Prestige Consumer Healthcare Inc (PBH) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Prestige Brands Holdings 2007 Second Quarter Earnings Conference Call.

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

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes.

At this time, I will now turn the call over to Dean Siegal, Director of Investor Relations.

Please proceed sir.

Good morning.

Welcome to Prestige Brands fiscal 2007 second quarter conference 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 US Securities and Exchange Commission.

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

Good morning everybody, thanks for joining us today.

With me, as always, is Peter Anderson, Prestige's Chief Financial Officer, as well as Dean Siegal, our Director of Investor Relations.

I hope that by now most of you have had the opportunity to review our September quarter results, which we released last night after the market close.

Those results are also available now on our Web site, which is www.prestigebrandsinc.com.

Our agenda for this morning's call is pretty straightforward.

We will review the quarter and the six-month results in some depth.

We will provide an outlook for the full year and beyond.

We will also give you a brief commentary on the ongoing search for Chief Executive Officer.

And finally, we will provide a brief update on the status of the acquisition of the Wartner line of wart treatment products.

And now, turning to the quarter, first a few general headlines related to the quarter's performance, which we believe was both good and was inline with our expectations.

Total revenues reached $84.6 million, which is a 15% increase over the same quarter last year.

Of course, the Chore Boy and the Dental Concepts acquisitions played a role in this strong revenue growth.

But, if we exclude those brands from the calculation, organic growth, that's the growth of brands that we did not own a year ago was a robust plus 7%.

Within this organic growth, all of our key OTC and household brands recorded year-over-year growth.

A bit later in the call, we will provide details on a brand-by-brand performance.

Turning to profits, earnings per share were $0.18 per fully diluted share, which compares to $0.15 per share in year-ago quarter.

While the sales increase obviously was the key driver of this profit delivery, a couple of other factors are worth noting.

Gross margin percent was very much inline with last year's level.

We are pleased with this performance as it was achieved in a period of high fuel charges and increasing commodity costs.

A&P spending rates were increased versus the June quarter and returned to more normal levels.

You should keep in mind that we have meaningfully curtailed spending behind our personal care brands and this reduction accounts for virtually all of the year-over-year change.

Finally, G&A spending increased sharply versus last year.

Some of the increases related to ongoing infrastructure improvements, which we discussed in some detail in previous announcements and calls.

In addition, the quarter was impacted by high legal expense and some extraordinary transaction related expenses, which Pete Anderson will discuss in a bit more detail later.

Finally, free cash flow for the quarter was $21 million, which represents a 43% increase over last year's cash flow.

As you know, we define free cash flow as operating cash flow less capital expenditures.

In addition to strong levels of book net income, our free cash this quarter was helped by the Company's long-term tax shield and a continued improvement in working capital.

Pete will provide some more details on this as well.

So, those are the general headlines for the quarter.

We are now at the midpoint of our fiscal year and we are generally pleased with that six-month performance for the Company.

Six months revenues are 17% ahead of last year, and within that, organic growth is 8%.

Six months net income is $17 million, which is 28% better than last year and six months free cash flow is $42.2 million, which is 74% better than last year's first half performance.

Before I get into the more granular detail of the quarter, I thought it might be helpful to put all of this into an annual perspective to give you an overview of the Company's financial position as it exists today.

So, 12-month trailing revenues for Prestige are $320 million, which is a 12% improvement over the preceding 12-month period. 12-month trailing EBITDA, which is a non-GAAP measure, is $112 million.

When we adjust that EBITDA to reflect the pro forma addition of the acquisitions, 12-month pro forma trailing EBITDA totals a $116 million.

On cash flow, the trailing 12-month free cash flow is $71.5 million, which is a 47% increase over the prior 12-month total.

Our total current debt is $490 million, which is 4.2 times that trailing pro forma EBITDA number we mentioned a few seconds ago.

So, with all of that as background, let's get into the quarter and look at it on a segment-by-segment and a key brand basis.

First, turning to OTCs.

As you know, the OTC segment is Prestige's largest and most important operating segment, accounting for more than half of our revenues and almost two-thirds of our profits.

For the quarter, OTC segment revenues grew 13% to $46.3 million.

Excluding the impact of the Dental Concepts acquisition, OTC organic sales growth was plus 5%.

Importantly, each of the major brands in this segment, Chloraseptic, Clear Eyes, Compound W, Little Remedies, Murine, and the Doctor's oral care line, all posted year-over-year improvement.

Profit for this segment as measured by brand's contribution grew 17% for the quarter.

Looking at the key brands, Chloraseptic had a good pre-season quarter with revenues growing 8%.

As you may know, the September quarter is the time when many retailers purchase their initial quantities of cough/cold items for the upcoming season and the Chloraseptic revenue strength reflects the generally positive reaction of our customers to the brand's five new items, three new lozenges and two new strip items.

