Prestige Consumer Healthcare Inc (PBH) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal 2007 quarter four and year-end conference call.

My name is [Lisa] and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) as a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr.

Dean Siegel, Director of Investor Relations and Communications.

Good morning.

Welcome to Prestige Brand's fiscal 2007 fourth-quarter and year-end conference call.

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

Statement of management 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 report that it files with the U.S.

Securities and Exchange Commission.

Now I would like to introduce Mark Pettie, Chairman and CEO.

Thank you, Dean, and good morning to all of the joining us on this call.

In addition to Dean, with me today is Pete Anderson, Prestige's Chief Financial Officer.

The main agenda item for today is a discussion of the past quarters results and Pete Anderson I will handle the portion of the call.

After those comments, I will also share some perspectives regarding our outlook for fiscal 2008.

I hope that most of you have had the opportunity to review our March quarter results, which we released earlier this morning.

The results are also available on our website, www.PrestigeBrandsInc.com.

I would like to start with a review of the quarter's performance from the overall corporate perspective.

For the March quarter, revenues were $78 million, which was 2% below year ago.

During the quarter, we benefited from our September acquisition of Wartner and if those revenues were removed from the quarters performance, revenues declined by approximately 5%.

We will provide more specific detail in just a moment, but two factors that were discussed on the previous earnings call continue to unfavorably impact the Company in the fourth quarter.

First was the continuation of the soft cold/flu season.

As was discussed on the call in February, the weak 2006/2007 cold/flu season negatively affected our third quarter due to the warm weather patterns experienced in most part of the country through December.

Unfortunately the fourth quarter did not see a meaningful pickup in the incidence of cold and flu and this phenomenon continues to adversely impact our Chloraseptic and Little Remedies sales in the fourth quarter.

Secondly, we continue to experience declines in revenues on our Personal Care businesses, which have been deemphasized as we focused our resources against the other higher-priority segments in which we compete.

From a full-year standpoint, total revenue Company revenues of $318.6 million were 7% greater than year ago revenues of $296.7 million.

And as we mentioned in our April 9 prerelease, underlying organic revenue growth was 1%.

Turning to the income side of the P&L, reported net income for the quarter grew 131% to $8.4 million, or $0.17 per share.

During the quarter, the Company benefited from an additional reduction to the overall tax rate of approximately 20 basis points, resulting in a $500,000 non-cash deferred income tax benefit.

Adjusted net income of $7.9 million, which excludes this tax benefit, represents a decrease of $4.2 million from last year's fourth-quarter net income of $12.1 million, adjusted for a non-cash intangible charge of $9.3 million and a $2.6 million tax charge that we recorded in that period.

For the full year, reported net income was $36.1 million, or $0.72 per share.

This represents a 37% improvement over reported fiscal year 2006 net income of $26.3 million.

Fiscal year 2007 net income, adjusted for the favorable impact of the non-cash deferred income tax benefit, was $34.2 million, or $0.68 per share.

That is $600,000, or 2%, below fiscal year 2006 net income, adjusted for the non-cash expenses I referenced above.

A reconciliation of reported to adjusted net income for the quarter and the year is contained in this morning's earnings release.

Finally, looking at the balance sheet and cash flow performance of the Company, you'll see that free cash flow for the quarter was $16.5 million, which is 8% below last year's level of $18 million.

However for the full year, free cash flow was $71.4 million, which is 34% ahead of year ago free cash flow of $53.3 million.

During the quarter we paid down approximately $7.9 million of senior bank debt, leaving our current total debt balance at just over $463 million.

So that is the overall corporate performance story.

Now let's take a look at the quarter a segment and a key brand basis.

First, OTCs.

As many of you know, the OTC businesses comprised Prestige's largest operating segment, accounting for more than half of revenues.

For the quarter, segment revenues declined by 3% to $43.3 million.

Excluding the impact of the Wartner acquisition, OTC organic sales were down by 7%.

For the year, total OTC revenues were up 9%, with organic growth in the segment of plus 1%.

Chloraseptic revenues declined by approximately 20% during the quarter.

This trend was significantly worse than the brand's consumption trend.

Because of the slow cold/flu season, retailers are continuing to sell through the product purchased at the beginning of the season as they seek to reduce their cold/flu inventories going into spring and summer.

For the full year, Chloraseptic revenues declined by approximately 5%.

Little Remedies was also negatively impacted by the soft cold/flu season in the quarter.

Factory revenues declined by 9% despite consumption growth of 6%.

However for the full year, the brand's revenues were up by 3% and we're continuing to broaden distribution of individual items within the line, lessening our reliance on seasonal SKUs.

The Doctor's line of oral care items continued the very strong sales trends shown during third quarter, largely driven by a new TV campaign in support of The Doctor's NightGuard.

Factory sales of the line increased by 33% during the quarter, which was in line with IRI PoS trends.

Our Clear Eyes North American business declined slightly in the quarter after growing in the high single digits during the first nine months of the year.

