Prestige Consumer Healthcare Inc (PBH) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter and fiscal year end Prestige Brand Holdings earnings conference call.

My name is Raeka and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to Mr. Dean Siegal from Prestige Brands Holdings.

Please proceed, sir.

Good morning.

Welcome to Prestige Brands fiscal 2006 fourth quarter and year-end earnings call.

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 U.S.

Securities and Exchange Commission.

Now I'd like to introduce Frank Palantoni, President and CEO of Prestige Brands.

Good morning everyone and thanks for joining us today.

Here also I'm joined by Pete Anderson, our CFO, who'll be reviewing portions of our financial performance for the quarter and the full fiscal year.

As well as Peter Mann, our Chairman and both will be with us through the question and answer segment.

By now I'm sure you've all seen the news release we issued last night which contained both our March quarter and year-end financial results.

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

This morning, as Dean said, we're going to review the March quarter and then the full fiscal year 2006 results.

I will also briefly share with you some perspectives regarding our expectations for fiscal year 2007.

To begin, corporate net revenues for the fourth quarter of fiscal 2006 were $80 million, which represents an increase of 3.5% versus the results for the same period last year.

Breaking the quarter out by business segments, the household cleaning segment drove the growth, up 21.4% which more than offset declines in the OTC segment of 2.4% and in the personal care segment of 17.1%.

You may recall that last year's fourth quarter was particularly strong in the OTC segment which has impacted this year's segment's year to year comparison.

However this year's fourth quarter revenues for both the OTC and household segments were also favorably impacted versus year ago by volume from the Chore Boy and Dental Concepts businesses, which we acquired during the third quarter of the 2006 fiscal year.

Additionally, while we announced selected price increases on certain OTC items which became effective in the middle of March, the impact of these increases on the quarter's revenue is very small.

With that as an overview, I'd like to review the segments in a bit more detail.

Net revenues for the household products segment were 28.9 million, an increase of 5.1 million or 21.4% over last year's fourth quarter sales of 23.8 million.

In terms of key brand contributors to that performance, Comet brand revenues were up significantly compared to last year, in part driven by an expanded distribution base for Comet Cream.

During the fourth quarter, we have begun recording income under the Comet license to Proctor&Gamble in Russia and 14 Eastern European countries.

This license income is included in other revenue for the segment.

Chore Boy, in its first full quarter under ownership by Prestige Brands, contributed 3.4 million to this quarter's revenues and achieved the sales goals we set for it.

Now let's turn to the OTC drug segment.

Net revenues of 44.7 million for the quarter were 1.2 million below last year's net revenues of 45.9 million or down by 2.6%.

Dental Concepts products, marketed under The Doctors brand, contributed 4.2 million to fiscal year 2006 fourth quarter OTC sales, primarily driven by expanded distribution.

This brand also achieved its sales targets in the first full quarter under Prestige Brands ownership.

However, the incremental sales from The Doctors brand were offset primarily due to declines of Chloraseptic and Compound W.

Impacting Chloraseptic during the quarter was a soft trend in retail consumption for the entire medicated sore throat category.

Although data indicates a higher incidence of cough-cold symptoms for the quarter, retail consumption trends for the medicated sore throat category had high single digit declines.

Retail consumption of Compound W continued to show improvement during the quarter although factory shipments of Compound W showed a decline attributable to strong sales in the comparable period last year.

Now for the personal care segment.

Net revenues of 6.3 million were 1.2 million below last year's revenues of 7.6 million for the quarter, a decline of 16.2% mainly attributable to declines in the segment's two largest brands, Denorex and Cutex.

In terms of profit, adjusted operating income excluding the non-cash charges related to an intangible impairment in the personal care segment and an inventory stepup charge related to the Dental Concepts acquisition was 29.5 million for the quarter, which was even with the same period last year.

Although sales generated a profit increase of 1.2 million, this was offset by increased advertising expenses and increased G&A.

Reported net income for the quarter including the non-cash expenses related to the personal care category impairment and the increased state tax rate on the deferred income liability was 3.6 million, or $0.07 per diluted share.

This compares to a net loss for the corresponding quarter last year of 1.7 million, which incorporated a number of unusual charges related to the early retirement of debt.

Adjusting for the unusual event in both years, net income of 12.1 million was up 6.1% over last year.

Free cash flow, which we define as operating cash flow minus capital expenditures, was considerably higher than net income for the quarter.

We delivered free cash flow of 17.9 million which compares to free cash flow during the same period last year of 10.9 million, an increase of 64%.

I'll now turn the review over to Pete Anderson who'll provide more financial details.

Thank you, Frank.

And good morning everyone.

Before commenting on the operating results of the business, I'd like to take a moment to briefly discuss the two non-cash charges incurred by the company in the March quarter.

The first is from [inaudible] charges related to our personal products segment.

This non-cash charge of $9.3 million, which resulted in 6.1 million net of tax, resulted from our annual impairment [inaudible] of assets in accordance with FASB Statements 142 and 144 which were related to accounting for goodwill and other intangible assets.

The other non-cash charge incurred in the fourth quarter was for an increase in the state income tax rate to be applied to our deferred tax liability.

During the fourth quarter, the company completed a state tax nexus study.

The results led to an increase in the state rate to be applied to our deferred tax liability.

This non-cash expense to the tax provision was $2.3 million.

Importantly, I'd like to point out that this change has no effect on our ongoing book tax rate of 39%.

As Frank mentioned, adjusted operating income for the quarter just ended of $29.5 million was essentially even with the adjusted operating income last year.

Our sales increase drove a 3% increase in gross profit, which was offset by higher advertising and promotion and G&A expenses compared to fourth quarter last year.

Now let's look at those line items in a little more detail.

Gross profit was 43.9 million, an increase of 1.2 million, or 3% over the prior year quarter.

The increase was due to the sales increase.

