?

No, as I think we've talked Joe.

Our bank, our loan [convenance] preclude any share back versus -- share buyback for several more years.

And certainly right now Joe our -- the first place we are going to use the cash is to first pay down the revolver, and then as Peter said if no acquisition opportunities come up to start paying down that term loan dig.

Okay, great.

Thank you.

And your next question comes from Chris Ferrara of Merrill Lynch, please proceed.

Hi guys?

Hi Chris

Can you talk a little bit about just a touch on the higher G&A expense in '07 again.

You said something about building from the bottom up on acquisitions which I'm just trying to understand a little bit better and is building out staff something that would be typical for future acquisitions?

Yes I mean when we talked about our G&A expense being up we were talking it comparing it to the average of Wall Street estimate that break out G&A.

And those estimates did not reflect the additional staffing necessary for acquisitions.

It was only part of our model, and we were just trying to point out areas where there are differences.

Does that mean --so are you saying it won't be up necessarily year-over-year, or will it just be high on Wall Street estimates?

It will be up year-over-year, the Wall Street estimates were averagely relatively flat -- up very marginally.

Got it.

But is that something you'd expect that future acquisitions do?

Sure, as we add business we have to add infrastructure to manage it.

Acquisitions for us are relatively efficient, in that we don't add G&A expense for acquisition that is proportionate to a sales increase, but you do have to add some.

Got it.

And I am just trying to understand the structure of growth overall.

I mean it has -- your G&A going up and I guess I am not sure as a percentage of sales what -- whether you guys are thinking it is.

But A&P is due and growth margin has been coming down I know that's a function of product mix.

What are you guys thinking abut in terms of margin expansion over the next couple of years?

Our view of margin defined as brand contribution margin, or operating profit margin we are looking to have that only grow very slightly.

But within that, we hope that the A&P component of operating margin grows somewhat as we get favorable product mix as OTC's grow, and as we continue drive closer as we get the benefits or scale as we get bigger.

But I think that's been a fairly consistent theme with us Chris, that you shouldn't look for meaningfully increased profit margins where the above revenue profit growth is going to come from D&A, where D&A won't grow as rapidly as sales and it's going to come from de-leveraging where interest expense certainly wont grow as rapidly as sales and actually will decline.

Got it.

And I just want to ask you I mean I think you guys said that Little Remedies was up 50% on factory in the quarter?

That's correct.

Is -- I guess what strategy I mean what about take away and retail I mean are you guys selling it ahead of consumption at this point and would we expect there to be sort of a rationalization of that next quarter?

In terms of retail, our numbers are up very significantly.

Very high double digit numbers a lot of that is also driven by distribution, and it's what we said we were going to do when we acquire the business which is to expand the footprint to put new SKUs in which we've done and to continue to advertise the business.

So it's really firing on all cylinders on Little Remedies.

One of the things Chris to keep in mind for the Little Remedies is that in addition to volume that goes through the measured outlets food drug [mass] Little Remedies has a very significant baby store businesses as well.

And that is anything even more buoyant than the very buoyant food drug mass business.

Right and I --that distribution is obviously a good thing I am just trying to understand.

I mean if you said strong double digits [to] takeaway, does that mean that it's running in line with factory shipments?

I was quoting IRI and I think to Peter's point we have to be very careful with these numbers.

Because some of it is not measured by IRI.

So I think if you look at the total takeaway and we could calculate the non-measured and the measured it would be relatively similar yes to our factory.

Okay.

And then, can you just talk about what the Chloraseptic supply issues where?

Sometimes we make some changes in our production methods.

And with respect to that as you know the strips is a new and innovative business.

There is not a huge amount of capacity there, and when things take a little bit longer, we kind of work hand to mouth because the demands for those products are good.

So as a results is -- we cant built excess inventories, we cant have excess capacity, if we cant make it for a while the demand is still there and we end up not shipping that business.

So what you couldn't find a supply--?

No, no it's just internal adjustments we were making.

But --

And it took a little longer than we thought.

Meaning what, the right formulation?

The various production issues and I think beyond that is our internal.

I think what you need to be rest assured of is, we solved the issues we are back in business and we expect that to be an event that's behind us now.

I think the larger question, we hope to pick up some of that business we are not making a forecast on that, but because we are back on business I hope to pick some of that back up in fourth quarter.

Got it thank you.

And your next question comes from the line of Karru Martinson of CIBC World Market.