For the full year, the brand grew by 6%.

New items launched at the end of fiscal year 2006 contributed nicely to the growth and the newest addition to the line, Clear Eyes Maximum Redness Release, added volume in the fourth quarter.

The Compound W line declined during the quarter in part due to the timing of promotional shipments ahead of the upcoming wart treatment season.

For the year, sales were down in the low single digits, which mirrors consumer trends for the year.

Finally, our newest acquisition, Wartner, delivered revenues which were in line with our pre-acquisition expectations.

From a profitability standpoint, as measured by brand contribution, the OTC segment declined by 15% for the quarter, but was up 6% for the full year.

Now let's turn to the Company's Household Cleaners segment.

Total revenues for the segment were slightly greater than prior year for the quarter and up 10% on a full year basis.

Organic growth in the Household segment was 3% for the full year.

Equally importantly, segment consumption remained strong, with total IRI and major customer consumption growing 5% for the quarter and 7% for the full year.

With respect to the individual brands, the segment's largest brand, Comet, registered a low single digit revenue decline.

This is primarily due to a club store promotional event in fiscal year 2006 which did not repeat in fiscal year 2007.

Importantly, Comet consumer movement remained strong at plus 8% in fourth quarter.

And for the full year, Comet sales grew by 4%, with consumer movement up 9%.

Spic and Span sales increased in the high single digits for the quarter and Spic and Span consumption also continued to grow, up 3% during the quarter.

Full year sales were down in the low single digits, while IRI PoS movement was up in the mid single digits as we consciously reduced sales in low-margin non-measured channels.

Finally our newest Household brand, Chore Boy, grew by approximately 10% for the quarter.

From a profit perspective, contribution margin for the Household cleaning segment declined by 9% for the quarter.

However for the entire year, the segment delivered a 9% increase over year ago.

Finally our smallest reporting segment, Personal Care, which accounts for less than 8% of corporate revenues, continued to decline with all of its major brands reporting decreases versus year ago.

These declines were foreseen and revenues for the quarter were in line with internal expectations.

As you may remember, we have cut back A&P support behind this small segment of our business.

And while segment profit was slightly below year ago for the quarter, it was better than year ago for the full year, despite the revenue declines.

Finally, we continue to be pleased with the performance of our international business.

As you know, we have historically done a very low percent of our business outside of North America and we continue to believe that overseas markets represent a large and relatively untapped source of growth.

During the most recent quarter, international revenues grew 23% and represented 5% of total Company revenues, as compared with 4% last year.

For the fiscal year, international revenues are up 46% and represent 5% of total Company revenues, compared to 3% last fiscal year.

In addition to solid performance in our more-established geographies, much of this growth has come from new markets in Asia, the Middle East, and Central and Latin America, giving us an expanded platform to build on going forward.

So that is the summary for the quarter.

And now I would like to turn the call over to Pete Anderson, who will provide additional commentary and financial detail.

Thank you, Mark.

Good morning, everyone.

As Mark mentioned earlier, net revenues for the quarter of $78 million were 2% below prior year net revenues of $80 million.

Operating income of $22.6 million was $2.5 million, or 13%, better than last year's operating income of $20.1 million, but it was $6.9 million less than last year's operating profit when we adjust for the intangible impairment Mark spoke of before.

Net income of $8.4 million was $4.8 million, or 131%, better than last year's reported net income of $3.6 million, however adjusted net income of $7.9 million was $4.2 million below last year's adjusted net income of $12.1 million.

The $6.9 million decline in operating income compared to last year's adjusted operated income of $29.5 million was due to the following factors -- the sales decline; an increase in cost of goods sold as a percent of sales, which was primarily due to an increase in our reserve for obsolescence; as well as increased advertising and promotions spending primarily against the OTC segments; and an increase in G&A expenses.

In the current year's quarter, Prestige benefited from a favorable income tax adjustment of approximately $500,000.

This favorable adjustment resulted from the continuation of the project we spoke about last quarter that is designed to make the Company's corporate operating tax structure more efficient.

The Company's ongoing book tax rate has now been reduced to 38.4% from 39.1% at the beginning of the fiscal year.

For the full year, reported net income of $36.1 million, or $0.72 per share, was $9.8 million greater than reported net income of $26.3 million, or $0.53 per share, in fiscal 2006.

If we adjust fiscal year 2006 for the intangible impairment and non-cash tax charges, and fiscal year 2007 for the non-cash tax benefits, net income declined slightly from $34.8 million, or $0.70 per share, to $34.2 million, or $0.68 per share.

Now let's turn back to the quarter.

Cost of sales for the quarter of $38.8 million was $2.6 million, or 7%, higher than cost of sales in the prior year.

As a percent of revenue, cost of sales increased from 45.3% in fiscal year 2006 to 49.7% in fiscal year 2007.

This increase was primarily due to an increase in obsolescence expense of $2.6 million related to cough/cold products facing expiration dating.