Gross margin as a percentage of sales declined modestly from 55.1% to 54.7% in the 2006 quarter.

This decline resulted primarily from sales mix and lower margin household products contributed a higher percentage of sales in the 2006 quarter compared to the prior year.

Advertising and promotion expenditures of 5.8 million were 500,000 or 9% greater than last year's spending of $5.3 million.

The increase over last year was primarily due to the advertising and promotion expenses for the newly acquired Dental Concepts and Chore Boy brands.

Now I'll look at margin performance by segment.

The OTC segment had a gross profit of $29.3 million, a decrease of $100,000 which was driven by the sales decline.

Gross profit as a percent of sales improved from 64.1% last year to 65.4% this year due to a favorable sales mix which more than offset increased transportation costs.

Total advertising or promotion expenses were 4.2 million [inaudible] increased by 1.4 million or 49% over last year's A&P spending of 2.8 million. 800,000 of that increase is attributable to Dental Concepts spending.

The slight decrease in gross profit, combined with the increased quarterly spending for advertising and promotion resulted in a 6% decrease in contribution margin for the segment from 26.6 million last year to 25.1 million this year.

The household products segment gross profit for the quarter was 11.7 million, 2.5 million or 27% better than last year's gross profit.

This increase was primarily due to the sales increase.

As a percentage of sales, gross profit for the household segment improved from 38.5% last year to 40.6% in the current year's quarter.

The improvement in gross profit as a percentage of sales year to year was primarily due to favorable product mix, again, partially offset by increased transportation costs.

Advertising and promotion expenses for the segment increased by 8% over the fourth quarter of FY2006 due to spending behind Chore Boy.

Contribution margins in the household products segment of $10.5 million was 2.5 million greater than last year's contribution margin of 8 million, due to the increase in gross profit which was partially offset by the increased advertising and promotion expenses.

And finally, the personal care segment saw gross profit of $2.8 million which was 1.2 million below last year's gross profit of 4 million.

This decline resulted from the sales decline combined with cost of goods increases which were driven by increased freight expenses and raw and packaging material cost increases.

Advertising and promotion expenses of 300,000 were $1 million below last year, resulting in brand contribution for the segment of $2.5 million, a $200,000 decrease from the contribution margin of 2.7 million last year.

Now returning to overall company performance, G&A expenses in the fourth quarter were $5.9 million, which represented an $800,000 increase over the prior year.

This increase was primarily due to increased public company expenses related to our Sarbanes-Oxley Section 404 compliance testing as well as increased wages for new positions added in the second half of fiscal 2006.

Adjusted net income of $12.1 million for the fiscal year fourth quarter increased by 700,000 over adjusted net income of 11.4 million last year and equated to earnings of $0.24 per diluted share.

As Frank mentioned earlier free cash flow for the quarter was substantially greater than net income, driven by our long-term tax shield, net operating loss carry forwards and very low capital expenditures.

The free cash flow for the March quarter was $17.9 million.

During the fourth quarter, the company repaid $18 million of the revolver borrowing used to partially fund the acquisitions made in the third quarter, leaving $7 million to be repaid as of March 31st.

During the month of April, the remaining $7 million was paid down completely.

As of March 31st, the company's cash balance was $8.2 million, accounts receivable was $40 million.

The inventory balance was $33.8 million.

Accounts payable was $18.1 million and accrued expenses were $13.9 million.

And now Frank will review our full fiscal year performance.

Thanks, Pete.

For the fiscal year ending March 31st, 2006, the company's net revenues were 296.7 million, which was up 2.6% or $7.6 million compared to fiscal year 2005.

Several factors contributed to this improved performance.

First, our acquisitions have performed well, contributing 11.6 million of net revenue and have met or exceeded our business plans.

Reviewing performance by segment, the household cleaning segment has been a solid performer, up 10.1% for the year with growth on our household business continues to strengthen.

The OTC segment showed a $2 million or 1.3% increase over last year inclusive of Dental Concepts, Clear Eyes, Little Remedies, Dermoplast and a number of our medium-sized OTC brands also had meaningful year over year increases.

As you know, the OTC segment overall, despite many successes has been challenged for much of the year because of Compound W and New Skin market conditions.

Beginning with the first quarter of fiscal 2007, we believe that we will see factory and retail performance of these brands tracking very closely.

Our smallest segment, personal care, continues to be our weakest performer.

As mentioned previously, we are continuing to assess strategic options for the segment.

In terms of profit, adjusted operating income for fiscal year 2006 was 93.5 million, down 2.3 versus last year.

Several cost factors impacted our profits.

We previously mentioned that cost of goods, particularly the delivery and packaging component of these costs, were up considerably, reflecting high prices for petroleum.

In terms of A&P for the year, we spent a total of 32.1 million, which was up 8% and which improved the quality of our earnings.

Lastly, our G&A expenses were higher, impacted in large measure by legal and accounting costs related to restatements and public company Sarbanes-Oxley initiatives.

Reported net income for the year was 26.3 million, or $0.53 per diluted share.

This compares to reported net income for the fiscal year 2005 of 10.2 million which incorporated a number of one-time events.

Adjusted net income of 34.8 million for the fiscal year 2006 was up 10% over last year's adjusted net income of 31.5 million.

And lastly, free cash flow for the year was considerably higher than net income.

We delivered free cash flow, defined as operating cash flow minus capital expenditures of 53.3 million.

This compares to free cash flow for fiscal year 2005 of 50.7 million or an increase of 5%.

I'll now turn the review back over to Pete Anderson to provide full year financial details.

Thanks, Frank.

As Frank mentioned, adjusted operating income for the 2006 fiscal year of 93.5 million was 2.2 million or 2% below last year.

Increased cost of goods, advertising and promotion and G&A expenses more than offset the modest revenue increase for the year.

Reported gross margin was 157.2 million or an increase of 7.2 million or 5% over last year.