Good morning.

Good morning.

Just to clarify, I thought I heard you say that advertising was a bit front loaded for the winter brand.

So I was wondering that does that mean that we should see A&P spending coming down here in the March quarter.

The A&P in the March quarter will not be up anywhere near to the extent that it was in the December quarter, year-over-year.

Okay.

And while strips were an issue for Chloraseptic I was wondering if we had an update in terms of how the newer products were performing in terms of Salt Water Gargle, [Citrus] spray and things of that nature?

The newer products, the things that we introduced this year, were new flavors of spray;

Citrus Spray, Citrus Lozenge those are doing quite well, we also re-staged the Lozenges with flavor crystals and our lozenge business is particularly strong, but Salt Water Gargle did not generate as good retail distribution as we had hoped for this year, but we are going to stay with it and make that an item that continues on.

Okay, and in terms of the flu season outlook, is there some kind of mixed messages with the Midwest being stronger than the East Coast, I was kind of wondering how are you guys are seeing that going forward here?

This is ending up being a more typical year really; that the flu season was a little bit stronger in the December quarter than it was last year, and it's likely to be a little bit weaker than it was in the March quarter last year, in total though for the six month period it's going to be not meaningfully different.

Okay.

And just in terms of the price increases that each took, do you -- were those taken in as an offset to what you see as the freight costs going forward or, was that just kind of a partial offset in the opportunities for you to take additional price increases?

We regularly look at all of our products line to see where there is opportunity to take pricing action.

Obviously the competitive situation for each individual brand and each individual SKU can and does differ, and that drives our decision as much as anything else.

We looked at all of our OTC and personal care items and took as I said increases that range from 2% to 5% which become effective in mid March, and will be therefore in place for all of next year.

Okay thank you very much.

And your next question will come from [Razah Rahimzidaph] of Lehman Brothers please proceed.

Good morning.

Good morning.

Good morning.

Peter I think you mentioned the inventories at the end of December quarter were roughly $34 million?

Correct.

What was the corresponding figure in 3Q '05?

Was -- 24

24.

Okay, and --

Razah just keep in mind that the number a year ago didn't have the two acquisitions of Chore Boy and Dental Concepts.

Right but those are not gigantic acquisitions right?

The inventory related to those two was roughly $2.5 million.

Right.

So the rest of the increase in inventories which is I guess roughly $7.5 million, what accounts for that?

[Biggest tease] continues to be Freeze Off, and let me -- anticipating your question, one of the things we do look at is months of supply; and months of supplies in December of '04 was about 2.1, at December of '05 that's up to 2.6.

However, the 2 6 is down from 3.2 in June and 2.8 in September.

What we aim to be at is between 2.1 and 2.3 months.

So, as we've been saying throughout the year, the Freeze Off, because each one of those cans is high priced.

It's definitely still over inventory, but we have been working and we continue to work to get that down.

So while the inventory levels that we are at right now, were certainly higher than we want them today, we are working very hard to get them back into line.

And certainly as we get into the peak selling season for Freeze Off, that definitely should come down to where we want it to be.

So, would you say the vast majority of the inventory increase year-over-year after acquisitions is essentially Freeze Off?

That [inaudible] yes.

Right, okay.

And, you would think that that inventory would get to normalized levels, what in the next quarter or two?

Yes.

Got it.

Chloraseptic consumption trends look pretty reasonable by most of your standards, but last year I think was a pretty strong year if I am not mistaken, following up on last couple of questions on this topic, would you feel comfortable that despite the tough comps in the March quarter that - - from the sales and margin standpoint that you can essentially match last year's result give or take?

I think what we have indicated is depending upon what happens on our strip business that we would be about flat.

We expect some upside on that, but I think that's the range we are internally looking at.

And is the strip issue resolved already?

Correct.

Okay.

And on the Little Remedies you mentioned you were up 50% in sales year-over-year, what is that in dollar amounts?

We don't give specific brand numbers on that, I think we've given indication before at the time of the acquisitions the rough size;

I think you could estimate through that.

Right.

But is that business roughly same levels about each quarter $4 million --?

It's less seasonal than some of our other businesses; it does have a hot/cold component associated with it.

Modestly, it's seasonal for the winter months.

Got it.

And then lastly, how do you feel about inventory levels at retail across your product lines; anywhere where there is --?

No, there is nothing unusual now.