Advertising and promotion expenses of $6.2 million for the quarter were $400,000 greater than spending of $5.8 million in the prior year period.

The OTC and Household Products segments experienced increases, which were partially offset by a decline in the Personal Care segment.

Our G&A expense of $7.7 million was $1.7 million higher than prior year's expense of $6 million.

The main drivers of this increase were compensation, particularly an increase in bonus expenses, and legal expenses.

Our legal expenses increased by approximately $200,000 over prior year, driven by expenses related to the OraSure mediation arbitration.

Now, we will briefly review fourth-quarter results by segment.

Net revenues for the OTC segment were $43.3 million, $1.5 million, or 3%, below the prior year.

Gross profit for the segment was $25.9 million, 12% below last year's fourth quarter.

Gross profit as a percent of revenues was 60%, down from last year's gross profit percentage of 65%.

This decline in gross profit was due to the increase in obsolescence expense primarily related to the Chloraseptic and Little Remedies brands.

Lower than forecasted sales due to the weak cold/flu season resulted in some potential expiration dating issues for those brands.

Contribution margin of $21.2 million for the segment was $4 million, or 16%, below the year-ago quarter.

This decrease was driven by the gross profit decrease combined with the increased advertising and promotion spending in the quarter.

Household Products' net revenues of $29 million in the quarter were $100,000 greater than last year.

Gross profit of $10.9 million was $700,000 less than the prior year due primarily to increased product costs due to mix and increased freight expenses.

Gross profit as a percent of revenues was 37.5% in the fiscal 2007 quarter, compared to 40.5% in the prior year quarter.

Contribution margins for the quarter of $9.5 million was $800,000 below last year, resulting primarily from the gross margin decline and a slight increase in advertising and promotion expenditures.

Finally, net revenues of $5.8 million for the Personal Care segment were $500,000 below prior year.

Gross margin of $2.5 million was $300,000 less than the prior year primarily due to the sales shortfall.

Contribution margin was $2.3 million, $200,000 less than last year, as the gross profit decline was partially offset by a reduction in A&P expenditures.

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, an improvement in working capital, and relatively low capital expenditures.

Free cash flow for the quarter was $16.5 million.

That represents an 8% decline from Q3 cash flow of $18 million generated in last year's fourth quarter.

Free cash flow for the 12 months was $71.4 million, a nice increase of 34% over year ago cash flow of $53.3 million.

As Mark mentioned earlier, our continued strong cash flow enabled us to pay down $7.9 million on our term loan during the quarter.

Total debt has been reduced to $463.4 million at March 31, 2007.

Now I would like to turn it back to Mark to discuss our outlook for fiscal year 2008.

Thanks, Pete, for helping put a bowl on fiscal year '07 for us.

A challenging year for organic growth standpoint for certain our businesses, but also year in which the key actions we must take to improve our organic gross performance began to come into focus.

With that in mind, I would like to now spend a few minutes with you looking ahead to fiscal year '08.

As I mentioned in my introductory remarks on our Q3 call, I do believe it is an exciting time to be involved with Prestige and I know I speak for the entire organization when I say we're looking forward with enthusiasm to the increased focus we plan to bring to our current portfolio and the improved organic growth we anticipate as a result.

Delivering this improved growth in fiscal year '08 and beyond does not come without a price, but it is what we can and must pay to realize the full potential of our portfolio.

This price comes in the form of stepped up A&P investments behind meaningful new product launches and key brands support in our priority OTC and Household segments.

It also comes in the form of investing to improve our understanding of our consumer base, which will help enable us to fill a focused, salient innovation pipeline and optimize the amount and mix of our marketing spending at the brand level over time.

In addition to increased investment behind building our brands and furthering our customer knowledge, fiscal '08 will see us undertake initiatives to strengthen our distribution base across all of our key customers and channels.

All of these efforts should begin to contribute to growth during fiscal year '08 and these benefits will continue to build in fiscal year '09 and beyond.

It is also important to note that our dedication to improved organic top line performance is not by any means restricted to our North American business.

We continue to have enthusiasm for our international growth agenda as well.

As I mentioned, this business represented approximately 5% of our total revenues in fiscal '07 and we would be disappointed if that number do not climb in the coming years.

I will provide more details on a couple of these top line growth initiatives in a few minutes, but before I do I want to speak to two new and equally important infrastructure activities we will begin undertaking in fiscal year '08.

The first is implementation of a systematic cost-reduction program focused on four key elements of our cost structure -- formulation, packaging, conversion, and distribution.

This inaugural program is designed to identify those costs that can be removed from our supply chain with no compromise to our products' quality or efficacy.

The savings we generate from this program will both help offset inflation and provide economic fuel we can reinvest behind our brands to help drive improved organic growth.

A second important effort is a review of our supplier network.

All of our third party suppliers are valued partners, but at well over 100 of them, we simply have too many to run efficiently.