However, gross margin adjusted to eliminate inventory stepup charges in [both years] was 157.5 million in fiscal year 2006 compared to 155.4 million in fiscal year 2005.

Adjusted gross margin as a percentage of sales was 53.1% for fiscal year 2006 compared to - excuse me - 53.8% for fiscal year 2005.

This increase in cost of goods was due to increased rate and packaging expenditures related to increased petroleum prices and the product mix as the household segment represented a larger portion of total sales than in the previous year.

Advertising and promotion expenditures of 32.1 million were 2.4 million or 8% greater than last year's spending of 29.7 million.

The increase was partly driven by A&P spending to support the newly acquired Dental Concepts and Chore Boy brands.

G&A expense for the year were 21.1 million which represents a $900,000 increase over the prior year.

This increase was driven by the legal and accounting costs related to the company's restatement in September and the cost associated with the initial year of Sarbanes-Oxley Sections 404 compliance testing, increased salary costs from additions to staff and increased compensation expenses related to [inaudible] 123R stock based compensation.

These increases were partially offset by a significant decrease in performance based employee incentive costs for the year.

Reported net income of 26.3 million for fiscal year 2006 increased by $16.1 million over reported net income of 10.2 million last year and equated to earnings of $0.54 per diluted share.

Adjusted net income of 34.8 million, $0.70 per diluted share for the fiscal year 2006 increased by 3.3 million over adjusted net income of 31.5 million last year.

Free cash flow for the year was $53.3 million, again greater than earnings.

This was driven by our long-term tax [shield] of approximately $9 million per year, net operating loss carry forwards and very low capital expenditures.

While significant NOLs favorably impacted net income and cash flow in fiscal year 2006 these are mostly used up with about $4 million remaining going into fiscal year 2007.

And now Frank will briefly provide a perspective on fiscal year 2007, our current fiscal year.

Thanks again, Pete.

As stated in our earnings release, we are updating our expectations.

Management is operating the business with the expectation that revenue growth on a long-term basis will be in the range of 3 to 4% before the impact of any acquisitions.

Net income is expected to grow at a somewhat higher rate, although impacted in the short-term by cost pressures and infrastructure investment.

We also expect to continue to deliver free cash flow which is higher than reported book net income.

And should we make additional acquisitions, they will all be incremental to this outlook.

For the fiscal year 2007, we expect revenue growth to somewhat exceed our long term expectations due to a full year of revenue from acquisitions of Chore Boy and Dental Concepts.

However, the company anticipates that net income growth will be below revenue growth.

This traces to our expectations of continuing costs related to pressures on gross profit and our plan to [slightly] A&P support - slightly increase A&P support but primarily to investments in G&A.

More specifically, for fiscal 2007, we expect gross profit as a percent of sales to be slightly unfavorable to fiscal year 2006 as a result of increasing commodity costs on cost of goods.

However we do expect those increases to be partially mitigated by favorability in sales mix.

In terms of A&P, we continue to make marketing decisions based on a long-term view that effective advertising will continue to contribute to the strength and value of our brand equities, which we consider to be our most valuable financial asset.

As such we are planning to increase A&P spending over the year in the range of 20 or 30 basis points, which is in line with what we have previously mentioned as part of our business model.

Now, turning to G&A expenses for fiscal 2007.

Management expects that these costs will increase at a rate in excess of the revenue increase primarily driven by increased staffing expense and increased directors and officers insurance costs.

The larger portion is related to three components of staff expense.

First, the salary component which will reflect a full year of salary costs in the fiscal year 2007 for investments made in additional staffing during the latter part of fiscal 2006.

Second, higher costs related to our employee incentive plan which was not earned during fiscal 2006 because company results did not meet internal performance criteria for payout.

Third, long-term stock based compensation costs under FASB 123R are expected to more than double.

This reflects a full year of pro rata expense for a plan initiated midyear of fiscal 2006 as well as a second year of the long-term incentive plan to be initiated in fiscal 2007.

We believe the additions to staff made during the fiscal year 2006 well position the company for our growth in the years ahead.

For the future, we believe our basic strategies remain sound and that our focus on sales and marketing as core strengths of the organization will continue so too will our continued investment in our core brands to fuel our revenue growth.

As you know, innovations and line expansions have been and will continue to play a key role in our growth.

With several new items scheduled to be launched throughout the 2007 fiscal year, we are pleased with the initial performance of our first new OTC segment items.

These include a new Clear Eyes triple action item, three new Murine homeopathic products, a Dermoplast poison ivy treatment product and a Little Remedies anti-colic item, which is the 15th extension of the Little Remedies brand.

We also see line extension growth opportunities for our newest acquisition, Chore Boy and Dental Concepts.

In sum, we are confident with our outlook.

We believe our plan focuses on achievable growth and sets an organizational platform for sustainable growth.

Comparing the fiscal year 2007 versus fiscal year 2006 we expect improved revenue performance, higher than our long-term outlook.

Excluding the impact of acquisitions, we anticipate that our fiscal year 2007 revenues will be in line with our long-term growth.

Further, we plan to maintain our quality of earnings to best position our brands for continued growth in the future.

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

We will continue to be selective in determining our acquisition targets based on achieving our internal benchmarks for rate of returns.

We also point out that free cash, which remains higher than our net income, if not used for acquisitions, will be used to pay down debt.

Importantly, our expectation is that fiscal year 2007 will be a more stable year.

And now we'd be very happy to take your questions.

[OPERATOR INSTRUCTIONS].

And your first question comes from the line of Lori Scherwin of Goldman Sachs.

Hi, good morning.

Good morning,

Can you talk about this new 3 to 4% sales growth target and how you're thinking about it by segment?

The fact that personal care is going to remain a drag for some time so that implies OTC and household have to grow faster than that.

Is that right, and then what would be the drivers to allow those businesses to grow faster?

Well, first, yeah - that's in line with our thinking the way you've characterized it by segment.