Clear Eyes, our main eye care line, registered low single-digit growth for the quarter.

But, this followed the June quarter where the brand was up strongly.

For the six-month fiscal year-to-date, Clear Eyes has grown 12% over the prior year.

Much of its success is attributable to strong retail movement for the entire line and in particular, our new triple-action item is helping that trend considerably.

For the quarter, IRI measured consumer movement for Clear Eyes grew 13%.

Compound W, our line of OTC wart treatments, also recorded good factory revenue growth for the quarter, with a 7% increase over last year.

However, you may remember that the prior year was relatively weak for the Compound W business.

And so, this year's factory revenue success should be evaluated with that background in mind.

Little Remedies, which our line of OTC pediatric items, enjoyed an excellent quarter with revenues growing 19%, which followed as you may remember a relatively weak June quarter.

For the six-month year-to-date, the brand is up 6% and that factory revenue number is still lagging behind consumer consumption trends.

Murine, which is benefiting from the launch of four new items this year, grew 4% for the quarter and is up 22% for the year-to-date.

And finally, within the OTC segment, our relatively new oral care line, which is marketed under the Doctor's brand, performed quite well, growing against the prior year which was the time when we did not own the brand and exceeded our plan.

At the end of the quarter, in early September, we launched a new TV campaign in support of the key item within the line, which is the Doctor's NightGuard and early reports on consumer movement driven by that advertising campaign are highly encouraging and will have a little more on that in a few minutes.

Now, turning to Household Cleaners.

As you know or may know, Household Cleaners is our most rapidly growing segment, now accounting for almost 40% of Company revenues, although the segment profit contribution is less largely as a result of intrinsically lower gross margins.

The September quarter continued the strength, which we reported for the June quarter.

Segment revenues grew 24% aided by the acquisition of the Chore Boy line.

However, within that, the two core brands, Comet and Spic and Span delivered organic growth of 12%, which is particularly impressive given the relative flatness of the categories in which these brands compete.

This strong segment performance is a continuation of the prior quarter.

And for the six-month year-to-date, the segment revenues have increased plus 28%.

Brand contribution for the Household Cleaning segment grew slightly more rapidly than revenues, posting a 29% increase for the quarter.

An important contributor to this household cleaner segment profit delivery was a 100 basis point improvement in gross margins, a result of that was achieved in an environment of rising commodity and fuel costs.

When we look at the individual brands within household products, we see that Comet grew 12% in factory revenues and all outlet consumer consumption was very much inline with this trend.

The brand is benefiting from a well-rounded marketing and sales program, which features new items like Comet Lavender Powder, increased distribution and impressive new packaging for Comet Soft Cleanser, consistent and targeted TV advertising, improved share of shelf for the core Comet powder items and consistent trade feature promotion activity.

Also contributing modestly to the brand's revenues during the quarter was the new arrangement with Procter & Gamble, whereby we have licensed the Comet name for their use in the institutional trade in United States.

Spic and Span also grew 12% for the quarter.

Unlike its bigger sister, Comet, Spic and Span boasts a number of different marketing and sales programs, all of which are contributing to the brand's growth.

We have new fragrances of the core dilutable cleanser, much wider distribution of our new spray item, improved formulas and improved packaging, and steadily improving distribution, particularly in some non-IRI measured outlets, and all of this contributed to drive the brand's growth.

Finally, our newest household brand Chore Boy added incremental volume to our segment and is generally meeting our expectations.

Our sales team have added some key point to distribution and an active new product pipeline is developing.

So, that's the story on household.

Finally, personal care.

As you probably know, this is by far our smallest reporting segment accounting for about 8% of Company revenues and 7% of Company profit.

Revenues for this segment declined 4%, which while certainly not desirable is considerably better than prior quarters.

For the six-month year-to-date, personal care segment revenues are down 9%.

As we noted earlier, we have cut back A&P spending behind this segment and as a result, contribution margins were up by more than 50% for the quarter, albeit on a relatively small base.

For the six-month year-to-date, personal care profit contribution is up 11%.

When we look at the core personal care brands, Cutex, which as you know, is the number one line of branded nail polish removers, Cutex saw its revenues decline by 7% during the quarter, which was generally inline with category trends and was actually somewhat improved from the prior quarter.

The brand has some encouraging news on the new product front, which we will discuss in a few minutes.

Denorex, which is our line of antidandruff shampoos, also saw its negative trend improved somewhat during the quarter as revenues declined 14%.

While clearly disappointing, this is a less severe decline than we have seen in prior quarters.

And Prell, which is our family shampoo line, actually grew 3% during the quarter, reflecting the fact that this well-known brand has a large cadre of core users.