Accordingly, our operations department is taking a hard look at our network with the goal of simplifying our overall supply chain over time.

The clear benefit here is reducing complexity and we may also enjoy quality and cost benefits from this initiative, which will begin this fiscal year and continue well beyond.

That provides a brief summary of our key areas of focus for fiscal '08 -- increased investment behind promising new items in our key brands; strengthen distribution and consumer understanding; a more-focused innovation pipeline; and expanding international business; and the introduction of key infrastructure initiatives, all supporting improved organic growth within our current portfolio.

Now I would like to further share our plans for fiscal '08 by providing some additional details about a couple of these areas, beginning with new products.

As I mentioned earlier, it is our intention to develop a more-focused innovation pipeline over time, which translates to a move toward bringing fewer, but bigger ideas to market than we have historically done.

The benefits of this rebalancing include more efficient use of Prestige resources, inherently greater customer and consumer interest in our offerings, and, importantly, the critical mass necessary to adequately support these introductions and give them the best chance of contributing to sustainable growth.

In the first half of fiscal '08, we are introducing two signature examples of these types of innovations.

The first is Comet Spray Gel, which I profiled for you on the Q3 call.

As a quick reminder, Comet Spray Gel is exactly what the name implies -- a viscous gel which the consumer plat sprays onto a mildewed surface.

Because it is a gel, it clings to the surface far longer than competitive liquids, allowing more time for the active ingredients to do their work and making for easier cleanup.

Customer authorizations are continued to grow.

We're shipping orders as we speak and national advertisers support begins mid-June.

Since Comet Spray Gel represents our first entry into the $70 million mildew remover category, and has a very relevant point of difference, we anticipate it will be an important incremental top line growth contributor to both Comet and Prestige this year.

On the OTC side, we are equally excited about the launch of Murine Earigate, an aerosol product that uses patented breakthrough technology to help protect consumers from the often-discomforting effects of ear wax buildup.

The magic of Murine Earigate is that it employs a unique reverse spray nozzle that gently flushes wax away from the sensitive ear drum and surrounding membrane.

This 100% natural product provides consumers with greater ear comfort and chronic sufferers who use Murine Earigate regulation should also experienced fewer expensive doctors visits.

These chronic sufferers are the core consumer audience for Earigate and our introductory remarketing plan is designed to focus on this group, while also delivering compelling news to those who are occasionally afflicted by ear wax buildup.

Murine Earigate provides very salient benefits to consumers in both these groups and we believe it will quickly become a part of these consumers daily hygiene routine.

As with Comet Spray Gel, authorizations have been strong and shipments begin this quarter, with introductory support in early Q2.

As I mentioned, both Comet Spray Gel and Murine Earigate our examples of innovations with meaningful critical mass and we look forward to their contributions to our organic growth this year.

That is not all we're doing in the way of innovation, as our OTC business will also benefit from full year distribution of Clear Eyes Maximum Redness Relief and Little Remedies Gripe Water.

Extensions of these popular brands that we began shipping nationally in the last quarter of fiscal '07.

That is some additional insight on the innovation front, a key building block of our fiscal '08 organic growth.

Now I would like to briefly point the spotlight on our international business.

As previously mentioned, we enjoyed strong growth in fiscal '07 and international revenues were up 46%, driven largely by entries into new markets.

One of the most significant new market development occurred right in our backyard with the introduction of Comet into Mexico in late Q3.

This business continues to perform well for us and research indicates the Comet name has potential to extend beyond purely cleaning powders in both Mexico and other parts of Latin America.

Expanding our Latin American presence in both Household and OTC segments is one of our top international priorities in fiscal '08.

And we believe Comet is well positioned to lead the way for us there.

Other high-opportunity geographies we will be looking to further develop this year include China, where we currently have a limited store test of Comet in Wal-Mart and Sam's; in the Middle East, which like Latin America, is fertile ground for select brands in both our household and OTC portfolios.

Finally, our well-established and growing Murine eye care business in the UK will be introducing three new items in Q2 and preliminary customer reception to both the products and packaging has been positive.

So all in all, we have high expectations for our international business in the future and we're looking to take another step forward there in fiscal '08.

Now that I have shared highlights of our overall fiscal '08 initiatives, what does this all mean from a performance standpoint?

Well, as mentioned in our earnings release, after two years of, essentially, lackluster organic growth, we expect organic net sales to increase in line with our long-term average range of three to 4%.

Since we will not lap last year's purchase of the Wartner business until October, we expect our total net sales growth to be slightly above organic growth.

Our A&P investment in support of this growth will rise meaningfully and will be heavily skewed to the first half, behind our Comet Spray Gel and Murine Earigate launches.

As a result of this increased A&P investment and the absence of the FY '07 tax benefits discussed earlier -- both of which will be partially offset by the benefits of the deleveraging -- we expect full year reported net income and EPS to grow at a rate slightly below net sales growth.