As we've mentioned, personal care, the smallest segment has continued to be a drag in terms of growth.

We continue to expect that to be weakest performer.

With respect to household it's been delivering very solid performance.

We expect solid performance to continue there.

As we've mentioned in terms of innovation, growth and marketing activities, we continue to invest in OTC and expect that to be the lead driver of our growth.

So is it fair to say you still think that OTC and maybe even household can grow in that 5 to 7%?

Well, given our portfolio we see a variety of growth rates among our many brands.

Certainly achieving 3 to 4% overall implies that some brands will be - have a higher growth rate and for some of our brands, 5 to 7% is a realistic growth target.

Okay.

And then on the EPS growth goal of somewhat higher than revenue, what's going to be the major driver here?

Do you expect any margin expansion or will this all come from deleveraging?

It's a variety of those.

As we mentioned before, deleveraging is important to our model.

Additionally as our revenue growth continues to increase we think on a ratio basis, certain costs related to G&A will decrease.

So we'll get synergy effects and leverage from our fixed cost structures as our revenue growth continues to increase as well.

So you still do see opportunity for some modest margin expansion?

At the bottom line level, absolutely.

Okay.

And then on the infrastructure cost, what exactly do those refer to?

Is that just the salary cost you mention in your prepared remarks or is there something else maybe you're looking at doing?

Your question relates to the outlook?

Yeah, in the press release you mentioned these infrastructure and investments and it wasn't quite clear what those were.

Well, I'll give you a first part answer to that.

Structurally we've made additions to staffing over the course of 2006.

Those occurred somewhat towards the latter half of 2006, so on a year-to-year basis, you're looking at a full year of costs for the staffing additions in fiscal 2007 compared to partial year costs for those staffing additions made in fiscal year 2006.

On an exit basis of 2006 going into 2007 we don't expect significant changes in an absolute headcount level, so that's the first piece.

But we mentioned there's three buckets of cost which will impact us first and foremost in fiscal year 2007.

That first bucket is as I just described, salary costs associated with that.

There's two other pieces which is year to year comparison of costs with respect to our incentive plan.

I mentioned that the earn out was not there in fiscal year 2006 because our company did not meet our internal criteria and we are planning to achieve growth in 2007.

Lastly, we have a long-term management incentive plan.

The long-term management incentive plan was initiated in midyear fiscal year 2006 so two impacts on that bucket - one is we'll have full year costing versus partial year costing of that portion of the plan as we go into fiscal year 2007 and second, seeing a long term plan, a [inaudible] is given each year so we'll have a second [inaudible] of that plan effective for fiscal year 2007.

And I'm - if Pete you'd like to comment further on that, or -

[inaudible] there was no - there's nothing in addition to that.

Okay.

And then just lastly you mentioned that you took some price increases in OTC in March, can you just tell us which categories and how much the price increases were and if you led or followed and what the competition is doing?

Pete, why don't you go ahead and address that?

The - it was a post of products scattered throughout OTC.

The average cost increases on the SKUs that we increased were between 3 and 5%.

And as Frank said, the effective date was March 15th.

Well, the impact on the fourth quarter was very slim.

What percent of the OTC business did you take that price increase on?

About 25% of the OTC line.

And are you seeing competition follow?

Yeah, I mean, it's a mixed bag.

In some cases, we followed competition.

In other cases, we were the leader.

I mean, I think you - if you just look out across the consumer products landscape, you've seen or heard that virtually every company faced with the same cost pressure that we're faced with have taken price increases or is taking price increases where they can.

Do you think you've taken as many as you can or do you still think that you have flexibility to take future price increases if costs don't seem to be abating?

Lori, the answer to that is both.

Let me give you a little perspective of the ones that were effective on March 15th.

As we mentioned they were selective price increases.

Our goal was to grow our brands and to be as competitive as we can be in the marketplace.

So what that translates to is we're not taking price increases simply to cover costs.

We're taking them strategically.

We're taking them - the categories that we think are correct to take price increases and we're doing it in a way where we expect to maintain our competitive positions.

That's why, as Pete alluded to, it wasn't across the full line.

It's on those brands where we think it's correct to take a price increase.

And where our competitive position will well tolerate that.

Looking forward, we are constantly looking at whether our either costs impacts warrant a price increase.

Sometimes commodity shifts will create a situation where everyone understands that a price increase is appropriate.

So looking forward we're going to keep an eye on that.

And secondly, given our growth there's opportunities where we can take a price increase because the competitive environment warrants it and it makes sense from a margin standpoint.

So our answer to that is it evolves.

We're going to do it with an eye to what's correct for our strategies in the long run.

Okay.

Great.

Thank you.

And your next question comes from the line of Reza Vahabzadeh from Lehman Brothers.

Please proceed.

Good morning.

Hi, Reza.

Hi, Reza.

You touched on the M&A environment that you found the environment was robust.

Would you mind elaborating to the extent you can, please?

Well, background.

We've mentioned before that we continue to see a dynamic environment with respect to the pharmaceutical marketplace.

What we mean by that is the macrofactors are that pharmaceutical companies are trying to get a line either towards biotech or consolidate their consumer businesses.

Some players going in one direction, others going in another direction.

The history of that probably picks up with BMS divestiture and the current Pfizer divestiture that's on the table.

So in that kind of an environment, where those are rather big acquisitions and divestitures that would be occurring, we see the consolidation will provide conflict situations where brands that are in our sweet spot may become available.

So that's part one of the dynamic.

Part two of the dynamic is that we've just seen activity increasing over the past - probably 3 to 6 months.

And we think that trend will continue.

Are you looking at the same size type acquisitions [inaudible] in the last year or two?

Or are you looking potentially at larger ones?

We look at acquisitions somewhat opportunistically based on what we think we can achieve on a rate of return basis.

Certainly at about $300 million in sales, a large acquisition we would consider to be over $100 million.

