Prestige Consumer Healthcare Inc (PBH) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Prestige Brands Holdings Inc.

earnings conference call.

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

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

We will be facilitating a question-and-answer session toward 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 your host for today's call, Mr.

Dean Siegal, director of Investor Relations and communications.

Please proceed.

Good morning and welcome.

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 Mark Pettie, Chairman and CEO.

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

In addition to Dean with me as usual 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 third-quarter results.

Pete will then review the financials for the quarter in more detail and I will come back with highlights of our segment performance and our outlook for the remainder of the fiscal year.

In addition I will discuss the key takeaways from the strategic review we conducted over the late summer and fall.

We will then open the call for questions.

So let's get started with our reported total revenues for the third quarter, which were $80.2 million, a small increase over last year.

As you know, Prestige participated in an industrywide voluntary withdrawal of certain pediatric cough cold products in October, resulting in the removal from retail of two of our Little Remedies SKUs.

While we established an estimated returns reserve in our Q2 results, we did have to modestly increase that reserve in this quarter's results.

Absent this incremental impact of the Little Remedies withdrawal Q3 sales increased 1%.

As an aside organic sales growth in the quarter is the same as total growth as we have now (inaudible) the Wartner acquisition which closed in late September 2006.

Reported net income for the quarter of $8.4 million was below last year's reported net income of $10.6 million.

You may recall that last year's third-quarter results benefited from a favorable non-cash income tax adjustment of $1.7 million.

Net income of $8.4 million was $500,000 or 5% below last year's net income of $8.9 million adjusted for the favorable tax benefit.

The decrease in net income compared to prior year was driven by a decline in gross profit margin due to unfavorable sales mix and an increase in A&P spending partially offset by reduced G&A and interest expenses.

Advertising and promotion expenses increased by 7% or 70 basis points versus last year's third quarter as we continued 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, turning to cash flow we generated free cash in the quarter of $13.6 million, up $1.2 million from the same period year ago.

Our continued strong cash generation enabled us to pay down an additional $10.9 million on our term loan, reducing total debt to $426.2 million at December 31 of 2007.

So that's 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, and good morning everyone.

As Mark mentioned our net revenues for the quarter of $80.2 million were slightly ahead of last year's net revenues.

Operating income of $22.9 million was $1.6 million below last year's operating income of $24.5 million, and net income of $8.4 million was $2.2 million below last year's reported net income of $10.6 million.

But, $500,000 below last year's net income of $8.9 million adjusted for the non-cash income tax benefit we enjoyed last year.

The $1.6 million decline in operating income compared to last year was due to the following factors.

Despite the slight revenue increase, gross profit decreased by $2 million.

That decrease resulted primarily from segment and product mix.

Advertising and promotion expenses were $600,000 greater than the prior year quarter.

Partially offsetting the decrease in contribution margin was a $900,000 decline in G&A expense.

Our cost of sales for the quarter of $38.8 million was $2 million or 5% higher than cost of sales in the prior year.

As a percent of revenue, cost increased from 45.9% in fiscal year 2007 to 48.3% in the current fiscal year.

This cost of sales increase was primarily due to an unfavorable segment and product sales mix as the household segment accounted for a larger share of quarterly revenues than in last year's third fiscal quarter.

In addition, sales declines for Chloraseptic and Little Remedies compared to last year's third quarter negatively impacted our cost profile.

Advertising and promotion expense of $9.6 million was $600,000 greater than spending of $9 million last year.

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

E&P as a percent of revenues increased by 70 basis points to 11.9% in the quarter ended December 31, 2007.

G&A expense of $6.2 million was $900,000 lower than the prior years' expense of $7.1 million.

During the quarter legal expenses continued to run ahead of last year's levels, but the absolute level of spending was lower than the previous quarter as the OraSure litigation has concluded.

As we mentioned on our last call, the litigation to defend our doctor's nightguard patents and trademarks is ongoing.

As a result we anticipate legal expenses to continue to exceed what we would consider to be a normal run rate until this matter is concluded.

Offsetting the increased legal expenses were reductions in incentive compensation accruals.

Now we will briefly review second quarter results by segment.

Net revenues for the OTC segment of $45.1 million or $500,000 or 1.1% below the previous year.

Gross profit for the segment was $28.1 million, 6% below last year.

Gross profit as a percent of revenues was 62.3%, down from last year's 65.9% but an improvement over last quarter's 60%.

The decline from last year was primarily due to unfavorable sales mix within the segments.

Contribution margin of $21 million for the segment was $2 million or 8.7% below the year ago quarter.

A&P spending for the segment in the current year was flat to last year's spending.

Household products net revenues of $30.1 million were $1.4 million or 4.9% greater than last year.

Gross profit of $11.8 million was $900,000 or 8.3% greater than the prior year due to the sales increase combined with decreased logistics expenses as a result of our overall systematic cost reduction initiative.

