Prestige Consumer Healthcare Inc (PBH) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2008 Prestige Brands Holdings Incorporated earnings conference call.

My name is Akia, and I will be your operator today.

At this time all participants are in a listen only mode.

We will can conduct a question and answer session toward the end of the conference.

(OPERATOR INSTRUCTIONS) If your question has, I would now like to turn the presentation over to your host for today's call, Mr.

Dean Siegal, Director of Investor Relations.

Please proceed.

Good morning.

Welcome to Prestige Brands' fiscal 2008 second quarter conference call.

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

Statements 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 risk and uncertainties which in many cases are beyond the control of the company and may cause actual results to differ from management's expectations.

Additional information concerning the factors that might cause actual results to differ from management's expectations is contained in the company's annual and quarterly reports that it files with the U.S.

Securities and Exchange Commission.

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

Thank you, Dean, and welcome everyone.

In addition to Dean, with me is Pete Anderson, Prestige's Chief Financial Officer, and also joining us today is Chuck Jolly, our General Counsel.

I will begin today's call with a brief overview of our second quarter results.

Pete will review the financials in detail, and after that I will come back and finish the call with highlights of our segment performance and our outlook for the remainder of the fiscal year.

We will then open the call for questions.

Let's get started with our reported total revenues for the second quarter, which were $87.3 million, an increase of 3% over last year, with underlying reported organic sales up 1%.

As many of you know, in October, Prestige participated in an industry wide voluntary withdrawal of certain pediatric cough/cold products.

Two of our Little Remedies products were affected by this action and we have reserved for the estimated returns of the affected items in our second quarter results.

Absent the impact of this withdrawal, total net revenues for the quarter grew 4% and organic sales were up 2% over a year ago.

Reported net income for the quarter of $6.8 million was below last year's net income of $8.8 million; however, excluding the impact of the Little Remedies voluntary withdrawal, which consisted of the returns reserve mentioned above and the reserve for obsolescence.

Net income for the quarter would have been $8.1 million or $0.16 per share.

Gross profit margin adjusted for the impact of the Little Remedies withdrawal improved by 140 basis points compared to last year's second quarter as a result as a result of favorable sales mix and early benefits associated with the implementation of our systematic cost of goods sold reduction program.

Advertising and promotion expenses increased by 17% or 140 basis points versus last year's second quarter and 42% or 280 basis points compared to this year's first quarter as we ramped up consumer support behind the Murine Earigate and Comet Mildew Spray Gel new product launches.

Performance to date on both these products is exceeding our expectations and we will touch more on this later.

Finally G&A of $10.2 million were significantly more than last year's expense of $7.3 million.

The increase is primarily due to abnormally high legal expenses which were focused in two specific areas.

The first area of increase was related to the OraSure dispute, which was concluded by arbitration in mid October.

As you may have read, the arbitration panel determined that the technical breach of the Compound-W Freeze Off supply agreement will not cause material damage to OraSure and that the supply agreement will end at the end of December as we had anticipated.

As a consequence to the arbitration, we will be obligated to pay OraSure $1 in nominal damages and certain legal and arbitration expenses in an amount to be determined by the arbitration panel.

A new supplier relationship will be in effect on January 1 of next year which will enhance Prestige's capabilities in an increasingly competitive work care category.

In addition to the OraSure arbitration, during our last call we informed you of four separate legal actions which were initiated by the company related to The Doctor's NightGuard business.

Three of these actions have already been settled on terms acceptable to the company.

However, the most serious and complicated case remains unresolved and we anticipate continuing to incur some level of incremental legal expenses through the balance of this fiscal year and potentially beyond to aggressively defend our patents, trademarks, and other intellectual property.

Finally, turning to cash flow.

We generated free cash in the quarter of $13 million.

Our continued strong cash generation enabled us to pay down an additional $10.4 million on our term loan, reducing the debt to $437.1 million at September 30th.

So that is the summary for the quarter.

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

Pete?

Thank you, Mark and good morning, everyone.