The inventory -- really in the past the only meaningful inventory issue we had was when we talked at great length about with Freeze Off, and that's now normalized.

So, then our inventory levels are not outside of a normal range as far as we know in any brand or with any retailer.

Okay, and I'm sorry, last question Peter; the M&A environment would you say, it's fairly active --

Yes.

- - targeted rich environment for what you typically look for?

Yes, there are a number of transactions that we've been looking at, are looking at, and we have belief that there will be a number of interesting transactions that come -- at least available for review over the next four or five months.

The same size as prior transactions?

Same size or bigger.

Okay.

And if the transactions are bigger, would you anticipate financing them to debt or any other way?

Obviously that's dependent upon how much bigger.

The transactions - - we have considerable debt capacity, and I don't think we'd be looking at transactions that would exceed that debt capacity.

Thank you, much.

You bet.

And your next question will come from [James Adams] of Scopia Capital please proceed.

Hi, good morning.

On the G&A, so if we took a million out of this quarter, is that kind of a good run rate, and maybe we will see it grow a little bit next year as you add a few people, is that a reasonable assumption?

There's an extra million dollars in this quarter from the one time or at least unusual costs related to the review of our numbers and the ultimate restatement of them.

Going forward we adding infrastructure and we are -- so you'll see it, you'll see the G&A next year ratchet up a bit from the run rate now.

Okay.

And then just clarifying a few points on guidance; the mid single digit revenue growth for the March quarter, is that -- that's inclusive of benefits from Chore Boy and Dental Concepts I assume?

Correct.

Okay.

And the EPS that you are comparing that too for last year, is that $0.26?

Correct.

Okay.

And then looking at the '07 guidance, I assume that includes no additional acquisitions?

That's correct also.

Okay.

And then looking at your -- talking about interest expense going up year-over-year, at the rate you are generating cash flow it seems like the revolvers should be paid off a few months into next fiscal year.

Or sooner.

Right.

So, it doesn't seem like there should be a meaningful year-over-year increase in interest expense or perhaps not a decline that some people were expecting?

I think James, that as we look at - - at least a consensus of the analysts' estimates that we gathered, the reason we wanted to call the [inaudible] is because the vast majority of people were saying that the total interest expense was going to go down.

I think if you take debt levels that I talked about earlier, and that you will see in the Q that comes out within the next few days, and just start there, far be it from us to do your modeling for you, but you'll see that indeed the interest expense will go up and it's primarily as a result of the starting point of the GAAP as of the end of December and the end of January.

Okay.

That includes the assumption that we de-lever next year.

Okay.

And then just back to the G&A for a minute; as I look at it sequentially, last quarter to this quarter, and take out the million from the restatement, it's still up a million quarter to quarter.

Is that a result of the acquisitions and then there is going to be more on top of that, or were there any other things in there that --?

There is about 200,000 this year for the cost of one term incentive plans which obviously we didn't have a year ago.

So, that's one of the new items, and then the cost of being a public company is significant, forgetting about the million dollar incremental expense.

Okay, thanks.

And your next question comes from Eric Larson of Piper Jaffray please proceed.

Yes, good morning everyone.

Hi, Eric.

Quick question again on the price increase.

Price increase is going to be in your OTCs and personal care, is it inclusive of all of that?

In other words what would be your average price increase for you're -- what would be over the size of your entire portfolio?

I think the way to think of it is, that the brands that we took price increases on represent slightly less than a third of the total company revenue.

Okay.

So, it's just selected brands within that --?

Because you -- it would be a dangerous policy to make across the board price increase, because each brand has a different competitive situation; we look at each brand very carefully to determine whether we think it can tolerate a price increase.

Yes, I know.

I just wanted to see what percent of your portfolio did get a price increase; that was just to that question.

And then, secondly if you look at the timing of that, you're essentially - - you are going to get maybe a little benefit in the fourth quarter but that's really a 2007 event right?

That's correct.

I think it would be a mistake to think that retailers will buy against the price increase, so they will get much benefit from it during the quarter.

Okay, alright.

And so, I think this goes back to kind of an earlier question; is this likely just cover some of maybe -- is this likely to cover your fuel costs or why wouldn't this have some potential impact to cover some of your G&A increases for the year?

It does.

We -- if you think about it our price increase on a third of our business is due to the math.

It's not a huge amount, it's entirely beneficial and it all is factored into what we've said our expectations for the year are.