Gross profit as a percent of revenues was 39.1% in the current year's third quarter compared to 38.1% in the fiscal year's, last fiscal year's third quarter and up from the 37.7% in this year's second quarter.

Contribution margin for the quarter of $9.5 million was $200,000 greater than last year as the gross margin improvement was partially offset by an increase in advertising and promotional spending behind the Comet Mildew Spray Gel launch.

Net revenues of $5.1 million for the personal care segment were $700,000 less than prior year.

Gross profit of $1.6 million was $1.1 million less than prior year, primarily due to the sales decline and an obsolescence charge related to the Cutex brands.

Contribution margin of $1.3 million was $1.1 million less than last year due to the gross profit decrease.

Free cash flow for the quarter which we define as operating cash flow less capital expenditures was $13.6 million.

That represents a 10% improvement over free cash flow of $12.4 million generated in the quarter ended December 31, 2006.

As Mark mentioned, our continued strong cash flow enabled us to pay down $10.9 million on our term loan during the quarter.

Since the beginning of the fiscal year we have repaid $37.1 million, reducing our total debt to $426.2 million at December 31, 2007.

And now I will turn the call back to Mark who will provide additional Q3 perspective, comment on our outlook for the remainder of fiscal year 2008, and discuss the outcome of our strategic review.

Thanks, Pete.

Before I get underway with my Q3 remarks I will quickly remind you that when I speak of consumption in this section I am talking about consumption across all channels, which includes traditional food, drug and mass as measured by IRI, plus actual sales results in nonmeasured channels.

These nonmeasured channels which include dollar stores, clubs and a major mass merchandiser 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 overall performance.

Beginning with our OTC segment as we highlighted in this morning's press release our topline results were heavily influenced by the impact of two well-publicized external events, specifically the weak cough cold season to date and the industrywide voluntary withdrawal of pediatric cough cold products negatively affected performance of our Chloraseptic and Little Remedies brands.

To provide a sense of dimension to these effects if we were to exclude the revenue of these two brands from both the current and prior year quarterly results revenues for the balance of our OTC portfolio grew 14% versus a year ago.

While several of our key OTC brands exhibited strong growth during the quarter our Murine ear care business again led the way, up 230% on the continued success of our Murine Earigate launch and its halo effect on the entire Murine ear line.

These strong factory shipments were matched by equally strong movement into consumer's homes as consumption for the period was also up over 200%.

Propelled by the Earigate performance our Murine ear business has grown seven share points year-to-date and is now the number one brand in the ear care category.

A terrific milestone for this important part of our OTC portfolio.

Our largest OTC brand, Clear Eyes, also enjoyed double-digit growth.

This is attributable in part to strengthening consumption particularly at one of our key mass merchandise customers where we are benefiting from improved shelf placement.

A second contributor was early shipment of our new one-ounce SKUs, larger sizes of our current line that offer our consumers the chance to purchase more of their favorite Clear Eyes products in a single package.

Incremental distribution of these new offerings will build through this quarter and generate growth to this important OTC brand in fiscal '09 as well.

A strong performance was also turned in by Compound W and the salicylic asset segment of the business in particular.

Consumption has been improving in this segment throughout the year behind effective new advertising copy and the business further benefited this quarter from solid late-season trade support.

Year-to-date Compound W has grown share 1.3 percentage points.

With share in Q3 up 2.2 percentage points over a year ago.

Importantly, our total wart care franchise comprised of Compound W and Wartner, grew its category share leadership position over the number two competitor, Dr.

Scholl, by 3.8 percentage points in the third quarter.

Returning for a moment to our Chloraseptic business, it is important to note that Chloraseptic also built share quite meaningfully in Q3 in the face of a sore throat category that was down 20%.

During the quarter our Chloraseptic built its category leading share position to 35.5%, up 3.6 percentage points versus year ago.

A key driver of this performance was the launch of our two new liquid center lozenge items, and the persuasive new advertising supporting their introduction, which broke in November.

As further testimony to the success of these two new items, and the power of focused innovation in general, they have enjoyed more consumption through early December than the combined total of all five Chloraseptic items we launched in fiscal '07.

Lastly, within the OTC segment our doctors business continues to be negatively impacted by significant competition in the Bruxism segment.

As you know from our Q2 call to a substantial degree this competition involves infringement of our patent, trademarks, copyrights and trade dress.

And we continue to vigorously defend our rights in these areas.

Moving on to our household business, as Pete mentioned our 5% revenue improvement was driven by our largest brand, Comet.

And the continued success of our new Comet Mildew Spray Gel product.

Introductory spray gel advertising support continued in Q3 helping drive overall Comet brand consumption up 4% and share up 2.1 percentage points versus year ago.