As Mark mentioned earlier, our reported net revenues for the quarter of $87.3 million were 3% greater than last year's net revenues.

Operating income of $20.6 million was $3.6 million below last year and $24.2 million -- last year's net income of $24.2 million.

Net income was $6.8 million, which was $2 million below last year.

The $3.6 million decline in operating income compared to last year was due to the following factors: revenue increase resulted in gross profit increase of $1.3 million.

That was offset by increased advertising and promotional, G&A, and depreciation and amortization expenses.

In addition, the Little Remedies withdrawal resulted in a reduction of operating profit of $1.9 million.

Cost of sales for the quarter of $42.8 million was $1.5 million or 4% higher than last year's cost of sales; however, if we exclude the obsolescence reserve required for the Little Remedies withdrawal, cost of sales would have only been 1.3% higher than last year's cost.

As a percent of revenue, our cost of sales adjusted for the Little Remedies withdrawal decreased from 48.8% last year to 47.4% in the current year.

This cost of sales decrease was primarily due to favorable sales mix, combined with a reduction in transportation costs.

Our advertising and promotional expense of $11 million was $1.5 million greater than spending of $9.5 million last year.

This increase in A&P was primarily due to increased media and consumer promotion spending against the Murine Earigate and Comet Mildew Spray Gel launches.

G&A expense of $10.2 million was $2.9 million higher than the prior year's expense of $7.3 million.

As Mark mentioned earlier, this increase was due to abnormally high legal expenses.

Now, we will briefly review the second quarter results by segment.

Net revenues for the OTC segment of $50 million were $3.7 million or 8% above last year.

Importantly, if we exclude the impact of the Little Remedies withdrawal, total revenues would have increased by 10% and organic revenue growth would have increased by 5% for this very important segment.

Gross profit for the segment was $30.3 million, 7% greater than last year.

Gross profit as a percent of revenues was 60.6%, down 50 basis points from last year's 61.1%.

However, the gross margin excluding the Little Remedies withdrawal was 63.2%, a very nice improvement over last year's 61.1%.

This improvement was driven primarily by favorable sales mix.

Contribution margin of $22.2 million for the segment was $300,000 or 5% above the year ago quarter.

The gross profit increase was partially offset by increased A&P spending in the current year.

Household products net revenues of $31.4 million were $100,000 greater than last year.

Gross profit of $11.8 million was $500,000 less than the prior year, due to increased product costs, partially offset by decreased freight expenses.

Gross profit as a percent of revenues was 37.7% in the fiscal 2008 quarter compared to 39.4% in the prior year quarter, and contribution margin for the quarter of $9.3 million was $1 million below last year, resulting from the gross margin decline and an increase in advertising and promotion spending behind the Comet Mildew Spray Gel launch.

Net revenues of $5.9 million for the personal care segment were $1.1 million less than prior year.

Gross profit of $2.4 million was $300,000 less than prior year, primarily due to the sales decline, while contribution margin of $2.1 million was also $300,000 less than last year.

Free cash flow for the quarter, which we define as operating cash flow less capital expenditures, was $13 million.

That represents a decline from free cash flow of $21.3 million generated in last year's quarter.

The decline from last year is driven by the year on year reduction in net income, combined with an increase in working capital in the current year compared to a decrease in working capital last year.

The biggest reason for the working capital increase this year was that accounts receivable increased in the current year due to the sales increase, combined with a change in the timing of cough/cold orders received this year.

This year, retailers purchased less than they did in the same quarter last year, but the orders came later in the quarter.

On the other hand, inventories continued to show a decline from both March 31st as well as from last quarter.

So as Mark mentioned before, our continued strong cash flow enabled us to pay down $10.4 million on our term loan during the quarter.

As a result of that our total debt now stands at $437.1 million.

And now I will turn the call back to Mark, who will provide additional quarter two perspective and comment on our outlook for the balance of fiscal year 2008.

Thanks, Pete.

I would now like to provide some additional highlights on the performance across our business segments.