And finally, the personal care segment was rounded out with a number of much smaller brand.

All of these small brands registered revenue increases, which is the testament to the long-term staying power of well-established unsupported OTC and personal care brands.

So, that's the story on our key three segments.

Before I turn it over to Pete Anderson, I also want to take a quick look at our international performance.

As many of you know, historically, Prestige has generated only about 2% of its revenues outside of North America, while most of the companies against whom we compete and against whom we measure a substantially higher levels of international business.

Expansion of our brands outside North America is the high priority for the Company and we are beginning to see the early signs of success in these efforts.

For the quarter, international sales grew 75% and represented 3.6% of total Company volume.

While existing international markets registered good performance, the majority of this strong international growth is a result of revenue coming from new markets and as many of you may remember, adding to that mix was the stream of royalties which come from our Comet licensing arrangement with Procter & Gamble in Eastern Europe.

I will have some more to say about the future international outlook in a few minutes, but now I am going to turn the call over to our CFO, Pete Anderson, who will provide some more financial detail on the quarter's results.

Thank you Peter and good morning everyone.

As Peter mentioned earlier, net revenues for the quarter of $84.6 million were 15% greater than the prior year net revenues, up $73.3 million.

Operating income of $24.2 million was $3.4 million or 16% greater than last year's operating income of $20.8 million, while net income of $8.8 million was $1.4 million or 19% greater than the prior year's net income of $7.4 million.

The improvement in our operating income was primarily due to the continuing strong sales gain for both the OTC and the Household Products segment combined with the decline in advertising and promotion spending against the personal care category compared to the prior year.

These favorable trends were partially offset by increased G&A expenses.

Cost of sales for the quarter of $41.3 million was $5.8 million or 15% higher than cost of sales last year.

As a percent of revenue, cost of sales increased very slightly from 48.5% in fiscal year of 2006 to 48.8% in the current fiscal year.

This cost of sales increase as a percent of revenues was primarily due to the continuing growth of our international business, which we discussed on last quarter's call.

The non-North American markets accounted for approximately 4% of total revenues in the 2007 quarter compared to 2% of revenues in the prior year's quarter.

As you may recall, our international sales have a lower gross profit than domestic sales because the margin allows for advertising and promotion activities to be conducted by our distributors.

Our advertising and promotion expense for the quarter of $9.5 million was $700,000 less than the spending of $10.2 million in the prior year.

As Peter said earlier, this decrease in spending was due to a decrease in advertising and promotion support against the personal care segment.

In fiscal year of 2007, A&P expenditures for this segment have been cut dramatically.

Now, let's forecast results by segments.

Net revenues for the OTC segment of $46.3 million were $5.5 million or 13% greater than the previous year.

Gross profit for the segment was $28.3 million, a 12% increase over last year's quarter.

Gross profit as a percent of revenues was 61%.

That's down slightly from 62% in the prior year's quarter.

Contribution margin of $21.2 million for the segment was $3.1 million or 17% greater than last year.

This increase was driven by the sales increase combined with flat advertising and promotion during the quarter.

Household Products net revenues of $31.3 million was $6.1 million or 24% greater than last year.

Gross profit of $12.3 million was $2.6 million greater than prior year as a result of the sales increase.

Gross profit as a percent of revenues was 39% in the current quarter compared to 38% last year.

And contribution margin was $10.3 million, 29% greater than last year and that resulted primarily from the gross profit increase.

As Peter said, net revenues of $7 million from personal care segments were $300,000 or 4% below prior year.

Gross profit of $2.7 million was $200,000 less than the prior year, primarily due to the sales short flow and contribution margin of $2.4 million was $900,000 greater as the gross profit decline was more than offset by a reduction in A&P expenditures.

G&A expense of $7.3 million was $3.2 million higher than last year's expense of $4.1 million.

This increase was driven by increased compensation expenses related to positions added during the second half of the prior year, increased stock-based compensation expenses and the increased legal and public company expenses.

As Peter mentioned earlier, we did have one unusual G&A expense during the quarter.

During the quarter just ended, the Company incurred approximately $500,000 of professional fees related to a potential strategic acquisition, which ultimately went to another acquirer.

We don't anticipate any additional charges related to those matters.

Confidentiality agreements prohibit us from discussing those matters in any more detail.

Free cash flow for the quarter, which we define as operating cash flow less capital expenditures, was substantially greater than net income, driven by our long-term tax shield, a substantial improvement in working capital and relatively low capital expenditures.

Free cash flow for the quarter was $21.2 million.

This working capital improvement was driven in large part by our continuing efforts to reduce inventories.

As you may have seen in last evening's earnings release, our inventory levels have declined from $29.3 million at the end of September.

That represents a $2.1 million decline from the June 30 level.