Aggregate Comet brand factory sales outpaced consumption in the quarter as retailers built inventory ahead of a national consumer event in January.

Within Q3 factory sales strength in the spray gel business was somewhat mitigated by powder softness as category wide inventory reduction at a customer continued to impact sales.

Finally, during the quarter we also received incremental spray gel authorizations from a major customer which will begin shipping in March.

Rounding out household, both Chore Boy and Spic and Span experienced declines in Q3, essentially in line with consumption.

And finally in personal care aggregate results were below year ago and in line with expectations reflecting our ongoing deemphasis of this segment.

Switching to our international business, revenues were down 23% from year ago.

You may remember that on our Q2 call I highlighted steps we took that period to eradicate diversion behavior in certain of our international markets.

At the same time I informed you that the impact of this necessary action would play out in reduced international sales for the balance of the year.

This is reflected in our aggregate Q3 results and offsets the very strong performance of our Murine eye business, particularly in our UK market.

Earlier this year we expanded that line from one to four SKUs in the UK, and simultaneously introduced breakthrough new package graphics.

As a result, this business was up over 50% in Q3 and is up a like amount year-to-date.

And we just received authorization for the entire line at one of the UK's largest pharmacy chains with initial shipments coming in March.

So to wrap up the Q3 segment discussion, it was in many ways a classic tale of two cities.

We enjoyed strong results on several important OTC brands and Comet negated by the effects of a difficult cough cold category environment affecting in different ways our Chloraseptic and Little Remedies results.

Not only did the external cough cold developments impede our topline growth but as Pete mentioned earlier they had a meaningful impact on our product mix and result in gross margin profile.

That said, we are pleased but far from satisfied with several developments during the quarter.

The ongoing success of our major new launches Murine Earigate and Comet Mildew Spray Gel which continue to exceed expectations and are driving share growth in our important Murine ear and Comet franchises.

Share performance and other OTC businesses including Chloraseptic which is outperforming the struggling sore throat category, early acceptance of our launch of one-ounce Clear Eyes SKUs which will begin shipping more broadly this quarter and new distribution gains, both domestically and abroad, which will provide growth as we move into fiscal '09.

In addition, it was another solid quarter against key enabling initiatives as we received stepped-up contribution from our cost of goods reduction program and successfully completed key supplier transitions on our Clear Eyes and Compound W freeze-off business.

Let me now move to a quick look at our performance expectations for the full year.

On our last call we adjusted our organic growth target for this year from 3 to 4% to 1 to 3%, driven principally by the impacts of the Little Remedies withdrawal and our proactive steps regarding international diverting.

Despite the subsequent negative performance of the poor cough cold season or negative effect of the poor cough cold season on our Chloraseptic sales, we are maintaining this projection based on strength we're seeing in other parts of the business.

As we've also stated previously, total net sales growth for the year will be above our organic number due to the benefit of the Wartner acquisition in our first-half results.

A&P investments will remain above year ago on a full year basis but taper this quarter as we move squarely into the mildew off season in much of the country and adjust our Comet Mildew Spray Gel support accordingly.

From a reported net income standpoint we continue to expect performance below our rate of sales growth, largely due to the absence of certain tax benefits recorded in fiscal '07.

As I previously discussed, the majority of those benefits fell in Q3 last year with the balance in Q4.

After adjusting for those benefits and the onetime costs associated with Little Remedies withdrawal, we continue to project net income performance to outpace net sales growth.

And of course, free cash flow remains very strong with delevering as the primary use of these funds.

So that is a recap of Q3, a period of strength and progress in a number of key areas, mitigated by challenges concentrated in the cough cold category that meaningfully affected two of our OTC businesses.

However, despite these adverse impacts we remain optimistic we can deliver the key elements of full-year performance discussed on our last call.

Equally importantly, we continue to believe that many of the actions we have initiated this fiscal year constitute the foundation for long-term, sustainable organic growth.

And with that in mind, let me take a few more minutes before we open up the call to give you some key takeaways from our recently completed strategic review.

My primary goal today is to let you know how these build on the growth initiatives we implemented this year and how they reflect real change in the way we will be leading Prestige brand as we head into fiscal '09 and beyond.

In the latter months of calendar '07 we devoted considerable time to an in-depth strategic look at our business.

Our main intent was to thoroughly and objectively examine our entire operation for both internal and external viewpoints with a goal of determining the optimal roadmap to long-term sustainable organic growth.

The review resulted in reaffirmation of several existing operating tenets, but also yielded a number of changes which will guide our direction going forward.

Let me first address the key aspects which we examined and reaffirmed.

Our belief in our current operating model, the virtual concept of outsourcing manufacturing, distribution and R&D, was validated as was our commitment to delivering superior cash flow metrics relative to our peer group.