It is very important to note, however, that we expect virtually all of the growth to occur in our second half as we move beyond the initial launch investments behind Spray Gel, Earigate and, to a lesser extent, our UK Murine extension.

However when measured on the adjusted basis Pete described, we anticipate full year net income and EPS growth will slightly outpace our net sales increase.

Although we expect free cash flow to return to normal operating levels, it should once again healthily exceed our net income and will be used for debt retirement, absent any acquisitions.

So finally, a word about acquisitions.

As you know, we do not anticipate acquisitions when we build our annual plan and has hopefully become clear we're rebalancing the focus of our energies toward improving organic growth in this fiscal year.

This change in emphasis is just that -- a conscious decision to drive our current portfolio harder in the short run.

It does not mean that strategically-appropriate acquisitions will not be of continuing interest to us, just that they are not an immediate priority.

We do continue to see a regular flow of opportunities and certainly remain receptive to and capable of acting rapidly on those that make strategic and economic sense.

So in closing, let me reiterate my enthusiasm for our prospects in fiscal '08.

No doubt, we have challenges in front of us and we must execute our fiscal '08 agenda excellence, while continuing to lay the groundwork for sustainable growth.

However, I'm confident we have both the capabilities and the commitment necessary to succeed in this fiscal year and to take those critical first steps necessary to extend this performance over time.

Thank you and now we'd like to open up the call to questions.

(OPERATOR INSTRUCTIONS) Bill Chappell, Suntrust Robinson.

First, just a little clarification on the guidance.

What are you expecting for the effective tax rate for fiscal '08?

38.4.

So it'll be up 400 basis points, basically?

It was 38.6 at the end of the third quarter and we reduced it to 38.4.

I guess I'm just looking at a different effective tax rate for all of '07, but I will ask that off-line.

I guess the second is, if I look at your operating income growth, should there be growth in fiscal '08, because I'm assuming if you're not making -- presumably, there are no acquisitions over the next six to nine months, all your cash will go towards paying down debt and you should have some leverage on the model from interest expense?

Correct.

So would you expect operating income to actually up, or is going to be flat to down in '08?

Should be up, not dramatically.

I guess, Mark, as you look at these new initiatives, do you expect any of them to help offset the A&P spend this year, in terms of reducing the number of suppliers and cost-cutting, or is this really more of an '08 type -- '09 type benefit?

As I mentioned, Bill, we expect the initiatives to really hit full stride in '09, but we are expected to get some benefits that will build as we get traction on these in '08.

So would I expected to fully offset the A&P investment?

No.

But to contribute to our overall performance this year on an accelerating basis?

Yes.

Is there any way to quantify what type of cost savings you can find or what kind of margin expansion you expect?

Not this point.

That is an initiative we're just getting underway with.

Great, then just last question on Chloraseptic.

With your top line guidance for this year, are you expecting another kind of warm cough/cold season?

It seems like you have pretty easy comps in the back half of the year for fiscal '08.

We are certainly hoping that we return to whatever passes for a normal cough/cold season, or cold/flu season in the fiscal '08 timeframe, Bill.

Okay, great.

Thank you.

Lori Sherwin, Goldman Sachs.

Could you talk a little bit more on the follow-up on the 2008 outlook?

I am just more curious about, not just next year, but the implications for longer-term earnings growth.

Certainly, next year, it looks like to be an investment year, but is that really a onetime step up, or could, conceivably, earnings growth always trail sales for the next couple of years?

That is going to be part of our long-term strategic plan, but for openers, I would say we would not expect that to be an ongoing phenomenon.

Obviously we're investing next year behind major new product launches and those should be contributing to sales growth beyond the '08 timeframe.

Mark, when you think that higher spending, how are you thinking about it?

Is this is a percentage of sales, or are you looking at some other measure?

This year was about 10% of sales.

Historically, it's been between 10 and 11.

Do you think it needs to, at a minimum, it should go back to the 10 to 10, but do you think it might even need to be higher?

I think that we are going to reserve judgment on what our run rate on that should be as we continue our analysis on marketing mix optimization, but no doubt it will step up from the levels that we spent at over the last couple of years.

When might you unveil a longer-term strategic outlook to the Street?

We are going to go through an internal process here, as I think I mentioned earlier, over the summer.

And so we would be position to talk about that, as appropriate, as we move into the latter half of the fiscal year.

Okay, then on the sales growth target, if international continues its recent 40% run rate, I'm getting that that is really going to contribute half of your growth.

Is that the right way to look at it, that your organic trends in the U.S.

are probably going to be in the one to 2% range?

I would not look at that way, Lori.

Why is that?

If you do the math, that is way works out, so what am I missing?

Do you think international slows or is there something better in the U.S.?

Well, I think our rate of growth on international is still going to be impressive, but it is not going to, as I think I have mentioned before, it is not going to continue a linear pace.

What we expect our international business to do over time is to grow faster than our domestic business, but it is going to be more of a step function, sort of, an approach, because we both chase low-hanging fruit in both our OTC and Household segments, but we will run into, certainly, regulatory and registration barriers on some of our OTC products over time.