But before I get started, it is important to note that when I speak of consumption I am talking about consumption across all channels, which which includes traditional measured food, drug and [math], which IRI covers, plus actual sales results in nonmeasured accounts and channels such as Wal-Mart, Dollar Stores and clubs.

These nonmeasured channels can account for more than half of total consumer movement for some of our brands.

So focusing exclusively on our IRI data can at times be a misleading indicator of our brand's performance.

Beginning with our OTC segment, the very strong factory sales growth this past quarter was led by the Murine ear care franchise, as our innovative new Earigate product responded extremely positively to the beginning of television advertising in August.

As a result of the Earigate launch and its halo effect on the entire Murine line, consumption of Murine ear products in total was 141% greater than the prior year period, while factory sales increased by over 200% versus a year ago.

Our largest OTC brand, Clear Eyes, also continued to perform strongly, with both factory shipments and consumption up 6% for the quarter.

This is attributable to underlying positive brand momentum, coupled with the continued success of our new Max Redness Relief product, which was launched late last year and supported with dedicated advertising in the first half.

Excluding the withdrawal impact our Little Remedies business experienced 4% revenue growth versus year-ago as a result of distribution gains and the introduction of our Gripe Water product in late Q4 of last year.

While the withdrawal of the two cough/cold items will negatively affect Little Remedies revenues in the second half, we are redirecting our sales and marketing efforts to the balance of the portfolio to offset as much of this impact as possible.

In particular, our Little Noses Saline and Stuffy Nose Kit products produce strong opportunities to recoup a piece of our lost pediatric volume during the cough/cold season.

Looking further ahead, we will be working with FDA and CHPA to determine the appropriate approach to the pediatric cough/cold market for our Little Remedies business.

The Doctor's line of oral care continued to be negatively impacted by both branded and private label competition in the bruxism category.

To a substantial degree, this competition involved infringement of our patents, trademarks, copyrights and trade dress, which resulted in several legal actions mentioned previously.

As a result of this competition, The Doctor's NightGuard suffered declines in factory sales versus last year's second quarter.

Finally, as Pete alluded to earlier, after two consecutive soft cough/cold seasons, many of our retailers appear to be shifting toward a more consumption based ordering pattern as we head into this year's season.

This change meaningfully reduced the traditional preseason load across the industry, with the impact to us being a 13% reduction in second quarter Chloraseptic sales versus year ago.

Assuming a normal cough/cold season, we would expect this shortfall to be made up in the second half, particularly in our fiscal fourth quarter.

Fresh new advertising that is breaking next week in support of our launch of Chloraseptic liquid center lozenges will help drive this all important in season consumption.

Turning to our household business, the segment's largest brand, Comet, experienced flat revenues compared to last year.

This trailed Comet consumption, which was up over 3% during the quarter, led by Comet Mildew Spray Gel sales.

Comet Mildew Spray Gel continued to gain distribution during the quarter and consumption responded very positively to the start of television advertising; however, the strong performance of this new item was offset by powder softness due primarily to category-wide inventory reductions at one of our key mass merchandiser customers.

Chore Boy experienced a very strong quarter compared to the previous year, with an increase of 39% behind higher shipments to wholesalers, while Spic 'N Span experienced a factory sales decline of 9% versus last year, steeper than the 4% decline in consumption.

Finally, in personal care, Cutex and Denorex experienced sales declines while Prell experienced a modest revenue increase.

Aggregate results in personal care were generally in line with expectations and reflect our continuing reprioritization of growth investments away from this segment.

Lastly a quick word on our international business.

During Q 2 we uncovered diverting behavior by a small number of our international business customers.

We immediately stopped sales to these customers and took other steps to make us confident we have eradicated this behavior; however, the short term result of this necessary action was an 18% decline in Q2 international revenues versus year ago.

While this action should have a positive impact on our domestic sales downstream, the net effect to our aggregate revenue this year is expected to be somewhat unfavorable.