Our focus on driving growth through concentration on our current product portfolio in the near-term and through the addition of strategically aligned acquisitions in the longer-term was also reaffirmed.

We are slightly widening the range of our current average revenue growth target from 3 to 4% to 2 to 4% in the near-term, reflecting the realities of our current portfolio mix as well as the competitive environment in which we operate.

However, we fully expect to be able to accelerate that growth rate over time, driven by the changes we are implementing which I will discuss in a moment.

And finally, our expectation of EPS growth exceeding revenue growth remains intact.

So what is different about Prestige going forward?

Well, over the course of the last several months I frequently referred to several fundamental building blocks to achieve sustainable organic growth.

These include deeper portfolio management, an innovation pipeline that is biased toward bigger ideas, strengthen domestic distribution, optimize marketing spending, systematic cost reduction, a simplified supply chain and international growth.

These remain essential to our future plans and to these we are adding the need for improved organizational effectiveness.

So going forward there are four key thrusts that incorporate and build on these areas and drive the change in our business that will ensure that 2 to 4% growth target in the near-term and then accelerating that over time.

First, as a result of a thorough deep dive into our portfolio we will be taking a more disciplined and brand specific approach to resource allocation.

This is no easy task with 28 brands participating in 19 categories across our three business segments.

We have determined that fully two-thirds of our revenue base is capable of growing above the 2 to 4% enterprise target, but one third has flat to declining prospects.

Not surprisingly, the biggest drag remains our personal care brands, where we also own many smaller OTC brands that we rarely speak about whose declines offset the growth of healthy brands and also inhibit overall enterprise growth.

As a result of this realistic and detailed assessment we will be allocating a meaningfully greater share of our resources to the highest growth prospects going forward.

A feed the winners approach to brand resourcing.

Simply stated, the focus brands, as we call them, those that constitute the two-thirds of our revenue with above-average growth potential will receive a measured step up in A&P support behind validated ideas as we move their spending toward more consistently competitive levels.

Those same focus brands will also receive the bulk of our innovation focus and organizational energy.

And we won't just be putting more marketing support behind these brands but better marketing support, as well.

We've made good progress on this in fiscal '08 with the improved quality and delivery of consumer communications showing strong results in the marketplace on certain brands.

We will build on this momentum by spending behind salient messaging focused on unique points of difference with the goal of creating lasting consumer equity.

We will also relentlessly pursue optimized return on marketing spending by adding partners with fresh thinking and an integrated marketing programming and media buying.

And we are not solely focused on our advertising and consumer spending.

In addition, we are establishing in-house trade marketing expertise to drive greater returns on this critical part of our overall focused brands budget.

The brands that constitute the remaining third of our revenue will principally be run to maximize contributions to support the focus brands while minimizing revenue declines.

As I mentioned, within this remaining one-third is our personal care segment for which we will continue to explore divestiture options at reasonable value.

And as a result of this review we are broadening the group of products for which we will consider strategic options to include the smaller OTC brands.

In total the combination of personal care in these small OTC brands account for just under 10% of total revenue.

Successfully divesting all of these assets would add one percentage point to annual enterprise revenue growth, meaningfully improve our gross margin and substantially simplify our portfolio.

So to summarize this first trust, there were certainly tough choices involved with this deeper, more refined portfolio management approach, but they are absolutely necessary to maximize the growth potential of the overall enterprise, and we are confident this new resource allocation model will pay short and long-term growth dividends going forward.

We are stepping up our emphasis on breakthrough innovation as our second trust.

We define breakthrough innovation as clearly differentiated new products or product improvements that add meaningful scale to our focus brands and separate us from category competitors.

As I said before, Murine Earigate and Comet Mildew Spray Gel are good examples of this type of innovation.

The real new news here is that guided by our portfolio of choices we will be more precisely focusing our breakthrough innovation initiatives on our highest growth potential brand.

In addition we will be proactively expanding our pool of traditional innovation idea sources to include technology houses and possibly Rx companies while simultaneously sharpening our internal capabilities in this critical growth area.

Our ultimate goal is to launch one to two breakthrough innovations per year with minimally $5 million in incremental revenue potential, and to efficiently export these innovations to our international markets wherever possible for even greater revenue impact.

Needless to say, we believe the additional changes and focus we're bringing to this area provides strong potential to accelerate our 2 to 4% target growth rate over time.

Our third trust is to broaden our existing international growth agenda to include a specific emphasis on Canada.

Canada currently represents 6% of total enterprise revenue, greater than all other non-US business combined.

However, we have historically managed it as a subset of our domestic business and treated it as an afterthought from a planning and investment standpoint.

Using the standard 10 to 1 US/Canada rule meaning based on population, Canada should be at least 10% the size of our US business, we believe our business in that country is under developed by 50%.