Months of supply of inventory has been brought down from 2.6 times at the end of June to 2.3.

During the quarter, the Company was able to fund the entire Wartner acquisition from cash on the balance sheet.

So, the employer revolving credit line of $60 million was and remains unused.

And I would like to turn the call back to Peter.

So, all in all, it was a good quarter.

We continued the positive trends we have been seeing for sometime now.

And as we look ahead, we see those positive trends continuing as we are going to continue to do the same things that drive our business, launching and supporting new items, expanding distribution on existing items, and working hard to hold down our costs and improve our margins.

I have a bunch of activities that are happening right now that are contributing to our success and we think should contribute to future growth.

We have enjoyed considerable success in obtaining distribution behind our five new Chloraseptic items.

These are three new lozenge SKUs, all of which are sugar-free and two new defense drips, which are intended to strengthen a person's immune system.

Advertising for the Chloraseptic line starts right now and we will be at record levels for the brand.

Our new Clear Eyes and Murine items are still gaining distribution and are already selling well for the retailers who currently stock them.

Consumer support in the form of both radio and television advertising continues and these items are adding important volume for these two key brands.

Our core Household businesses Comet and Spic and Span are continuing to benefit from the synergistic benefits of new items, new distribution, increased consumer support, and strong trade promotion efforts.

In particular, we are gaining important new placements regularly and this expanded distribution in both IRI measured and other outlets, is helping both brands grow market share in their respective categories.

Our line of pediatric OTC items, which we market under the brand umbrella of Little Remedies, continues to grow driven by sustained advertising to new and expected moms as well as a considerably expanded sampling and promotional effort targeted at pediatricians who are key influencers of brand choice.

Looking at consumption, we consolidate all of the various Little Remedies items into one IRI report.

And for the quarter, total Little Remedies IRI consumer movement grew 28%.

The Doctor's NightGuard is showing robust growth driven by the advertising campaign I referred to a few minutes ago, which toasts persuasively the consumers who grind their teeth at night.

Our research indicates that about 22% of adults have this problem and yet most currently don't do anything about it.

Our advertising, which began only a few weeks ago, seems to be communicating a very impressive story to a very receptive group.

In all of our major customers, where we get weekly point-of-sale data, consumer movement has jumped impressively since that advertising began.

We are now launching two new unique Cutex pump items, which have already generated strong plate endorsement, which should lead to good levels of distribution in the next summer's nail polish season.

Both items should begin shipping in our fourth fiscal quarter.

And finally, we anticipate that our international growth will continue.

We are continuing to add new geographies.

We are continuing to obtain additional regulatory approvals and we are continuing to launch new items into existing international geographies.

So, as we look ahead, we see much to be optimistic about.

At the same time and as we have told you regularly, the year ago comparisons from Prestige will change importantly in the upcoming quarters.

In September, we will anniversary the Chore Boy acquisition and then, we will lap the Dental Concepts transaction in mid-November.

We are now benefiting from new sales and new profits from the Wartner acquisition.

However, we are in the off-season for wart removal products, and so that benefit will be modest until the start of the wart season next spring.

Finally, in the current quarter, we will also anniversary several important major new national distributions for Comet, which have played an important role in driving that brand's consumer and factory revenue growth.

Now, all of that is not meant to imply that we expect the basic vitality of the business to diminish, rather it's just to remind you that the year ago comparison base will change meaningfully in the current quarter resulting in more modest organic growth rates for the balance of the fiscal year.

While we are maintaining our policy of not providing specific future guidance, here, in a general sense as how we see both the balance of the fiscal year and beyond, we continue to believe that long-term organic revenue growth, that's growth before the benefit of acquisitions will be in the range of 3% to 4% annually.

Of course, that's an average.

Some years will be better and some may be less robust.

On that same long-term basis, we expect that organic net income will grow more rapidly than revenues, thanks in large part to deleveraging.

Of course, acquisitions in the future will continue to be totally incremental to that outlook.

Looking at the current fiscal year, and as you know that is the year that ends March 31, 2007, we expect total year organic growth to be slightly better than our 3% to 4% long-term average growth expectation.

Of course, total fiscal 2007 revenues will grow at a higher rate driven by acquisitions.

For the full year of fiscal 2007, we now expect that net income will grow slightly less rapidly than total revenues.

Those net income expectations are somewhat better than our original expectations, largely because of the success of the first half of the year.

Profits during the second half of the year will be impacted by increases in A&P support behind many of our key brands.

Finally, before we take any of your questions, I want to briefly comment on two additional topics.

First, the recent Wartner acquisition.

That transaction as you know has now closed.

We are well along in the process of integrating the brand into the Prestige infrastructure.

We expect that integration to be complete on time at the end of November.