That said, the most important takeaway is that despite these short-term developments, our belief that international markets represent very strong growth for us in the years ahead is in absolutely no way diminished.

So to summarize, while was this a challenging quarter for us in some respects, when you look past the surface, there were several favorable fundamental developments in pursuit of our longer term goal of building sustainable organic growth.

Specifically, organic sales performance improved for the third consecutive quarter and turned positive in absolute terms, with particularly encouraging underlying results in our OTC segment.

Our two major new product launches continued to perform well behind dedicated A&P support and we've advanced the development of promising new products in our pipeline.

Our focused more from the core base business distribution program continues to gain traction, achieving a number of incremental authorizations on key brands, such as Clear Eyes and Chloraseptic.

Our systematic cost of goods reduction initiative began contributing to gross margin performance this quarter and its continued success will be critical to helping offset the increasing upward pressure we're seeing on commodity based input costs.

In addition, key supply chain consolidation activities are progressing well, and we project a 13% reduction in our supplier base by year end with an additional 9% reduction already identified for fiscal year 2009.

As we have discussed, clearly there were also some difficult actions we took this quarter that impinged on our results; however, we firmly believe that they were necessary and appropriate, and in the case of The Doctor's NightGuard litigation and the shutdown of international diverting, it will result in stronger and more sustainable businesses in the long run.

While we continue to make progress on several important fronts, we also acknowledge there's plenty of work ahead of us on our key initiatives.

We must continue to improve our consumer knowledge on our key brands, which will allow us to sharpen our marketing messages and optimize our A&P spending.

We must also continue to push for more scale within our current portfolio through an innovation agenda that focuses on bringing both new products and new consumer benefits to our most promising brands.

Above all we must and we will continue to operate with a sense of constructive dissatisfaction that challenges and encourages the entire Prestige organization to continuously push for the changes necessary to build sustained organic growth.

Let me now wrap up with a look at our performance expectations for this year.

Although our long term average organic growth target remains at 3 to 4% growth, the effects of the Little Remedies withdrawal and our proactive diverting steps yield a revised fiscal year '08 organic growth projection of plus 1 to 3%.

As we have stated before, total net sales growth for the year will be slightly above that due to the benefit of the Wartner acquisition in our first half.

A&P investment will remain above a year ago with particular emphasis in Q3 as launch support continues behind both Comet Mildew Spray Gel and Murine Earigate.

That will taper in Q4, which is not a heavy mildew period in much of the country.

While legal expenses should decline from second quarter levels, we do expect them to stay somewhat above normal run rates as we continue our defense of The Doctor's NightGuard franchise.

From a reported net income standpoint, we have previously told you that we expected performance in fiscal year '08 to be below our rate of sales growth.

That's still the case.

The impact of Little Remedies withdrawal and higher legal expenses will somewhat widen that gap.

However, after adjusting for the Little Remedies product withdrawal cost, and the absence of certain tax benefits recorded in fiscal year '07, we also continue to expect this adjusted net income performance to modestly outpace our net sales growth.

Importantly, full year free cash flow remains very strong, and should once again meaningfully exceed net income, allowing for continued aggressive delevering absent any acquisition activity.

That's the story for Q2, a quarter of continued progress on fundamental growth initiatives, tempered by the impact of some very necessary marketplace and legal actions.

Importantly, looking beyond the immediate impact of these actions, we remain confident we are on the road to sustainable growth.

Thank you, and we will now open the call up to questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Bill Chappell of SunTrust Robinson Humphrey.

Please proceed.

Good morning.

Hi, Bill.

Can you talk a little bit about the level of A&P that you have ramped up, I understand it's supporting kind of couple new big products, but do you see the longer term need to just raise the A&P level to a double digit of sales or even higher, maybe even the teens as you have kind of had a chance to evaluate things over the past nine months?

Yes, Bill, I think as we stated before, the level that you are seeing now particularly as we projected through on the year, represents the threshold level that I believe we need to invest to get these businesses going forward.