We have already taken the first steps toward change in this region by consolidating our broker network for greater effectiveness, resulting in a 15% increase in revenue year-to-date.

Our next step is to carve out dedicated internal resources charged with a specific responsibility of developing marketing and sales initiatives to accelerate closure of the Canadian market gaps.

We are very excited about this effort and the growth prospects afforded by this and our other international franchises.

As we move into fiscal '09 and heighten our focus on this important non-US market, we will begin to include Canada as part of our international results discussion with you.

Our fourth trust is to improve both internal and external organizational effectiveness or to borrow the popular expression, get the wiring right for growth.

The centerpiece of this change externally will be a move away from brokers and toward a direct selling model with the majority of our top customers.

Our goal is to eventually have the bulk of US revenues under the direct selling model, a substantial increase from the less than 40% we have today.

In turn, this will result in a higher profile for Prestige and more direct and intimate relationships with key customers.

This in turn will translate to multiple growth enablers, including further strengthening and broadening of our distribution base, greater speed to shelf of new product launches and a greater return on trade marketing spend.

Internally, organizational effectiveness will be enhanced by aligning the entire enterprise behind the new portfolio management model.

We are also committed to supporting our new portfolio management approach by upping our investment, evaluate analytical tools to boost organizational efficiencies and decision-making capabilities.

Finally, in addition to these changes we are introducing a consumer centric mission instead of commitments to complement our core value system and to crystallize the Prestige identity among all our constituents.

Our new mission and commitments can currently be found on our website.

In summary, I am pleased with the results of the strategic review.

It reaffirms several key aspects of the Prestige operating model, reinforced the importance of the initiatives we began in fiscal '08 and most importantly provided much-needed perspective on new ways to more confidently and reliably deliver sustainable and ultimately accelerating organic growth over time.

I feel very certain that with the support and commitment of the entire Prestige organization we will infuse our business with increased vitality and drive growth for these four key trusts.

To quickly recap, these fourth trusts are one, a concrete approach to more detailed and discipline portfolio management and resource allocation, backed by improved marketing behind proven idea for our high potential focus brands.

Two, an intensified emphasis on true breakthrough innovation aligned with our portfolio management approach and supported with focused internal and external resources.

Three, a broadening of our international growth agenda to include specific attention on the underdeveloped Canadian market.

And four, improved organizational effectiveness, headlined externally by a move toward a direct selling sales model and internally by alignment with a new portfolio management approach.

While we strongly believe we have identified and are pursuing the right path forward, we also recognize it will take consistently excellent execution of these specific strategic thrusts to deliver the full organic growth potential of Prestige in both the near and longer-term.

Clearly we have a lot of work to do to bring these thrusts fully to life.

However, implementation has already begun in some cases, and we are encouraged by our early progress.

These tangible changes and the hard work, tough choices and collective commitment that went into developing them leave me more enthused and confident than ever about our future prospects.

I look forward to updating you on our progress against these trusts and their associated business results as we move into fiscal '09 and beyond.

Thanks very much for your attention, and I would now like to open the call for questions.

(OPERATOR INSTRUCTIONS) Bill Chappell, Suntrust Robinson Humphrey.

Mark, I think we all appreciate the strategy laid out and trying to reaccelerate growth, but I guess is there any way to further quantify what you expect to see out of that?

I understand the 2% to 4% topline growth yields greater than that in EPS growth, but I guess it is tough to get fired up about your holding yourself to at least 3% to 5% EPS growth.

I mean, how do we look at these initiatives?

When do we expect to see some real uptick, and do you expect any major changes to the P&L in terms of advertising spend or accelerated topline growth or accelerated EPS as we move into fiscal '09?

As I mentioned, the 2% to 4% growth is our near-term objective, and the key takeaway here, Bill, is that over time we fully expect to be able to accelerate that as we kick these new thrusts into gear.

For '09 we will, as I mentioned, take a measured approach to increasing support behind our focus brand.

As I think I've previously mentioned, you should certainly expect this year's spending level to be the threshold going forward, and you should expect some growth in A&P heading into next year.

But that will be measured and represent as much a reallocation inside our portfolio as an increase across the entire enterprise.

We are committed to continuing, as you said, to generate EPS growth that exceeds sales growth.

And as we reach out into the future and really get contraction on these initiatives, we would expect that performance to improve, as well.

I guess -- and not to press too hard on this, but if you do 2% to 4% revenue growth, will you be happy next year with 3% to 5% EPS growth?

No, I would not be satisfied with that at all.

And I guess on turning to the kind of divestitures this has been especially on the personal care side something we talked about now for at least twelve months.

And I guess the credit or M&A market hasn't gotten a whole lot better.

What is there a renewed sense of urgency to kind of get these businesses off the books and focus on the core business, or is it still the similar story as prior quarters, where you would like to do it but there is nothing imminent?