And That will stretch out the pace at which we can continue to grow our OTC business.

So we are expecting good growth this year.

I can't give you any idea what '09 looks like.

We have not formulated those plans yet.

What I don't what you walk away from is an expectation that the curve on the international growth is going to be linear out over time.

Okay, then on the new launches you talked about, I'm assuming the pipeline was built before you got the proceed grants.

Am I right on that and, if so, what is now changing about the process to do differently to accelerate and step up the pace of innovation over the next couple of years?

You have sort of touched on it briefly, but you mentioned new products for the year.

So I'm just curious how that works.

We are revisiting our innovation process internally, with the one core end-state being to develop a pipeline of fewer, bigger ideas.

And we're going to revisit our process top to bottom with that in mind.

I do not expect that the source of innovation ideas for us is going to change dramatically, but we are going to place different parameters on the types of ideas that we move forward with in an effort to funnel our resources towards the ones that will have the biggest, most-sustainable benefit for us.

I guess, the two new products you're launching this year, though, it sounds like they fit into the category of fewer, bigger launches.

So I guess that that was done before you got there.

What really needs to change?

What am I missing?

What we need to do as we need to take the type of effort that went into those two launches and apply it across our balance of our portfolio.

As we look at all of our major brands, we think about innovation for our major brands, how do we shape that innovation pipeline so that the level of revenue we get from each new idea is one that we believe we can support and we believe we can support over the launch horizon?

Our history has been to primarily put out a number of small ideas and ultimately see what sticks.

We want to move away from that to more towards the types of ideas that Murine Earigate and Spray Gel represent.

And so it's basically taking a look at how we got to those ideas, in the context of our overall innovation pipeline, and then trying to apply lessons learned from those to the balance of our portfolio.

Okay, that's helpful.

And just one quick last one on the quarter.

Little Remedies, I understand the issue the cold/cough season being weaker, but it just seemed like a pretty dramatic fall off.

Maybe you can sort of give us order of magnitude, how big cough and cold as a percent of Little Remedies and if the other brands, or other products within that brand were up or down.

I don't think we have that level of detail at this time, so we're going to pass on that one, Lori.

Okay, thanks.

Joe Altobello, CIBC World Markets.

First question for Mark, in terms of what you talked about earlier on the investments to understand your customer better and strengthen your distribution base, could you expand on that a little bit?

Sure, let me talk to the -- when you say customer, I assuming, Joe, you mean our consumers, our end-consumers?

Yes.

We just have a fundamental need to get a better understanding of who the core consumer is for our products, and with that understanding and knowledge comes the ability to better pinpoint their need states and drive the innovation pipeline, a little bit to Lori's question as well.

The more we understand our end consumer, the more targeted we can be in our efforts to create new products that will really be salient and resonate with them.

That is separate from the distribution initiative, which is really a customer-based initiative, and takes a look at our core products today up against the channels and key customers that we are in and asks the question, are we missing points of distribution with those key customers?

I think the top-line answer is yes, and now we're in the process of going through an analysis that says, okay, where are the key voids in customers and channels across our major lines?

How do we fill those out so that each of our customers is carrying the appropriate number of SKUs?

And inside that number of SKUs, the right SKUs for their particular consumer base?

So that is a separate initiative from the consumer understanding, which is market research driven.

Is that people or is that computing power?

In terms of which?

The latter, the infrastructure for the distributions.

The distribution?

That is computing analytics.

It is not if you're getting to a point of adding to our sales organization or anything like that.

That is not the intent there.

Arm our sales organization with the data that allows them to be effective with customers, work with customers to improve their profitability.

Okay, then secondly, I think in the past, Mark, you talked about distribution opportunities for certain products and how you're not everywhere you want to be.

Could you give us certain examples of products that you feel have the most distribution opportunity?

Without being specific, Joe, I would say that there's opportunities across virtually all the major products in both our OTC line and in our Household line.

And as I mentioned earlier, what we're doing now is lining those up, validating them, and we'll be prioritizing them and getting after them with our sales organization.

But you can take away from this that we will be working the major brands in both the OTC and Household segments hard on this one.

Okay.

So it sounds like it is not going to have much of an impact on gross margin, since the mix is not going to change all that much.

That is correct.

Then lastly, I want to follow up on an earlier question regarding A&P.

The way I understand it, '08 it sounds like is going to be an unusually high year for A&P spend, and going forward that is not going to be a normalized level?

I would not necessarily conclude that.

That is not the point that I was making.

It is going to be a step up behind new item launches, but until we put our strategic plan together, it is inappropriate for me to comment as to whether that is a new going year run rate for us or we're going to land somewhere differently.

Okay, thanks.

Jon Andersen, William Blair.

Sticking with brand support for a minute, is it fair to assume that in addition to a step-up in total brand support fiscal '08, there may be a shift in the emphasis away from trade promotion and more dollars into advertising and consumer promotion?