And as we continue to work through our strategic review, it is conceivable that the ongoing level could in fact increase beyond the run rate we are looking at for this year, behind both new products and also news against our current portfolio.

So if I look at that kind of 10 to 11% this quarter, that's what you are saying is the threshold or kind of the minimum level?

I would say that is absolutely a minimum level, Bill.

Okay.

Then anyway to kind of quantify for this year what the legal costs and what, any additional Little Remedies cost would be?

I think we've got the Little Remedies cost behind me that we know factually, which were the withdrawal costs and the obsolescence reserves.

It would be premature to speculate on the sales impact of that.

Obviously we know that the withdrawal of those two items is going to affect the portfolio negatively, but as I mentioned we are trying to recover at least a portion of that through redirecting our marketing efforts to certain other products, which in the cough/cold season I think consumers will find beneficial as alternatives.

The net impact would be premature to speculate on.

And then on legal?

Legal, it is difficult to get granular on.

I think as I mentioned, taking a look at our overall run rates for G&A for this quarter, our overall experience in G&A this quarter, we do not expect to stay at that level.

We would expect it to taper off although not to the degree that would represent a normal run rate.

Okay.

On to the Little Remedies, I guess there has been so much talk about the, the effectiveness of efficacy of these type of products for infants.

I mean are you seeing the recall affect the other Little Remedies products?

No, absolutely not.

Consumption of those products is staying exactly where we projected it at this point.

We will obviously consider to monitor that as this unfolds, and I think you can expect that media coverage of this will ebb and flow as FDA goes through its longer term deliberations and then ultimately comes out with some pronouncements coming out of the advisory panel.

But in the short run aftermath of the media coverage that led up to and succeeded the mid October FDA panel review, we have not seen any drop off in the other Little Remedies products.

Bill, I think it is important to note that while Little Remedies was affected in the cough/cold arena here, our Little Remedies products stand, digestives and many other ailments.

So the good news is that none of those products were in any way affected by this withdrawal.

Okay.

And then just the last one on Chore Boy, I think you said shipments were up 39%, but at least we see in the Nielsens it doesn't look that great.

Is that just kind of a one quarter blip or how should I look at that?

That's one of those businesses in my kind of upfront caveat about being careful looking at just IRI -- it's one of those businesses where a big portion of it runs through unmeasured channels.

And we saw the increase in the wholesalers side of things, which is basically unmeasured channel where they sell to unmeasured channels.

So while the IRI numbers are down, the alternative channels are performing quite well for us.

Okay.

Thank you.

You bet.

And your next question comes from the line of Mimi Noel of Sidoti and Company.

Please proceed.

Hi, Mark and Pete.

I have a few questions.

Hi, Mimi, how are you?

Very good, thank you.

Can you provide any more detail on what the product pipeline looks for fiscal 2009?

Yes, obviously, Mimi at this point it would be premature to talk specifically, but we are focusing our efforts on our bigger brands as it has been part of our stated strategy, bigger ideas.

I can tell you that some of the consumer research that we have already conducted on brands like Chloraseptic is giving us very encouraging evidence that we can push those brands beyond their current categories.

So in the case of Chloraseptic for instance, which has historically been a sore throat business, there is ample consumer evidence that we can push out beyond those.

And so we are focusing on items that would move Chloraseptic beyond its core heritage and build scale behind that very important brand.

That's one.

Obviously we are going to continue to innovate despite the current competitive situation on our Doctor's NightGuard business.

And we have a lot of promising developments there, and we continue to look across the balance of the line with the bias to OTC and our big household products such as Comet for our next round of innovation.

Okay.

That's helpful.

Thank you.

And perhaps premature as you just suggested, but at what point do you get closer to comfort with defining targets -- profitability targets perhaps for the overall business?

As we think about fiscal '09 and ongoing?

Yes.

I think our fiscal fourth quarter, you should expect us to be in a position to talk with you about those.

Okay.

That would be great.

And then the last one, this is probably more question for Pete, could you break out exactly what the legal expense was in the second quarter?