Obviously we would like to do it as soon as possible.

I wouldn't say there is anything imminent, but we will be dialing up our focus on it.

And you hit the nail on the head; it is going to be dependent on the market as well in terms of the speed at which we can move because we remain committed to getting reasonable value for these businesses.

But suffice it to say we are turning our attention to these particular options with renewed vigor.

And as I mentioned, it is broader than just the personal care franchises.

There are a number of these small OTC businesses which are also a bit of a drag on our topline that we're going to add to the pool as we move forward.

Finally, to and I will turn it over, any idea on an annualized basis what your -- what Little Remedies kind of the recall remaining permanent those products being off-the-shelf, and also litigation -- ongoing litigation would be as we go for the next two, three quarters?

As far as the Little Remedies piece goes, Bill, it is still kind of a wait-and-see game.

We're working through CHPA with the FDA to determine ultimately what their stance is going to be post withdrawal and also post the open session they had in October.

We are hopeful that we have some conclusive perspective from them before we need to gear up for the upcoming cough cold season.

And I share my competitor's perspective on that as well.

We all hope that FDA can bring some clarity to the table ahead of that, which would mean we would be looking for something out of them in the next one to two months at the outside.

As far as the litigation environment goes, I am going to ask Chuck Jolly to comment on that and to give you additional perspective.

Bill, this is Chuck Jolly.

We are still in the early stages of the litigation, which is pending in the US District Court in White Plains, against a major competitor who has infringed our trademark patents and intellectual property.

The case has become more complex rather than simple.

However, that said, we are aiming at some early dates where we expect the focus of the court to come to bear.

And we have moved for a preliminary injunction, which we are optimistic about with respect to providing some near-term relief.

And we will -- we are prepared.

Injunctions are always difficult to obtain but we are prepared to move ahead.

We think that the prospects of ultimate recovery here are excellent.

We think that there has been some very serious damage done to our business in some very inappropriate ways.

But we are also exploring ways of managing this litigation so that should we need to hunker down and to protect our position over a longer period of time, it will not have the disruption on the P&L that it has had up to this point.

So we are proceeding on several different courses in order to protect our interests and our property.

And at the same time present some sort of reasonable cost expectation for management here.

Okay, great.

Thank you.

Chris Ferrara, Merrill Lynch.

I was wondering if you could talk about the cost side of some of the things you mentioned I guess, Mark, like establishing in-house trade marketing expertise.

And sounds like you're really looking to improve on your understanding of consumer analytics as part of the new initiatives.

What would be the cost?

What are you guys expecting with respect to operating expenses?

Of all the initiatives I spoke about having to do with adding capabilities internally as well as our migration to more of a direct selling model, we are looking to make those costs a neutral proposition.

So that at the end of the day we get a much more effective organizational model and no increase in costs.

Can you talk about how you could do that?

Is there fat in the organization that you plan on cutting out or how can you do that?

Well, as far as the direct selling model goes, as you know we have one our P&L broker expenses associated with model we are operating under today, and basically we believe we can trade those broker expenses off our P&L for the expenses (inaudible) on board and moving toward the direct selling model.

And that would be a zero sum game for us.

And as I mentioned in my remarks provide us with a much more positive set of relationships with our key customers going forward.

As far as the balance of the additions go, in terms of total dollars they are not significant.

It is just a question of rearranging certain aspects of our organization and unboarding those effectively.

And just drilling in a little bit to the concept of moving more to a direct selling model, I guess can you just review -- and I think I understand the basics of it but I mean what changed, I guess?

Why do you think now?

Like why is it more appropriate to be a direct selling model and for that matter, how do you get your retailers on board with this?

We think there are a lot of benefits from a direct selling model; fundamentally at the end of day it just gets us closer to the customer.

It is one less layer between us and the customer.

And while we won't be able to move there universally for practical reasons we believe we can move there on our major customers.

It allows us to have a more regular dialogue with them on key programming, new products etc.

And it is really a subject that fell out of our review here as we looked at our current model relative to the effectiveness of some of the competitors in our space and determine that this was a smarter way to go for us.

It is not something that we're going to move to overnight.

We will move toward it in a reasonable fashion.

But at the end of the day we believe it is the right place to be from an overall effectiveness standpoint.

It will just allow us to have direct and real-time dialogue with key customers about new items, about trade spending, about shelf placements, all the things that at the end of the day in store or on shelf, make your business as successful as it can possibly be.

Okay, and just one other follow-up.

Are there other companies that are very similar in scale to you that are also on the direct model or most companies of your size going through distributors right now?

I would say that those companies that we most closely compare ourselves to from a peer group such as Chattem are on a direct selling model.

Thanks a lot.

Joe Altobello, Oppenheimer.

Good morning, guys.

First just a few quick questions on the move to direct sales.