So our sweet spot in terms of what works from a capitalization standpoint, what works from a synergy standpoint and what works most easily from a integration standpoint would be sub-100 but we can certainly consider things larger than that.

And I mean, how much - how high a leverage are you willing to absorb?

At least temporary to capitalize on those [inaudible]?

Pete, why don't you comment on that.

Yeah, we would be comfortable going up to around 5.

We have the ability if we wanted to, to use our accordion feature on our loan to go up to 5.5 times.

But right now we're at about 4.4, 4.5 times.

And we'd be willing to go up to about 5.

Just on that topic, household - housecleaning item just on cash taxes.

Do you - you mentioned your [inaudible] are used up excluding $4 million so your cash taxes going forward will be what percentage of book taxes?

Well, the cash taxes as a percent of taxable income will be in the low 20s.

Okay.

And then your [inaudible] will expire after '07?

No.

The $4 million about 2 - 2.8 or so will - is available in '07.

The rest are - go out through 2008 I believe.

Okay.

Lastly, inventory at retail, with your key customers in your product lines, how do you feel about that trend?

We think we're in relatively good shape there vis a vis the market in general.

As we've noted before, we had destocking issues with a large account last year.

It primarily impacted our household segment so we've experienced that.

Our impact right now we believe is more modest - our interpretation versus what we read about in the press.

We think there's a different kind of destocking intention now that's been taken on by some of the larger retailers whereby we're less impacted than some of the major players that we're reading about in the headlines.

Okay.

And then you - on your guidance you said A&P spending as a percentage of sales may be up 20 or 30 basis points.

G&A as a percentage of sales in '07 versus '06 - would that be up also 20 or 30 basis points?

We're not giving any specific comments beyond what I said numerically.

Suffice it to say we're pointing out that there will be significant cost increases in the buckets of G&A expenses that we mentioned.

And we kind of characterized that.

That's really all we're going to comment on at this point.

Is that because the long term compensation or expense or just a compensation [inaudible] of expense is to be determined in terms of the absolute dollars?

What I can do is just recharacterize what we said.

I don't think that's a correct assumption.

We mentioned the three components of it, one is just the year to year impact of some partial year costs relating to full year costs on the salary piece.

Right.

The second is year to year differences is employee incentive plans.

And then the third which I think you're alluding to had to do with our long term incentive plan and adhering to FASB 123 we're accounting for all those.

We're - we've had costs associated with the first year of that plan which are costed or expensed pro rata over the years so those costs began to impact us halfway through last year.

Those costs continue in our expense pro rata throughout the year for the full year of 2007 so there's just an accounting impact of how much cost gets expensed in 2006 versus 2007.

And second of all, long term incentive plans are exactly what they say they are.

They're there for the long term so there's an additional [inaudible] of that plan each year there's a new award which is effective in the long-term given we achieve our performance criteria.

So that is also layered into those costs.

Really nothing unusual to the way our accounting flows over these two fiscal years.

Thank you much.

And your next question comes from the line of Joe Altobello of CIBC World Markets.

Hey guys, good morning.

Good morning, Joe.

First a question on the long term growth targets, now 3 to 4% versus 5 to 7.

What was the thought process in terms of why you'd do that now and in terms of how you get there, is it top down, is it bottom up?

Are you assuming any market share gains or pricing in that?

Let me kind of answer the middle part of that question.

What our thinking is on a long term forecast.

And why that varies.

What we do as you know is write our strategic plans.

We look at our marketplace and we try to make forecasts internally off of that.

As we've mentioned, our personal care segment - and we believe that broadly the personal care categories in which we compete will continue to be very challenging environments.

That's been evolving over the past year or so.

And we've decided that it's appropriate to reset our expectations on those marketplaces - on those categories and accordingly it affects what we consider to be our expectations for that segment internally.

So that's one lowering of our internal thoughts relative to that segment.

The second piece is, we've had two market categories - that of wart removal and that of liquid bandages - which have seen tremendous, tremendous growth.

So we're always optimistic and pleased to see that tremendous growth.

At a certain time we recognize that categories will come more in line with more modest growth expectations.

We've taken a look at those two categories.

We have set our expectations on what we believe is very modest and realistic growth for those two categories and accordingly have set our internal business plans.

When we go through that strategic planning process to get the second part of your question, Joe, we come out with our financial plan - our internal numbers and are just explaining to all of you how management here is expecting to operate the business and a little bit of the thinking that underlies that.

Okay, so are you assuming any market share gains of pricing or is that really just category growth?

Yes, we're assuming both those things.

That we will take price increases in the future and that we will build and gain market share as we've been doing.

And that's true.

I want to point out that from a strategic and marketing standpoint, because a category has experienced modest growth or because a category is declining, and certainly you know the [IRI] numbers on household cleaning.

We have dramatically built share with our household cleaning segments, specifically on Comet.

So share growth is always very, very important to us strategically.

I think, Joe, the difference in the thinking really was driven by the fact that our plans always included modest levels of price increases and that hasn't changed.

As well as share growth in certain of our categories and brands and as Frank said, that the change was really looking at both the personal care segment and what we've gone through over the last year with both wart removal and the liquid bandage categories and it just was resetting the expectations for those two segments of the business.

Okay.

And then in terms of your guidance for '07, in the press release - I just want to make sure I read this right.

You guys are expecting revenue growth above your long term target of 3 to 4%.

But earnings growth below revenue growth.

Is that below the revenue growth in '07 or below the 3 to 4%?

In '07.

Okay.

So it'll be above 3 to 4% in '07?

The earnings growth.

I think you want to go back and clearly - we can restate that here.

But what we're saying, Joe, to be very clear, is our long term expectation is 3 to 4%.

And what we've added is a 3 to 4% excluding the impact of any acquisitions.

So if you look at any particular year or you do a year to year comparison, if you take out the impact of acquisitions, our management is operating on the assumption that our company will grow 3 to 4%.

That's the first statement.