We do not -- actually, it was $3.1 million.

Okay.

That's helpful.

Thanks, guys.

Sure.

You bet.

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

Please proceed.

Thanks.

Good morning, guys.

How are you?

Good.

First question is on the legal cost, how much of the $3.1 million is quote unquote unusual?

A large chunk of it.

So -- Is it $2 million, that's unusual?

I would say the vast majority of it is unusual, Joe.

Okay.

Fair enough.

Then Mark, in terms of the withdrawal, what is your sense as to how the FDA with, the FDA review going to sort of shake out and what happens to that industry?

Well, it is kind of an interesting advisory panel.

I think that the discussion is really going to center around what happens to that 2 to 6-year-old age because there were very -- it was very clear guidance given to the FDA by the panel on 0 to 2 and on 6 to 12 on the basis of their votes.

0 to 2 is clearly an area where pediatric cough/cold medications will no longer be marketed and 6 to 12 was given ample clearance by that advisory panel.

The vote on whether or not to continue to market pediatric cough/cold products to the 2 to 6 range was fairly close.

13 to 9 against.

And the FDA in its followon comments said that they wanted to take their time and study all of the evidence before making a determination in that regard.

So it is anybody's guess right now where that one will come down.

If it comes down unfavorably in that 2 to 6, in other words, the FDA determines that they will not allow marketers or companies to market to that age group in cough/cold, it really will have no incremental impact to us because our items that were in that segment are already off the market.

They were the ones involved in the withdrawal.

The opportunity for us presents itself if they continue to allow us to market products and the entire industry to market products to that segment, in which case we are ramped up and ready to go with our reentry strategy.

But I think it is probably going to be beyond this year's cough/cold season before that final ruling comes down.

Okay.

And then in terms of inventories at retail, how do you feel in terms of your product portfolio at this point?

We feel comfortable in particular as Pete mentioned -- the retailers year, after getting caught with heavy inventories of cough/cold items heading into the season have really backed off.

They would traditionally have taken in our estimation six to eight weeks in, going into the third quarter, and we think that this year, they backed that down to four to five.

And so they're really trying to move to more of a consumption-based model.

We welcome that in some regards because it helps our supply chain as well.

The only other thing that affected us this quarter and we have to continue to monitor is as I mentioned in my comments about Comet, one of our key mass merchandising customers continues to try to drive inventory down in that particular segment.

We are not the only ones affected, everybody in household cleaners has been affected.

So there may continue to be a bit of downward pressure there moving forward, but otherwise we feel like we are in a good shape from a retail inventory standpoint.

Okay.

For most of our product, our consumption is leaving our factory.

Right.

So we feel good.

Particularly, if you look at the last four weeks, on IRI basis, that dynamic is really working in our favor.

And then lastly on OraSure, it seems like this is going to be an easy fix for you guys, because you are basically swapping out one supplier for another.

So from a consumer standpoint, they're not going to know the difference.

It will still be the Compound-W brand Freeze Off with just a different technology supplier.

That's exactly right.

There's absolutely no danger of supply disruption.

That overlap will occur seamlessly for both our customers and our consumers.

Is there any difference with the efficacy of the technology between OraSure and the new one?

None whatsoever.

Thanks.

You bet.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Olivia Tong of Merrill Lynch.

Please proceed.

Good morning.

Good morning, Olivia.

How are you?

Very well, thanks.

Good.

On accounts receivable, if it is later ordering for the Chloraseptic brand, should you expect to reverse some of the increase you saw in Q2 and Q3?

Yes, definitely.

And then you had mentioned that for most categories consumptions leaving factory.

In which categories are you seeing the opposite and what's driving that?

The one that is significant of note is in The Doctor's NightGuard arena where again the competitive environment is impinging on our retail consumption.

And factory shipments have not quite caught up with that yet.

So that is one that obviously we are going to have to continue to monitor as well, but we are also clearly working the legal side of that simultaneously.

In virtually every other category, we are aligned or a little bit ahead.