Mark, you mentioned that you want to improve relationships with the retailers.

Is your relationship poor at this point?

No, I wouldn't say it is poor by any means.

But we can always improve.

Okay, now in terms of the decision to do this, it sounds like it was all internal or were there any inputs from retailers telling you guys to sort of make this move?

No.

This was purely a result of our strategic review and internal analysis.

Okay and then obviously it is going to incur some costs here and you said it was going to be cost neutral.

I would imagine it would vastly improve your visibility into a lot of your businesses.

Yes exactly; and it is not as though we are going from zero to 60 on this.

We have direct selling with several of our key customers today.

So we've got already a model inside our business that we can look at in terms of the benefits of direct selling.

So we enjoy that relationship with a number of our key customers already, and we expect those benefits to accrue to the relationships with other customers that we're planning on migrating to.

Okay and moving on to the one-third of your businesses that are below average in terms of growth, I would imagine you're not spending a heck of a lot on A&P on those businesses.

So what percentage of your cash flow do they represent?

Or your EBIT?

Slightly more than that.

Slightly more than that, but not meaningfully?

No.

Okay, and then in terms of the cough cold season any sense of how trends were in January?

If you look at the latest SAN data, which we use to both retrospectively and prospectively assess the season, January seems to have stepped up modestly from the run rates that have been in place through December.

And we're seeing a little bit of that uptick in our January consumption, as well.

So I am not ready to signal victory by any means yet, but there is ample evidence historically of late developing seasons.

And this one January data point is by no means signaling a trend, but at least there is reason to believe that the back half of the season at least as it is starting could be better than certainly the dismal front half has been.

Lastly on the balance sheet, is there a certain debt target or leverage target you want to get to where you would then go look for additional acquisitions?

Well, clearly as we've stated our focus in the very short term is to really try to strengthen what we've got now.

But that said, once we get down to 3.5 times our loan agreements would allow us not only to look at acquisitions as we've done in the past, but will also at that point in time we'd be free to look at buying back stock.

So clearly our short-term goal is to get the 3.5 or below.

You're now just over four, right?

Yes, we're about 4.1 to [4.7].

You're probably about a year away is my guess.

Yes.

Yes.

Joe I would say at the end of the day, the thing that is going to drive us most on downstream acquisition is not going to be any particular leverage level but it is going to be what is the strategically right thing to do.

Got it.

Thanks, guys.

Mimi Noel, Sidoti & Co.

Just a couple questions.

First, touching one more time on the direct sales model, I understand the benefits.

They seem pretty obvious.

What are the risks to moving to direct sales and away from the broker?

I think the only risks that we have are effective execution of the transition.

Longer-term my estimation and our collective estimation the benefits far outweigh the risks.

We want to make sure we do it as I said in a smart, measured fashion.

And so we're not on any particular timetable.

But we are dedicated to doing it right.

Would it be logical to assume that once you are through the transition in the long-term you get better operating leverage out of a direct sales model than you would outsourcing so to speak to a broker?

Yes, absolutely.

That is the whole premise behind this thing, that the things I mention in the call, whether it is greater speed to shelf on new items, more effective return on trade spends, strengthen distribution, all those things accrue to having the benefits of that more intimate and direct relationship with your key customers.

Okay.

Also can you tell me what the timing of new product announcements would be for fiscal '09?

As you know our new products are generally timed against whenever the categories that we are in go through their resets.

The first thing we've got coming up is the March ECRM, which deals with the cough cold season for next year.

And we will certainly be talking to retailers at that point about what we're thinking about bringing to market.

As far as sharing publicly what our plans are, we generally tend to do that once we have let our retail partners know what our plans are.

And it is a phased basis.

There is -- every category clicks in at a different time.

It is not as though there is one particular date to circle on the calendar where all gets revealed.

And also maybe this is a question for Pete, but the G&A expenses all year have seemed to have bounced around a fair bit, and I appreciate the legal expenses have made things a little unusual, but what can we expect for the fourth quarter and possibly thereafter?

Well, as we said, Mimi, hopefully you can expect that legal expenses, although higher than what we would consider a normal expense should not show those spikes that we saw earlier this year.

(inaudible) is now behind us, there should be a mitigation of those expenses.

And this quarter as we mentioned we were helped by the fact that there were some incentive compensation reserves that were reduced.

We don't expect that that is going to continue going forward, so I would expect you are not going to see violent increases or decreases one way or the other.

Okay but maybe the June quarter is a better proxy than say the December quarter?

And certainly the September quarter?

Yes.

Okay and then one last question.

I don't know if you answered Bill's question alluding to the winding down of the Little Remedies voluntary withdrawal.

Is that done, or can we expect to see more of that in March?

The only impact it should carry into March is just the lost sales impact.