Okay, and did you get any price benefit -- gotten any price benefit so far in your '06 fiscal year?

Well we raised a year ago, or almost a year ago, we raised prices on Comet Powder, and so most of this year has benefited from that and happily that's one of the factors that's contributing to the strong Comet Powder sales growth.

So a much more limited pricing benefit in '06 than what you might get in '07?

Well because really, the only price action in '06 that that was affected by Comet Powder, which is not a third of our company revenues so --

Okay, alright.

Thank you.

And your next question comes from the line of [Amid Anand] of [XL Capital] please proceed.

Hi, good morning.

Good morning.

Firstly I just wanted to get a sense of sort of a more normalized number for free cash flow.

I think the working capital number that you had in there was maybe a little higher than I expected, and I just wanted to get your perspective on do we get any of that back and the final quarter of the year, is that within your expectations?

As Pete said we're going to work hard to drive inventories down, so we should which is probably over the next couple of quarters we'll get some of the then benefit in each quarter.

Our goal is to have working capital generally rise in proportionary line with sales, and that's what you should ultimately look for.

Right.

And then, approximately the million dollars of unusual expenses.

Can you give me a stance if you paid cash taxes on that, what the effect would have been on free cash flow, had you not had those?

Well we paid roughly a million dollars in extra expenses, which became tax deductible expenses.

Got it.

And then I'm happy to see that you are finally starting to give guidance, I think that's a huge positive for your investors to judge your performance by.

But I guess one thing I'm wondering is, given the relative volatility in your business trends over the last two or three quarters, how can we get comfortable that you're giving yourself room to be able to protect earnings if you see similar types of volatility going forward?

I would take slight issue with volatility this quarter; our sales volume this quarter, our revenues, were not so volatile, they were very much what we expected and what we had told you and other investors to expect.

So, really one of the things that's most appealing about the consumer products business is the relative lack of volatility, and we see that going forward as a great strength to the company, and we have as high level of confidence as anybody could have looking forward that the numbers and the general outlook that we provided you are reasonable and achievable.

And then going back to acquisitions for a second, I was wondering if we could review again your criteria for how you look at acquisitions and the multiples you look at?

And then in light of you telling us that some of the acquisitions might require a higher incremental G&A, than maybe what analysts were modeling out, do they still fit in your criteria for your --?

Absolutely, because the way we model an acquisition is on a pro forma basis, which that pro forma modeling builds in whatever additional G&A infrastructure we believe, and by the time we get up to it we know we are going to need.

So, the initial G&A for managing acquisitions isn't a surprise at all, its very much a part of our modeling, and our transactions are -- we model them, they are usually asset purchases which creates immediate tax shields which are beneficial for the cash flow of those acquisitions.

As we've said consistently we target to buy at a seven times pro forma EBITDA multiple.

So far we have been successful in that, hopefully we will continue into the future.

And so, that seven times would include, for example, what you are guiding towards for next year which is higher G&A to build up the infrastructure?

No.

Think of the [inaudible], we're buying a business that has revenues of $100 and we model that out, and then if we own that business, that $100 business will generate $30 in EBITDA and we model off of that, and that $30 EBDA reflects whatever incremental G&A is necessary.

Great, got it.

And then finally, I was wondering if the new products that you mentioned for launch in 2007, they are very impressive.

I was wondering if you could sort of give us a sense of how they comp against the new products that you launched in 2006, both in terms of just the sheer number of new products and also your expected contribution of these new products.

We really only announced the things that we are doing right now.

It's our policy not to announce new products until we've actually launched them to the retailers, we don't want to give our competitors any unnecessary heads up.

Our plan for fiscal year '07 has a very full and very aggressive new product pipeline built into it.

Those products that we are planning to launch are all realities, they are not things that we haven't thought of yet.

They are all real products that are in various stages of development and finalization.

That it is very much at the heart and the life blood of Prestige, and really any consumer product company, to keep its brands new and fresh by introducing new items, and we intend - - have been active, we are active this quarter, we were active last quarter and we are going to be very active in the upcoming year.

Great, I appreciate it.

Thank you.

You bet.

I think with that our chaperons are saying that we are out of time.

Thank you very much for your attention, for your excellent questions, and we look forward in a little over three months to reporting on another improving quarter.

Thank you everybody.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your presentation, and you may now disconnect.

Everyone have a wonderful day.