Second statement is over the long-term, our income will grow, we believe, at a rate higher than that.

We then went on to sort of explain '07.

And as you know, there will be a partial year versus full year impact of acquisitions and that would make our revenue growth for that year higher than our long term average.

That is a year that will be impacted by effects of acquisitions.

And what we said is that when we have looked at that total revenue growth in our planning process, we expect that our income growth may be somewhat below that.

Slightly.

Below 3 to 4%?

No, no.

No.

Our [inaudible].

[inaudible].

Total revenue growth for the year.

Perfect.

Which will be in excess of 3 to 4% given the impact of acquisitions.

Excellent.

That clears it up.

And then lastly if I could just one last question on the acquisition side.

You and I have talked about this in the past but how do you guys look at acquisitions today versus debt reduction and compare that with how you've thought about it in the past.

In the past I think you've clearly focused more on acquisitions and thought the balance sheet was fine and it sounds like that's still your thinking today but I was just curious if you guys have considered more debt reduction and deleveraging more aggressively over the next year or two.

Again, let me answer that in two parts.

The first part is how do we look at acquisitions?

We believe we add a tremendous amount of value to our brands and when we see an acquisition opportunity where we can add value, and it's consistent with our internal benchmarks for rate of returns we will pursue those types of acquisitions as a target.

Because what we believe we do very effective job at is adding value to those types of brands.

That's part one.

With respect to our capitalization, Pete has pointed out that in the short term we have some flexibility with regard to our debt structure.

We're not at capacity with regard to our debt structure and that what we have pointed out is that we have strong cash flow so that given kind of a sweet spot size of acquisitions we don't believe there's any problem in the short term.

Okay.

Great.

Thanks.

And your next question comes from the line of [John Anderson] of William Blair.

Morning.

Morning, John.

I was wondering if you could just comment on new products a little bit. [inaudible] as you look at '07 do you have kind of a target contribution from new products and if you could just shed some light on some of the newer items that you may be bringing to market in '07 that you're particularly excited about?

Sure, yes.

We have targets for our new products.

We'd like to see a certain amount of new product growth every year through innovation and through line extension.

Those are internal targets.

We don't release those. #1. #2, from a standpoint of contribution whether you're talking in terms of contribution margin or the quantity of that, we like to see our new products positively contributing to our profitability.

So we tend to launch new products which will enhance our profitability.

As we've described before, one of the advantages we have with such strong brands is to maintain a relatively stable amount of A&P investment, shifting the focus somewhat of the communication to the new products.

So it's one of our advantages in the marketplace is such well known brands that what we can do is during the peak season where we're selling in our new products, shift the message, talk about the new products, still advertise the core brand and be very effective with our new products.

That's especially true in OTC.

OTC is an area where we expect to continue our new product development and line extension and I've referenced 3 or 4 new items we've already put into the market just beginning in 2007.

And lastly, yes we expect to have further new item introductions as we progress through fiscal year 2007. [inaudible]

-- private label penetration in any of your categories that was kind of an input to your revised expectations?

No to both of those.

I - just to recap what I said, we have a segment-specific issue with regard to personal care.

As you may know, personal care - especially some of the subareas we compete in, has year to year changes because of fashion with respect to the nail polish category.

Those are independent factors that affect the marketplace.

We're simply looking at that and trying to manage our business in a way that's consistent with what we see for market trends.

On the other two fronts [inaudible] again those are market conditions.

And we don't see any issues with respect to private label with those two categories.

As you may recall, private label is usually a lesser factor in the OTC category.

Thank you very much.

You're very welcome.

And your next question comes from the line of Eric Larson of Piper Jaffray.

Yeah, good morning everyone.

Good morning.

You haven't mentioned anything about potential stock option expense for this year.

Can you give us a figure, either in dollar terms or an EPS what it might be?

That's our one term comp expense that we were talking about.

And then to put it into dollar terms, the year just passed - 2006 - was just north of 350,000.

And the expectation for next year is that it'll be around 900,000.

And will that be pretty evenly split across the quarters?

It'll be a little bit low in the first quarter simply because the second [inaudible] of the plan won't happen until the second quarter.

Okay, great.

Thank you.

And your next question comes from the line of [inaudible] from [inaudible] Capital.

Hi, good morning.

Good morning.

How are you doing?

Very good, how are you?

Great.

Just to start off with a clarification, the NOL that you were mentioning - the 4 million that's left - that has nothing to do with the 9.2 million shield that you get every year, right?

That shield just continues on -

[inaudible].

Right.

All right, so that 4 million is incremental to the 9.2?

Yes, sir.

Great.

I have a question on forecasting.

Very few public companies out there have your track record when it comes to forecasting their revenues.

And I was wondering if, after the experience that you had in your fiscal '06, if you've changed anything about your forecasting methodology or if you could just review what your forecasting methodology is?

Well, as I've said, we do several looks at our business.

One under long term strategic basis and other on an annual plan basis.

And I think to your point about our company versus others, we've participated in a couple of categories that have very different things going on with them.

As a result, the volumes up and down of those categories have been significant.

So what we're simply doing is taking a look at those categories and on a normal, year to year long term strategic planning basis as well as short term financial budgeting basis, trying to look at those categories and set our brand expectations in a way we believe is most appropriate.

So really nothing has changed conceptually with the way we plan or look at our business.

Our belief is those categories have moved up and down a great deal and in that kind of environment from time to time you need to reset expectations based on sort of the independent movements of those markets and categories.

All right.

On retail [inaudible] I know Frank in the past you've given us some statistics on retail [inaudible] for some of your big brand and I was wondering, now that you're almost 2/3 of the way through with your current quarter, if you give us a sense of what retail sell through is like for some of the big brands - the brands that matter and whether in this quarter you expect any divergences between retail sell through and factory shipments.

Let me start at the last part of that question.