I would say, John, that the mix will change in that direction, because the incremental support is primarily coming in the A&P line.

So the mix will change.

Now, you raise another effort that we're undertaking here, which is to review the overall mix of our total spent, trade and A&P, and make sure that we're optimizing that.

That is a downstream initiative that we will be undertaking in '08 as well.

Great.

And I wanted to ask about Wartner.

You have had it for a couple of quarters now and commented that the sales have been in line with the pre-acquisition expectations.

Are you seeing some benefits from the combination of Wartner and Compound W in terms of your ability to compete more effectively or adding distribution, etc.?

I would say any of those benefits, John, are out in front of us.

We are putting together our total wart category strategy as we speak, and Wartner obviously will play a role in that.

Thank you.

Olivia Tong, Merrill Lynch.

Your three to four long-term sales outlook, what is driving that?

How much is new product versus category growth versus potentially taking market share?

We do not give that level of detail, Olivia, but it is a combination of all of the above.

So it is not exclusively reliant on new products.

We certainly are anticipating underlying trends on the businesses without major launches to be positive as well.

Okay.

For international, obviously it was very strong in fiscal '07.

How much do you think is left as far as low-hanging fruit?

And also can you give us a sense of how much of that growth was sort of a same-store sales of basis versus new market expansion?

Well, again, I won't parse the growth for you, but I will tell you that we are very enthusiastic about the opportunities over the long-term for our international platform.

As I mentioned earlier, it is going to be a bit of a step function for us in the years ahead, but we continue to believe that there is a lot of runway there.

And that is both in terms of our current products and where they can go in new geographies and the potential to get other selected products from our current portfolio into international markets.

So there is still some sort of what you would consider low-hanging fruit available at this point?

I guess it depends on how you define it.

The best I can say is that we're comfortable with the ability of that business to step up over time, and we're expecting positive things from it in fiscal 2008.

Okay, just lastly, answering another question previously you said you would not conclude that fiscal '08 ad spending is materially going to be higher than you would over the long-term, but you also said that over the long-term you think net income will grow faster than sales at some point.

So can you sort of help us understand the point between sales and the net income and how that is all going to work out over the long-term?

Well, obviously, I will speak to fiscal '08.

Obviously, we have got deleveraging, which will always be a benefit for us as long as we don't do anything on the acquisition front.

And we expect benefits from the cost reduction program that I mentioned to begin in '08, but to accelerate as we get out over time.

Sp those will be -- in steady-state mode, those would be two contributing factors.

Over the long-term do you think that operating income is going to grow faster than sales?

Yes, I think that --.

And what is driving that, depending which way?

I would say, again, tending our strategic plan which we need to put together, the fundamental notion of net income accelerating faster than sales is not inappropriate.

Okay, thanks very much.

Mimi Noel, Sidoti & Co.

First I wanted to ask about the G&A expense.

It seems a bit volatile quarter-to-quarter and rising more than I would suspect, even with added infrastructure for acquisitions less than a yea -old.

I thought it was part of your business model to keep that relatively steady, relative to any sales increases.

Should I still think of it like that?

I think, Mimi, that what you saw this year and what we saw in the fourth quarter is a continuation of what we have been saying all year.

The biggest driver of the increase was zero bonus payout in fiscal year '07 compared to a bonus payout in fiscal year '08.

That plus increased legal expenses really were the two key drivers of '07 over '06.

We fully anticipate that next year we're going to pay a bonus.

That is going to remove a large delta that we saw in FY '07.

So basically what we would expect -- again, I can't -- who knows what is going to happen on the legal expense front, but everything that I know right now would say that G&A should return to kind of grow at inflation.

Okay, and Pete, since I have you, I also wanted to ask if you would reiterate -- you gave guidance for F '08 on two terms, as reported and as adjusted.

Can you please repeat that again?

Surely.

The adjusted EPS, if you will, was $0.68, and that adjusts for the non-cash income tax benefits that we experienced this year of about $2.2 million.

Okay, and the guidance for next year relative to that figure or the implied net income?

The guidance was that we would grow better -- and that was actually more (inaudible) -- that we will see, compared to that adjusted income, that we will see net income growth more than the sales growth.

More than sales, okay.

I am all set.

Thank you.

Karru Martinson, Deutsche Bank.

You have the two large product introductions, but I was wondering is there going to be fill-in around that or have we already moved to this large project introduction model?

No, there will always be fill-in around it because there are businesses, like Chloraseptic, that will always be looking for news on an annual basis.

So I mentioned two that are very germane to our Clear Eyes and our Little Remedies businesses -- the Maximum Strength Redness and the Gripe Water.

Those are examples of smaller, but still very relevant, for those respective businesses, introductions and extensions that will be taking place in fiscal '08.

So the notion here that I want to make sure I leave is not that we are walking away from smaller introductions, just that we are focusing on the larger ones and rebalancing toward fewer bigger ideas.

