Prestige Consumer Healthcare Inc (PBH) 2008 Q4 法說會逐字稿

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

earnings conference call.

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

We will be facilitating a question and answer session towards the end of today's conference.

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

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

Please proceed, sir.

Good morning and welcome to our fiscal 2008 fourth quarter conference call.

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

Statements of management's expectations of what might occur with respect to future operating results are what is known as forward-looking statements.

All forward-looking statements involve risks and uncertainties which in many cases are beyond the control of the Company and may cause actual results to differ materially from management's expectations.

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

Securities and Exchange Commission.

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

Mark?

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 fourth quarter and full fiscal 2008 results.

Pete will then the financials for the quarter in more detail, and I will come back with highlights of our segment performance and our outlook for fiscal 2009.

In addition, I will discuss our progress against the four strategic growth thrusts I highlighted on our last call.

We will then open the call for questions.

So let's get started with our reported total revenues for the fourth quarter which were $80.4 million a 3% increase over last year.

As you know, organic sales growth in the quarter is the same as total growth as we have now lapped the Wartner acquisition which closed in late September 2006.

Reported net income for the quarter of $10.4 million was $2 million or 24% greater than last year's reported net income of $8.4 million.

The increase in net income compared to prior year was driven by improved gross margin resulting from the sales increase and reduced cost of goods sales combined with favorable G&A and interest expense.

FInally, we generated $9.6 million of free cash in the quarter.

Our continued strong cash generation helped us to pay down an additional $15 million on our term loan reducing total debt to $411.2 million at March 31.

Now let's take a brief look at annual results for the 2008 fiscal year.

Total revenue for the year was $326.6 million, $8 million or 3% greater than fiscal year 2007.

Organic sales which remove the April to September benefits of the Wartner acquisition were up $2.6 million or 1%.

Net income of $33.9 million was $2.2 million or 7% below fiscal year 2007 reported net income of $36.1 million.

As you may recall fiscal year 2007 net income benefited from favorable non-cash income tax adjustments in the third and fourth quarters amounting to $2.2 million.

After adjusting for this benefit, fiscal 2008 net income was equivalent to fiscal 2007 net income.

Finally, free cash flow for the year was $44.5 million and we paid down $52.1 million in term loan debt during fiscal 2008.

So that's the brief summary for the quarter and the year.

Now I'd like to turn the call over to Pete who will provide additional commentary and financial details.

Pete?

Thank you, Mark.

As Mark mentioned net revenues for the quarter of $80.4 million were 3% ahead of prior year net revenues.

Operating income of $24.8 million was $2.2 million or 10% above last year's operating income of $22.6 million; and net income of $10.4 million was $2 million or 24% better than last year's reported net income of $8.4 million.

Cost of sales for the quarter of $39.2 million was $400,000 or 1% higher than cost of sales last year.

As a percent of revenue, cost of sales declined from 49.7% in fiscal year 2007 to 48.8% in fiscal year 2008.

This cost of sales decline was primarily due to a reduction in obsolescence expenses in fiscal year 2008 as last year included charges related to cough cold products which were facing expiration dating.

Advertising and promotion expense of $6.3 million was $100,000 greater than spending of $6.2 million last year.

G&A expense of $7.4 million was $300,000 lower than the prior year's expense of $7.7 million.

Lower professional service expenses primarily related to reduced expenses for Sarbanes-Oxley compliance testing were partially offset by increased legal expenses.

As we saw in our fiscal third quarter, our legal expenses continued to run ahead of last year's levels but the absolute amount of spending was lower than the previous quarter reflecting the successful resolution of the OraSure litigation in December; however, as we mentioned on our last call, the litigation to defend our doctor's (inaudible) core, 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 case is concluded.

Interest expenses of $8.6 million during the quarter were $1.2 million or 12% lower than the prior year as a result of the reduction in debt achieved throughout the year.

Finally, you may recall that last year we instituted a program to look for opportunities to make the Company's corporate operating structure more tax efficient.

As a result of those continuing efforts, the Company's ongoing booked income tax rate has been reduced from 38% to 37.9%.

Now, I will briefly review fourth quarter results by segment.

Net revenues for the OTC segment of $46.2 million were $2.9 million or 7% better than last year.

Gross profit for the segment was $28.9 million, 12% greater than prior year.

Gross profit as a percent of revenues was 62.6%, a substantial improvement over the prior year's gross profit of 59.8%.

The improvement over last year was due in part to last year's large obsolescence accrual for expiring and discontinued cough cold products.

Contribution margin of $23.8 million for the segment was $2.6 million or 12% greater than the year ago quarter.

A&P spending for the segment in the current year was $500,000 greater than last year's spending.

Household products net revenues of $29.7 million were $700,000 or 2% greater than last year.

Gross profit of $10.6 million was $300,000 or 3% below the prior year as the sales increase was offset by increased cost of sales due to unfavorable sales mix.

The household segment contribution margin for the quarter of $9.6 million was $100,000 greater than last year as the gross margin decline was offset by a decrease in advertising and promotion spending.

Finally, net revenues of $4.5 million for the personal care segment were $1.3 million less than prior year.

Gross profit of $1.7 million was $800,000 less than prior year primarily due to the sales decline.