What we mentioned on the call is the two categories that have been up and down and when categories move up and down you do get a little divergence between retail and factory - that being wart removal and liquid bandage.

We fully expect to see our retail performance closely tracking our factory performance.

Said another way, we believe most of the ups and downs of 2006 with respect to retail versus factory variances are in the past.

They're part of 2006 and as we move forward with respect to the two categories they will track very closely.

I don't know if that answers your question but that's what we've said on the call.

And then could you give us a sense of just what retail sell through is like for some of the big brands?

When you say retail sell through, you're talking about our IRI, POS data?

Yeah, sure.

Not really.

I mean, those data are proprietary.

And I think we've alluded to what has been in our call stronger or less robust retail performances already.

To kind of characterize our past fiscal performance.

All right, and then finally, Frank, at a recent investor conference you mentioned that last year one day your stock dropped significantly and essentially nothing had changed about the company.

Now we're sitting here at the beginning of your fiscal '07 and I just like to get your view as a shareholder, as to how you would think about your stock price and how you justify your valuation when you say nothing has changed from when you went public - given the new reset of long term growth targets.

Sure.

Nothing has changed since we have gone public with respect to our brands the strengths of our company.

If anything we've made acquisitions and we've seen growth of some of those acquisitions and in our categories that we're very proud and pleased with.

What we've said here this morning is that we operate in many categories.

Those categories are influenced by a lot of external factors that no one really in particular controls.

And as a normal part of our planning process, we've taken a look at some of those and have operated the business and are operating the business now with what we consider to be realistic and appropriate expectations.

So again, coming back to the point, our brand equities are as strong if not stronger as they've ever been.

Our strategies remain sound and intact.

We expect to grow these brands and we will grow these brands through good marketing support, through effective advertising, through a continuation of new products and line extensions, through very effective sales efforts and building distribution.

Through a lot of the basics that we have always stood for.

So all of those elements remain in place and we will continue those.

Great.

Thank you.

You're welcome.

And your next question comes from the line of Bill Chappell of SunTrust.

Good morning.

It's actually Mark in for Bill.

Good morning.

Just a quick question on the licensing agreements with P&G in Eastern Europe, is that something you see as kind of a growth avenue in the future in emerging markets?

It really depends - that - P&G have businesses with Comet, with Chloraseptic in many countries throughout the world and we're talking to them as well as other people to see if there may be opportunities to capitalize on some of those strong trademarks in other areas of the world.

So certainly we will not shy away from any opportunity.

We look at a variety of ways of bringing our trademarks to market and that happens to be one that we felt would work best for us over in Eastern Europe.

We are currently looking at opportunities in several other areas of the world.

Okay, great.

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

Good morning.

Good morning.

In terms of the competitive response out there - I know you mentioned that it wasn't significant during the quarter in terms of performance.

I was wondering, with the relaunch of the kind of Head and Shoulders with Procter and Gamble and also the line extensions that Chatham has been doing with Selsun Blue unit, has that been a weight on the Denorex performance?

Certainly when we looked at our strategic plan, when we evaluated where our business could head short term, we saw an increasingly competitive environment with respect to dandruff shampoos in general.

And specifically because of what you just pointed out - Chatham is launching new products, P&G we believe will staunchly defend its territory.

That creates for a very very competitive environment.

And as we said with respect to an earlier question those are things that occur in the marketplace and have impact on our brands.

And we certainly have considered that to be an impact on the Denorex brand.

Okay.

And in terms of in - just kind of a robust acquisition environment, I mean, have you considered potentially spinning off one of some of those brands in the personal care business or the personal care business itself and using that as - to fund further acquisitions in faster growing sectors?

What we've mentioned for a couple of months is the fact that we always strategically evaluate our business segments and we've had a sharper focus on the strategic evaluation of personal care as a segment.

The hows and whys of that we're still continuing to assess.

Okay.

Thank you very much.

You're very welcome.

And your next question comes from Tony Gleason of Lehman Brothers.

Thanks.

Given all the [inaudible] that you've outlined, can you give us a sense of what you think free cash flow will be for '07?

We believe it will be consistent with what has been over the last year.

So say 50-plus?

Well, we believe it will be consistent with what has been over the last year.

Okay.

I guess my - a lot of my questions have already been answered.

But I - sort of my take on things is you've sort of outlined a modestly positive outlook for '07.

Perhaps the confidence in that outlook might be more convincing if you folks were to commit to purchasing stock personally here.

We appreciate the comment.

Okay.

Would you care to share any thoughts on that - you know, Frank, Keith and Peter?

I think that's always an option for us as managers and I think we'd leave it at that right now.

But we certainly appreciate your comment and your question on that.

And we understand how that would affect perspectives.

Thanks.

And your next question comes from the line of [inaudible].

Okay, thank you.

Hi everyone.

Hello.

Most of my questions have been answered but I wondered if - Peter, maybe this is a question for you.

If you could disclose what your internal expectations are from the acquisitions that you've made in F06 as far as revenue goes.

[inaudible] we don't comment on individual brands.

Okay.

And [inaudible].

We can give you a framework of that as we know what our capital structures are - what the cost of those capital structures are and like most companies we intend to make acquisitions which are positive and above our internal benchmarks.

So to the extent that one assumes we're doing those internal assessments on rates of returns and playing that out, we always seek to target acquisitions that we believe we'll achieve those benchmark rates.

Were you pleased with the results from the fourth quarter of '06 from those brands?

Yes.

Definitely.

Okay.

And also did you mention which - what asset or which assets took the impairment charge in the fourth quarter?

Segment.

Yeah, it was a segment review.

Okay.

Yeah, we looked obviously at all of the segments and all of the brands.

And it was trademarks within that segment.

And you said - I'm sorry, it was a little broken up - personal care, it was?

Yes, personal care.

Correct.

Okay.

That's all I really have.

Thank you.

And your next question comes from the line of Alexis Gold of UBS.

Yes.

Good morning.

Good morning.