Okay.

And then for comment, should the inventory reduction impact further continue until that lapse at this point next year?

I don't believe so.

It is a short-term effort by the key merchandiser to reduce inventories, and once we hit that steady state, we should see things plateau.

We would expect that to happen over the course of the third quarter.

The X factor for us to a certain degree is going to be whether that reduction in inventory, in their store inventories affects our consumer takeaway, simply by not having as much inventory in the stores will there be more out of stocks, will consumers find the products harder to locate?

We are seeing some evidence of that already and we are talking with the merchandiser about that.

But in terms of the actual inventory stepdown piece itself, from a shipment standpoint, I would expect that to be behind us as we move through the third quarter.

Okay.

Got it, and also can you give us the annual sales of those two cough/cold Little Remedies products that were withdrawn.

They were as we said about 1% of our total net sales.

So, a little north of $3 million.

Okay.

Got it.

That's it for me.

Thanks very much.

You're welcome.

Your next question comes from the line of Jon Andersen of William Blair.

Please proceed.

Good morning, guys.

Hi, Jon.

A question on the gross margin improvement in the over the counter business, which as you mentioned excluding Little Remedies withdrawal was impressive, I think up over 200 basis points.

Can you help me understand the gives and takes in terms of the sales mix and then should we expect a similar type of improvement as you move through the year?

The biggest two drivers in the mix was that Clear Eyes was up, that Compound-W and in particular Freeze Off which has a high cost [incurred] was lower than the same quarter last year.

So the Freeze Off phenomenon, it won't repeat itself because as we go into the winter months we are kind of out of season.

So I don't expect that to continue.

So I would think that quarter to quarter going forward, there will be less of a -- improved [gap].

Okay.

Just one other quick question.

On the international diversion actions that you took -- just a little bit more color on what actions you are taking there can and will we see a similar effect on international revenues during the next few quarters?

Yes.

We took two actions.

One was to shut down as I said, sales to the specific violating customers, and we just immediately cut them off.

We are working to rebuild sales to the end customers because we are really shut off with some master distributors.

We are looking to rebuild those sales with end customers, but that's a slow fairly laborious process.

So I would expect that we are going to have a negative impact on our international sales that will carry through on a net basis for the balance of this year from those actions.

The second thing that we did was review our price list across our entire customer base to make sure that there were no other opportunities out there for this situation to present itself in other parts of the geography.

This was isolated primarily to the Caribbean.

And we are confident that we -- on the balance of our international customer base are in very credible and legitimate territory.

Thanks a lot.

You bet.

Thank you very much.

We have a follow up question.

We do have a follow up question.

From the line of Mimi Noel of Sidoti and Company.

Please proceed.

Please proceed.

Hi.

Yes, just one more.

Okay.

Mark, would you mind commenting on how follow up negotiations go.

What's the nature of them once a retailer realizes they've got stock out?

Are they very quick to get those factory orders in or would they prefer to miss out on the incremental sales than be stuck with excess inventory?

At the end of the day they're there to serve their end consumers.

They're very quick about responding to out of stocks.

In fact, in particular with Wal-Mart, we have a very good relationship with them, and it is a dialogue in terms of what inventory levels we think they should carry and what they believe they should carry to try and maximize their supply chain efficiency, which what they're certainly about in many ways.

And also make sure that they don't run out of key items with their end consumers.

So --

So you are not necessarily --

At the end of the day, they're keenly aware of the impact stockouts have on consumer relationships as well as their profits because a lost sale is a lost sale and that consumer could easily walk across the street and pick it up somewhere else.

You are not seeing an irrational preoccupation with margins or discounting?

No.

Okay.

I wouldn't call it irrational by any means.

I would call it normal.

All right, thank you.

That's all I have.

If there are no more questions I would like to turn the call over to Mr.

Mark Pettie for closing remarks.

Please proceed, sir.

In summary, thank you very much for your time today and the questions.

We will look forward to talking with you again at the end of our third quarter.

Appreciate it.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.