What we've been specifically talking about and quantifying for you is the impact of the onetime withdrawal reserves we established in Q2, and then had to modestly increase in the third quarter.

I think what Bill was specifically asking about was going forward what the prospects were for us being able to reintroduce those items in next year's cough cold season.

And as I mentioned, really that is going to be dependent on developments within the FDA over the next four to eight weeks.

So we shouldn't see much of a topline impact from here on out or any surprising adjustments to the reserves?

No, we think we've got the thing cornered.

That's all I have.

Thank you for your help.

Reza Vahabzadeh, Lehman Brothers.

This is Christian Hoffman for Reza Vahabzadeh, good morning.

Could you talk a little bit about inventory levels at retailers, do you see any pullback there?

The one most prominent adjustment this year and we talked about it on our last call and we continue to see it in the third quarter is on the cough cold inventories that retailers have taken in this year.

Over the last two years they've been burned by taking large amounts of inventory in in preseason in anticipation of normal cough cold seasons and wind up holding a lot of that exiting the season.

This year they made a conscious effort to go to more of a consumption based inventory model and just take modest amounts in to start the year and then replenish based on consumption.

It turns out in retrospect they were smart.

Because the way the season has developed so far.

So that is the most significant inventory adjustments that we see that is kind of category wide.

But overall you're comfortable with levels of inventory?

Overall, we are.

And just a housekeeping item, can we get cash taxes for the year?

We're going to have to look that one up for you.

And, oh.

$6.9 million.

Jon Andersen, William Blair.

Given the success that you have with Murine Earigate and Comet Spray Gel todate, it really seems to reinforce the importance of good product innovation on an ongoing basis.

So I was delighted to hear about the intensified emphasis on breakthrough innovation.

I was just wondering if you could talk a little bit more about what we could expect to change in terms of the way you source, [vet] and develop new ideas going forward.

As I mentioned, John, externally what we want to do is put more or let's call it reliability in filling the top end of the funnel by developing relationships with sources that are out in the industry.

With be they technology houses or potentially Rx companies that are looking for opportunities to switch products from pharma to OTC.

Both of those would provide a steady stream of innovation ideas into the top of our funnel.

In addition, internally we want to put some more dedicated resources on breakthrough innovation that will work both to develop those ideas from within our current portfolio, but also develop those external relationships I spoke of to generate new sources of ideas.

Our historical pool has been a combination of suppliers, our own internal ideas and inventors and entrepreneurs.

And we certainly don't want to walk away from those (inaudible) resources; we just want to augment them with a couple of the additional resources I've mentioned.

And when it comes to technology houses we've already got initial dialogues going with a couple of those to round out our pool and make sure we have some consistent go to sources for new, big ideas.

Excellent.

Thanks, that is helpful and the only other question I had was, is the right way to think about some of the changes you're making from an org effectiveness standpoint being the direct selling model?

It sounds like some additional analytical tools orienting toward more of a consumer centric mission internally.

Are those the right way to think about the costs associated with that as being largely offset by other benefits that you are going to be able to achieve through your cost reduction and supply chain simplification efforts?

Yes, I would probably be even a little more specific than that, Jon.

We really do want to improve and sharpen those capabilities in a cost neutral fashion within our non-cogs, non cost of goods areas.

So making sure that our broker commissions trade off effectively against our direct selling model, making sure that within our aggregate G&A structure we can add the capabilities I mentioned in terms of systems.

And sharpened focus on key areas in a cost neutral fashion and then let the cost of goods benefits continue to accrue to our gross margin.

The other piece and the real payoff on all of this obviously is that improving organizational effectiveness is something we do in the name of over time accelerating that growth rate beyond the 2 to 4%.

It is not that we want to do just for the sake of doing it but for the sake of at the end of the day, driving that top line even harder.

And that is the real payoff.

Terrific.

Thanks.

(OPERATOR INSTRUCTIONS) Michael Turgel, Eaton Vance.

Most of my questions definitely been answered at this point; I appreciate all the color.

A question on potentially working capital impact from moving to a direct sales model, anticipating any changes in either inventory levels or AR, anything like that.

That should not change at all, Mike.

Our model is that as revenues increase you should expect working cap to increase at that same rate.

But there should be absolutely no impact at all from going to a direct selling model.

At this time there are no further questions.

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

Mark Pettie for closing remarks.

Thank you all on the phone for your attention to somewhat extended conversation today.

Again, I can't tell you how enthused we are about the results of the strategic review, and I appreciate the questions around some of the key elements of where we are headed.

Because those are the things I look forward to talking with you about going forward.

Those are the things that are going to initially ensure our near-term 2 to 4% topline growth target and then ultimately as I said, drive that to greater heights downstream.

So thanks again.

I look forward to talking with you in another quarter.

Thank you for your participation in today's conference; this concludes the presentation.

You may now disconnect.

Good day.