Just one follow up, I know you had a bunch of questions about your share price but [inaudible] what's the [inaudible] on your restricted payments [inaudible] right now on your bonds.

Trying to get a sense for [inaudible] repurchase any shares at this point.

I guess what is your [inaudible] -

Yeah.

We have many or several covenants that would preclude us from doing that.

Not the least of which is that our debt to EBITDA ratio must be below 3.5 times.

Okay, great.

Thank you.

And I guess just additionally, you've definitely touched on inventory levels - current inventory levels at retail and a little bit about your inventory levels this quarter.

But I know Wal-Mart yesterday continued to make comments about managing its inventory levels pretty aggressively.

Any - it sounds like you think your [inaudible] for whatever reason you guys are less impacted than other companies. [Inaudible] sense as to why that's actually the case and what you think is different about maybe your product mix or what you've seen your own business versus what the mass retailers are talking about right now?

Well, let me just go back and correct something.

We were significantly impacted by destocking last year --

Correct.

-- on household.

And the magnitude of 2 plus, 3 plus kind of weeks.

I think we commented on that in our second quarter call.

So we have been very significantly impacted in our household segment.

We believe that now we are through that destocking impact with respect to the household segments.

We have seen minor impacts to Wal-Mart's plan to reduce their inventories on our OTC segment.

So we have seen them but from what we are seeing, they seem to be less than what's in the headlines vis a vis P&G and some of the other major companies.

Okay, and [inaudible] across your [inaudible] look across your distribution [inaudible] that you're starting to see other areas whether it's drug or grocery trying to take similar initiatives kind of follow suit.

Or is that not something that you're seeing at this point?

Not as yet.

Okay.

Great.

Thanks very much.

And your next question comes from the line of Chris Ferrara Merrill Lynch.

Hey guys, apologize if some of this is redundant.

I just got on the call a little late.

I wanted to ask about the change in the long term top line rate.

It looks like - I guess it's coming down about on average 2 to 3 points on the top line and the things you talked about were personal care - I guess Compound W and New Skin.

And it seems like even if you combine those three, I mean, I don't know, just roughly - what - 30% of sales?

Seems like you'd have to have a major shift in how you're viewing those categories.

And I just wanted to make sure that's right, if the math makes sense?

Well, let's first put the math into context.

Let's say averagely it's 2%. 2% of $300 million in revenue is about 6 million.

Those categories are relatively sizeable.

I think the delta on that approaches high single digits.

So if that's what you're describing as a delta that's just the way the math plays out across what we've talked about and the magnitude of the 2% or $6 million shift on revenue.

Chris, if you look at the personal care, for instance, although a smaller category for us - the expectation when we were looking at 5 to 7 was that we were going to stabilize the category.

And then perhaps have modest 1 to 2% growth.

What we're looking at now is we now face the year with that category has declined about 15% year on year.

So that is a big delta, going from flat to down 15.

And similarly in the other two categories - both wart removal and liquid bandage, over the past two years there have been - in terms of IRI, available data there have been growth - period to period growth and year to year growth of 30% that we've seen in those categories, 40%.

So that's not indicative of complete year growth for all of those categories but it gives you a sense that they were extremely dynamic for certain periods and that was expected to continue for a certain period.

But at a point, those categories will tend to moderate.

So that gives you some context of how to feel about that 2% or that 6 million in terms of actual variance.

Got it.

So you would - I guess you had thought originally that the Compound W and New Skin categories would have continued at that rate over the longer than you think it actually will now?

Is that fair?

We had anticipated that very high growth was going to moderate so that the growth over the year just passed and the year that we're in now was going to be in the low to mid teens.

And looking now you would say, wow, that was a pretty crazy assumption.

But we were experiencing over the past couple of years plus 30 or plus 40%.

So our expectations have been that that huge growth was going to moderate but that it was still going to be in the low teens.

But we now based on the past year have taken that down to grow slightly in excess of what we're looking at the entire company [inaudible].

Got it.

Thank you.

Sure.

And your next question is a follow up from the line of Reza Vahabzadeh.

Please - of Lehman Brothers.

I don't know if you touched on this, I didn't hear it but can you kind of bring us up to date on what's going on with Compound W?

Can you be more specific?

We've covered that a little bit.

It's a follow up question -

It sounded like last year was a bit of a weak year for it, do you anticipate '07 to be better?

Yeah, I think we've covered the point several times.

If you go back to fiscal year '05, we had a major retailer with a very, very heavy buy in so we would characterize fiscal year 2006 as a period of normalizing our retail levels with our factory shipments.

Part 1.

Part 2, we also saw some differences that we're alluding to them as category trends.

So we had two things impact in '06.

We think that as we look forward we have very realistic expectations for still a very good growing category with respect to wart removal, so we've aligned our internal projections for the business consistent with that market expectation, #1.

And #2, we think we're about synced up right now with respect to what the retail performance of Compound W will be doing with the factory performance.

Got it.

Thank you much.

Think we'll do -

And our -

-- last question.

-- our last question comes from the line of Mitchell Spiegel of Credit Suisse.

Just a housecleaning issue.

Could you just break out your debt component to what was available under your revolver at year end?

We had a $60 million revolver.

At year end we had 7 million outstanding on that [inaudible] 53 million available.

Subsequently we paid back the $7 million so right now we've got 0 drawn on that.

In addition to that we've got a $200 million accordion feature on our debt.

That basically the restriction there is that on a pro forma [inaudible] 12 month basis our debt to EBITDA ratio could not go over 5.5 times.

Okay and your term at year end was what?

Our term at year end was 490 less 126.

Okay.

Thank you.

Ladies and gentlemen this concludes your question and answer session for today.

I would like to turn the conference back to management for closing remarks.

We want to thank you all for joining us this morning and we look forward to speaking with you next quarter.

Thank you.

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

This concludes the presentation.

You may now disconnect.

Have a great day.