We are also well along in the process of finalizing our plans for the 2007 wart season where it is our intention to support both of our wart removal brands, Wartner and Compound W with strong levels of advertising and promotion support.

Some of you may have read about potential issues, which have recently developed between Prestige and OraSure Technologies.

As you know, OraSure supplies Prestige with a product, which we market under our trademarks, Compound W and Freeze-Off.

We value our relationship with OraSure and we are scheduled to begin mitigation with them next week.

We are hopeful that this process will enable both companies to amicably resolve any of our differences.

Having said that and because of the sensitivity of the current situation, we won't be able to comment further or answer any questions on this topic.

And finally, our search for a CEO.

As you know, we began that search in July and we have told you that the process would likely take six months and could actually extend past that timeframe.

For me and for the rest of the Board of Directors, the key to all of this is to find the right person for this important position and we intend to do exactly that.

We are attracting well-qualified candidates.

We are carefully interviewing and screening those candidates and we are making good progress towards a final resolution.

In the meantime, as you can tell from the results, the Company is running smoothly and well, the management team is focused and enthused and we are really not missing an operating beat as the search process continues.

And with that, we would now be happy to take your questions.

Thank you for that presentation.

[OPERATOR INSTRUCTIONS]

And your first quarter comes from the line of Alexis Gold with UBS.

Please proceed.

Hi, good morning.

Good morning.

Hi, Alexis.

Thanks for the update.

Just wanted to talk a little bit about some of your new products and just to get a better sense, I mean it sounds like things are trending fairly well.

But, I know Wal-Mart has talked about really focusing on core relationships and I want to get a sense for, how you fit into that category and where you might be seeing some of the shelf space improvement and maybe some shelf space declines?

We are really not seeing any meaningful shelf space decline for our brands.

As you know, Alexis, the ultimate key driver of distribution of Wal-Mart is if your products sell well for them, our brands, our items, our SKUs generally sell very well for Wal-Mart.

And so, we are not seeing any meaningful cutback of our items at Wal-Mart, in fact, not really any at all.

Of course, it remains a competitive market and we [inaudible] supporting our brands to drive distribution, but we are expanding distribution of Wal-Mart, not contracting.

We have several new Chloraseptic items in Wal-Mart this year, which is a net gain for the Chloraseptic brand.

We have added Comet items.

We have added Spic and Span items and so on.

So, while it is a business that we have to stay very much on top of and have to make certain that we have the right items in the Wal-Mart stores, we are not seeing a cutback by Wal-Mart of our items really at all.

I guess, if you can see the moderate traffic patterns there, it obviously seems your sales are trending below their expectations.

I know that some of the traffic drivers are -- they are looking at actually changing their generic programs to drive traffic into the store.

Do you think that that program, just given the four locations, actually should help drive some of the over-the-counter sales going forward?

Well, obviously, the more people they can drive into their stores, the better it is.

We track, as every manufacturer on business does, we track our Wal-Mart movement by their point-of-sale data, which we are online for.

We track it every week and while not every one of our items is growing, the vast majority of our 40-plus items that are in Wal-Mart stores are showing gains year-over-year, driven by more stores, driven by greater traffic to the stores and driven by greater market share for our brands.

Okay, great.

Thanks very much.

Okay.

And your next question comes from the line of Amy Chasen with Goldman Sachs.

Please proceed.

Good morning.

Just two questions.

First of all, in your press release, you didn't mention higher cost pressures and you had mentioned that last time.

Is there a shift in your thinking given the recent pullback in oil prices?

It's both a shift in our thinking driven by exactly that, Amy, pullback in oil prices.

We are also seeing some operating improvement unrelated to oil prices in our ability to consolidate our freight shipments.

We are working hard to make more of our trucks go out full by consolidating shipments.

That's a program that has worked quite well for us and is an important driver of why during the September quarter when the year-over-year fuel comparison was still not so -- was still hurtful, we were able to maintain, particularly in Household, our margins.

We actually improved them slightly because a lot higher percentage of our trucks went out as full trucks.

And while that sounds like a small matter, particularly in our Household line, that is a very important contributor to lower cost of goods and lower deliver cost.

Okay.

And then, I just wanted to be clear on the advertising.

That was lower in the quarter than we had expected.

Is that just a shift in timing into the second half because of these upcoming launches or was there something else going on there?

No.

It's timing.

When we get to the end of the year, you will see that the advertising and promotion rates, excluding the cutback in personal care, and you have to keep that in mind -- but excluding that, you are going to see advertising and promotion rates for the Company not dipping.

And so, it's timing.

And that's in part why the second half profit delivery will be somewhat less good compared to revenues in the first half.

Okay.

And so -- and that's again, just because of the timing of new products?

Yes.