We will definitely always have a need for, and an interest in, the smaller fill-ins for certain of our product lines.

But we have got to push our emphasis toward more of the Spray Gels and Murine Earigates over time.

Just in terms of the cold products, with the inventory charge and the retailers sell-through, is there going to be any kind of inventory overhang as we come into the upcoming year's cold season?

We do not believe so.

As we mentioned earlier in the prepared remarks, the factory sales in the fourth quarter were much weaker than the consumer sales were.

And you see this phenomenon a lot where the retailers get ready to go into the summer or spring season.

They understand that they're going to lessen their cold section, so basically what happens is they're living off the inventory they bought at the beginning of the year.

So we do not believe that we're going to be in a position where anybody is sitting with a glut of inventory.

Just on the Personal Care front, I know it is the smallest part of the business.

Have we seen the rate of decline start to level off?

Are we're approaching a bottom on that business or is that still a ways to go?

You know, that is a bit of an open question for us.

We have seen a minor modification in the rate of decline, minor moderation in the rate of decline on those businesses.

And obviously we are still looking at them from a strategic options standpoint, but I think the jury is out in terms of where the equilibrium, kind of, level is for those, where they will bottom out.

So it is obviously something we continue to monitor on a regular basis.

Without acquisitions, you guys should have a decent debt pay down coming up.

I was wondering what your views are on a long-term capital structure.

Your bonds are callable in March of '08.

Do you feel that you have the financial flexibility in place to kind of pursue the larger acquisitions out there?

We definitely believe that if the right acquisition comes along, that given our current capital structure, that we could very easily lever back up to five to 5.5 times debt to EBITDA.

We would certainly be comfortable there, because whatever we would acquire would have the same characteristics as the existing portfolio and that would allow us to get back down to a four, 4.1 times pretty quickly.

So the capital structure, as it stands right now, is totally comfortable.

We'd be comfortable going up.

On the bonds, the callable bonds issued for March of '08, has there been any early thought on that?

We continue to look at what the best way to handle that is, so we've had discussions with various people, but to this point, have not made any decisions.

Lastly, on the acquisitions, it sounds like there is certainly some small ones in the pipeline or are being looked at, but nothing major on the horizon.

I was just kind of wanting to throw a little more color on that, and just also multiples you're seeing in the market right now.

I would correct the observation that there's small ones in the pipeline.

My point is we continue to get unsolicited interest coming across our desk, here, but given our intent to refocus on organic growth in our current portfolio, we've really tightened down the screen on things that we would even consider putting into our pipeline to take any effort against.

And right now, we've got nothing going on there.

And just in terms of multiples?

We haven't progressed in the recent timeframe to even worry about multiples at this point.

Okay, thank you very much.

Reza Vahabzadeh, Lehman Brothers.

On the Household Products front, it looked like gross margin this quarter was well below last year.

What accounts for that?

There were two things.

There were modest increases in product costs, and that was primarily due to a mix shift.

And then there was an increase in transportation costs.

That was a reversal of what we had seen through the first three-quarters of the year.

I see.

And the product costs that you were talking about, that was just sales mix or are we talking about the ingredients?

Sales mix, yes.

For the new products that you are introducing in 2008, would they be gross margin accretive or would they be awash?

It's slightly accretive.

Slightly accretive.

And as far as A&P spend level in 2008, did you give any color or guidance as to where it would come in as a percentage of sales for the year?

No.

Is there even a wide range?

Nothing that we would offer up.

Would it be heavier in the first half than the second half?

It will definitely be heavier in the first half and that is an important point.

Again, as I made mention of in my remarks, because of the investment behind primarily our new products in the first half, the earnings growth that we're expecting in '08 will virtually all come in the back half.

Okay and so all the comments that you're offering, would that all suggest that the gross margin for '08 would be fairly close to '07?

I think that is a fair statement.

Okay, just from your answers to some other questions it sounds like you have a similar acquisition strategy as in the past.

Sounds like you have a similar leverage tolerance as in the past, but that the pipeline is a little bit cleaner right now and fewer targets in the pipeline than perhaps recent past, just because you're focused on the base business?

Yes, again, we continue to see a regular flow of unsolicited interest, but because we want to the next six to nine months and focus on our current portfolio, unless something is truly a bulls-eye for us, we're very likely to take a pass on it.

It does not mean that if something that is a real perfect match comes along that we are, as I mentioned earlier, not ready to react, both with interest and with economics.

But to right now, we're not making that a priority for us.

Right, and then as far as inventory and retail, whether it is Chloraseptic or anything else, are you comfortable that inventory at retail is in line with what it should be and that there is no overhang anywhere?

Yes, we are.

Thank you much.

Ladies and gentlemen, this concludes the question-and-answer session of today's conference.

I would now like to turn the presentation back over to Mr.

Mark Pettie.

Thank you and thank everyone for joining us on the call this morning.

We look forward to speaking with you again next quarter.

Goodbye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.