Because of the timing of new products, we want to wait until this -- stating the obvious, we want to wait until those items have adequate distribution, we have considerably more Chloraseptic advertising coming because we have new items.

We are extending advertising behind the Clear Eyes and Murine, extending it seasonally, and a considerable amount of advertising is now running behind the Doctor's NightGuard, which is what's driving those quite remarkable point-of-sale increases.

Great, thank you.

You are welcome.

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

Please proceed.

Hey guys.

I just wanted to ask about the Compound W. Peter, I think you said, it was up 7%, but keep in mind the comp was on a really weak period.

Could you just give a little more detail on that?

I mean I understand what was going on in the prior period, but I guess what inspired that statement?

What are you saying?

Well, because consumption for -- Compound W consumption for the entire wart remover category has been flat basically and Compound W consumption is not as robust as we would like it.

We were measuring against a weak year-ago period in terms of factory revenues driven by all of the events 12 and 18 months, which you know well.

And so, I don't want people to take great comfort in that plus 7% for Compound W factory revenues.

It was again less good consumption trend.

Got it.

Does that mean right now that you are shipping ahead of consumption and basically -- or is it the opposite?

No, no.

The gain in this year was driven by the very weak year ago, where we shipped below consumption.

Okay, okay.

Fair enough.

And why is Little Remedies still -- why are factory shipments still lagging consumption?

What's going on in the inventory at retail there?

Most retailers carry -- if you walk into a typical drug chain store, you will see on a typical Little Remedies side, you will see one or two pieces.

And so, as those pieces sell [experience] amount of stocks, it is a growing pain that many brands go through, as their consumption base goes up, retailers haven't adjusted their ordering patterns to keep their retail inventories in line.

Obviously, we are working hard to correct that.

And I think it is promising for the future that as factory revenues catch up to some degree with consumption, we will see continued growth on Little Remedies.

So, you are stock out you think in that business run higher than your Company average?

Probably, yes, because there are quite a few items in the Little Remedies line.

There is eight or ten key SKUs, maybe retailers carry six, seven, eight -- eight of them and so it's quite possible that a retailer, while their in-stock on some Little Remedies items, they will be out of stock on the gas item or the saline spray or whatever.

Got it.

And then just on the proportion of international sales, I mean, have you updated, I guess your three or five-year target as far as how big international you think would be of the total pie?

I guess has your recent success let to any changes there?

No.

We have said consistently and I believe it still is the case that our international business, which was 2%, will grow gradually.

It's now running 3.5%, 4% and as we look ahead, those numbers should gradually creep up.

We are not going to make, I don't believe, a catapult ahead -- it's slow, steady gains, we are picking off new geographies.

We are adding items in the existing geographies, but there is no dramatic expansion that is likely.

But, when you look ahead four, five years, I think it's entirely reasonable to think that Prestige will be doing a meaningfully higher percentage of its business internationally than we do today.

It's meaning 2010?

Sure.

Thank you very much.

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

Please proceed.

Hi, good morning everyone.

Good morning, Eric.

Hi, Eric.

A question on sort of your overall revenue, obviously, at 15%.

When you break it down, I believe you said sort of core growth less acquisitions was about 7%.

In that 7% roughly, what would -- given the multiple numbers of products that we -- that you talked about, what would be sort of core volume growth versus what would be the pricing component of that?

Pricing would be 1% or less.

And the rest would be?

The rest is true volume growth, right.

Okay.

In the current environment, is there -- do you see any further need for pricing in any particular area or any particular product line at this point?

Well, we look at pricing for all of our items regularly and we will take price increases when we think the competitive situation warrants.

So, over the course of the last 12 or 18 months, we have taken pricing action on a significant percentage of our line and it really is a brand-by-brand, and in many cases, an SKU-by-SKU determination.

But the good news in all that, Eric, is that we have been very successful when we have taken a price increase and getting it to stick, meaning that we don't get a high level of retailer pushback.

Of course, they don't like price increases but our price increases are ultimately going into effect and are contributing that 1% or so to revenue growth.

Okay, good.

And then just a general comment on your cost -- obviously, with oil prices sort of, at least leveling out, we could maybe say that they are down, but at least it looks like they have plateaued.

Do you expect to see less pressure on your cost, maybe not necessarily a downside benefit, but less pressure on your cost over the next 12 months?

I think that's a reasonable expectation that there will less -- probably meaningfully less upward pressure.

Okay, thank you.

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

Please proceed.

Hey guys, good morning.

Hey, Joe.

First question on this gross margin issue for the second half.

I am just not sure why we wouldn't see a pretty significant increase in the back half given you have got lower commodity cost and easy comparisons, you got operational improvements, and you got probably an improving mix, I would imagine with OTC and Household Cleaner growth starts to converge a little bit.

So, should we see a pretty nice lift in the back half and could we see gross margins up for the year?

Assuming that wildcard of oil prices stays where it is, yes.

I mean as Peter said, we certainly should not see upward pressure on freight and we certainly shouldn't see upward pressure on bottle costs, which were largely driven by the resin increases.

Indeed, we should see a better mix because, as Peter said, we are going to be up against higher levels of Household beginning in the quarter that we are in currently now.

So, OTC should be a slightly higher percentage of the total -- overall mix.

Okay.

And then, secondly on personal care, what's the end gain there?

Just a point, I mean it's seems to me like you guys have essentially just stopped spending.

Is it just to let it wither on the vine so to speak, or are you guys looking to do something strategic?

Wither on the vine, I would never say that.

My words, not yours.

We continue to discuss strategic alternatives for the personal care brands.

They are now, as you have seen, declining only modestly and because of the cutback in A&P support, they are now handsomely profitable and generated significant amount of cash.

And as I think we have told everybody before that the challenge in all that is to find structural transaction where any divestiture or sale would be not dilutive meaningfully to cash flows.

And one of the things, I think it is a general phenomena in OTC and personal care items, it's brand decline, they ultimately tend to reach a level where the loyal consumer base stays with you and so, we expect and we are seeing it now that the declines will diminish.

Also for Cutex, which is the largest of the personal care brands, there is some actual real reason for optimism.

The new pump items that we are launching now have been met with quite good trade reaction and we will be shipping those or we should begin shipping those in the fourth fiscal quarter, i.e., the March quarter for the summer nail polish season next year and we have hopes that those will actually be quite beneficial to the Cutex line.

The other thing I would add, Joe, is that yes, we have dramatically decreased the A&P support.

But, what we have done is to shift some of the spend into call-up advertising, which as you know is captured not down in the A&P line but it is captured up in the gross to net sales reduction.

So, what we are doing with more limited dollars is using call-up advertising with accounts to support the brands where they exist and where they are on the shelf.

Okay.

And then lastly, if you could, Chore Boy, was there a pretty significant sequential decline in sales?

No.

For this quarter, we didn't own Chore Boy in the year ago, so it was all incremental.

I am saying June versus September.

Let me -- I don't think that --

It looks like, it was about $2 million last quarter and about $2.7 million this quarter.

Bear with me.

I will answer that question in one second.

I can't imagine scouring that [it's your] season.

Yes, your math is good Joe.

There was a decline quarter-to-quarter.

We had in the first --at the end of the first quarter, we had a -- we implemented a price increase on the main item within the Chore Boy line which is the copper scrubber, comes in two sides in the box of two and individual one.

And so, some of the wholesaler customers bought in some goods at the start -- at the end of the June quarter in advance of that price increase.

And so, that resulted in those customers buying less during the second quarter.

We believe that -- well, that is behind us now and those sales should average out to the more levels.

Got you.

Okay, thanks.

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

Please proceed.

Good morning.

Hey Bill.

Just a question on your guidance for organic growth for the reminder of the year.

I think you said slightly higher than your historical long-term rate.

Bill, be clear -- what we said was that the organic growth for the full year would be slightly higher than our long-term outlook.

Right.

Then, I think your long-term outlook is 3% to 4%.

Right.

And it is down 8% year-to-date.

And it sounds like you've got a lot of product launches going in the next couple of quarters.

Am I missing anything?

Are you -- is there anything that should slow the growth over the back half of the year or in terms of timing of shipments?

Or you are just being kind of conservative?

It's two things.

It is the fact that particularly in our Household business, the second half of last year was very strong and so the year-ago comps become more difficult.

And so, we are expecting less robust organic growth in Household, not because the business is losing vitality but because the year-ago comparison is more difficult.

And the second part of your question is probably, yes.

Got it.

And then, in terms of new product launches, I think you said there is certainly some things with Chloraseptic.

Should we expect the majority of the launches to kind of hit in the upcoming quarter or is it pretty even between third and fourth quarter?

It's our policy, Bill, not to announce items before they are presented to our customers.

And so, items that we would be launching in the fourth fiscal quarter, the March quarter, while they are very much on the dock and we wouldn't tell you about them until they had actually occurred.

So, what we are talking about in terms of new items are the items that we have already launched.

Got it.

Okay, I will stay tuned.

I guess final question is, as you look both at the acquisition landscape and kind of your debt levels, what would change your mind in terms of paying down more debt sooner or using some of the cash flow to really reduce the debt over the next six months versus making more acquisitions?

It would depend entirely on the quality of the acquisition.

We are -- we still remain focused on evaluating good, strategic acquisition opportunities but we would also remain committed to not making deals that are strategically sound or where the price is too high.

And so, it is absolutely -- in the case if we don't make acquisitions over the upcoming six months, then our model and our intent would be to use the cash that is generating very rapidly to pay down debt.

Okay, great.

Thanks.

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

Please proceed.

Good morning.

Good morning.

If we were to back out the $500,000 for the acquisition expense that you incurred during the quarter, would that give us pretty much a good run rate for SG&A going forward?

It's probably a little on the high side because we had a high level of legal expense in the quarter.

So, it's a bit on the high side, I would say.

And then, just in terms -- how much was the increased stock-based compensation during the quarter?

$200,000.

And just lastly, in terms of the improved shelf space for the core Comet brand, where are you getting that extra distribution and who are you taking share from?

Well, it's our selling strategy that retailers really only need two scouring powder products, Comet and their private label, because that covers the entire gamut.

You have the best quality brand and then a [private label].

So, we are working hard to do and we are gradually making head-roads against competitors in that category as Comet is getting an increasingly large share of the shelf.

Thank you very much.

And Your next question comes from the line of Stephen Prince with Pivot Capital.

Please proceed.

Hi, good morning.

I just wanted to focus a little bit on your second half guidance.

If I am looking at your net income, does your guidance imply on an absolute basis, net income in the second half is up or down versus last year?

It is our policy or view that we are not going to give you that.

What we have said and what we have repeated that for the year, our total organic growth will be somewhat better than the long-term 3% to 4% rate.

And that for the full year, net income will slightly lag total revenue growth.

Right.

So, you are not going to comment on versus what the Street has?

Correct.

Okay, thanks.

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

Please proceed.

Good morning.

Good morning.

Hi.

I don't know if you mentioned this, I missed the beginning of the call, but what your expected A&P spend increase to be in the second half of the year and year-over-year?

It's going to be an increase year-over-year.

We are not going to give you the specifics of that.

Okay.

Would it be 10% to 20% kind of ballpark-ish year-over-year?

It's going to be -- A&P spending will grow more rapidly than sales and that's the level of detail I am comfortable giving.

Okay.

And then, the timing of your A&P spend, I mean the A&P spend has been lumpy in the past.

I am assuming that is driven simply by your new product launch timing?

Yes.

That's largely the main factor.

It is also -- as we refine our advertising models, we are running, we are getting more and more focused on running advertising right at the time that the consumers are making their purchase decisions.

I see.

How do you feel about the potential sort of acquisition environment?

Do you see lots of properties likely for sale at the right size and the right price, not a lot, many kind of?

There are -- there have been as you have seen from a number of recently announced transactions and there continue to be a meaningful flow of interesting deal opportunities.

The challenge or the opportunity for Prestige is just to sort through those, to identify the ones that are growable, that will fit with our operating model and where we can have immediate accretion to earnings and where we believe that the valuation fits within our basic valuation criteria.

Your acquisition sort of purchase prices recently has been in the $30 million to $50 million range.

I mean is that still your sweet spot or has it changed?

No, that's more just -- the event dictated that.

We would definitely entertain and go forward with larger transactions if basically those larger transactions met those -- met our basic criteria.

Right.

And then just as far as maximum leverage tolerance with an acquisition, where would that take you?

We would take the leverage up to five times, get to pro forma trailing EBITDA.

Okay.

And then for this quarter, did your sales benefit margin from shipments of new products?

Well, sure.

The new products, most of which were launched prior to this quarter are now benefiting because retailers are reordering as consumers buy the products off the shelf.

The Chloraseptic sales this quarter benefited from retailers' initial stocking orders of our five new items, the three new lozenges and the two new strips.

Got it.

And then sticking on Chloraseptic, I mean some people are talking about a kind of a mild winter all the way around -- I am not a weather forecaster nor do I pretend to be one.

But, I mean have you done any work around that?

Sure.

We measure the season using a syndicated service that is called [STAN] and what that service does is it provides both up-to-date measurement of the number of the people who are reporting cold and flu symptoms and the service also provides, based upon a variety of factors, projections for the next month or six weeks as to the incidence of cold and flu.

So far, this season, incidence of cold and flu which is the most reliable determinant of how many people are going to buy products like ours, the incidence of cold and flu symptoms is slightly, slightly above average and the projections are that it will remain slightly above average.

Okay.

When you say average, you are just talking about long-term average, right?

Yes.

If you take the average over the last six or seven years, that's right.

Thanks so much.

Ladies and gentlemen, that concludes that question-and-answer session.

At this time, I will turn the call over to Peter Mann for closing remarks.

Really, just thanks to all of you for participating.

We are pleased with the results of the quarter and we look forward to talking with you again both between now and our next quarterly call.

Thanks for being with us.

Thank you for your participation in today's conference.

Ladies and gentlemen, this concludes the presentation.

You may all disconnect and have a good day.