Contribution margin of $1.6 million was $700,000 less than last year due to the gross profit decrease.

Our pre-cash flow for the quarter, which we define as operating cash flow less capital expenditures, was $9.6 million.

That represents a 42% decline from last year's free cash flow of $16.5 million.

The major driver of this decline in free cash flow was accounts receivable which increased from $35.2 million on March 31, 2007 to $44.2 million on March 31, 2008.

The increase is attributed to the sales increase as well as the timing of certain price increases in the quarter ended March 31, 2008.

In response to cost increases for raw materials, packaging, and transportation expenses, the Company instituted price increases on several brands which were effective March 15th.

Consequently, there were a number of invoices which came due during the first two weeks of April as orders placed just prior to the price increase were due 30 days later.

As expected, cash payments were very strong in the beginning of April as those invoices became due.

Consequently, our days sales outstanding which were 48 at the end of March improved substantially to 39 days at the end of April.

As Mark mentioned, our continued strong cash flow in the fourth quarter helped us to pay down an additional $15 million on our term loan during the quarter.

For the full year we repaid $52.1 million of debt, reducing total debt to $411.2 million at the end of the year.

And now, I will turn the call back to Mark who will provide additional Q4 perspective and discuss our progress against the four key strategic thrusts and our outlook for fiscal 2009.

Thanks, Pete.

Before I get underway with my Q4 remarks I will again quickly remind you that when I speak of consumption I'm talking about consumption across all channels which includes traditional food, drug and mass as measured by IRI; plus actual sales results in non-measured channels.

These non-measured 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 brands overall performance.

Moving to the OTC segment.

While several of our key brands exhibited strong growth during the quarter, our Murine ear care business again led the way with sales up 100% on the continued success of our Murine Earigate launch and its halo affect on the entire Murine ear line.

Importantly, consumer take away also remained quite strong during this period as Murine ear consumption was up over 140%.

This performance allowed Murine to extend its share leadership position in the ear care category having grown nearly 8 share points in fiscal 2008.

Our largest OTC brand, Clear Eyes, also enjoyed strong growth in Q4.

This is attributable to a combination of continued consumption growth and the benefit of incremental distribution from the launch of our new one ounce SKUs.

Quarter performance was also helped by the relaunch of our Clear Eyes allergy SKU.

Time to coincide with the start of allergy season, this relaunch included changing the product name from the somewhat obtuse Clear Eyes ACR to the much more consumer friendly Clear Eyes for Itchy Eyes.

Advertising support for this launch began in April and the response to this campaign has been very encouraging.

I'm also pleased to report that Chloraseptic enjoyed strong sales growth in the fourth quarter due to demand caused by the late breaking upturn in the cold/flu season which kicked in primarily during the months of February and March.

During the quarter, Chloraseptic also continued increased its category leading share position growing 2.5 share points to 35.7% of the sore throat treatment category; however, while we are pleased with the strength and finish to the year, the improved sales performance in Q4 was not enough to offset the unfavorable shipment trends experienced earlier in the year.

Compound W and the salicylic acid segment of the business in particular turned in solid performance during the quarter.

Consumption has been improving in this segment throughout the year behind effective new advertising copy, and Compound W grew share 1.6 points for the year and over 3 points in Q4.

Behind this performance, our total wart care franchise, comprised of Compound W and Wartner, also grew its aggregate category share leadership position in the fourth quarter.

It is important to point out that as we enter the first quarter of fiscal 2009, the dynamics of the cryogenic segment of the wart care business are changing.

In response to a similar action taken by Doctor Scholl's Freeze Away product, we have reduced list pricing on both Compound W Freeze Off and Wartner closing the price gap between the cryogenic and salicylic acid forms of wart care products, and improving the consumer value proposition of the cryogenic segment.

Both Doctor Scholl's Freeze Away and Compound W Freeze Off have concurrently reduced the number of applications per package.

We believe this will stimulate unit consumption within the cryogenic segment which has been steadily declining for the past three years.

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

As you know from earlier calls, to a substantial degree this competition involves infringement of our patents, trademarks, copywrites and trade dress and we continue to vigorously defend our rights in these areas.

Moving on to our household business our 2% revenue improvement was driven by our largest brand: Comet.

During the quarter Comet benefited on two fronts.

First, Dollar Store powder sales trends continue to improve as a result of one of the major dollar retailers introducing a larger size Comet offering earlier in the year.

Second, Comet mildew spray gel made a meaningful contribution as pipeline orders to support increased store distribution and a major mass merchandising customer were shipped during the quarter.

Spic and Span factory sales declined in line with year to date trends while Chore Boy was down due impart to lapping a year ago promotion that was not repeated.

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

Switching to our international business, total revenues were up 3%.

This reflects continued strong growth in our Canadian franchise offset by a 22% decline across our other international markets.

You may remember that I previously highlighted steps we took beginning in Q2 of fiscal ' 08 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 sales in these markets for the balance of fiscal '08 and through Q1 of fiscal '09.

This is reflected in our aggregate Q4 results and offsets the strong performance of not only Canada, but also our Murine eye and Chloraseptic businesses in our UK market.

As I mentioned on last quarter's call, earlier this year we expanded the Murine eye line from one to four SKUs in the UK and simultaneously introduced very impactful new package graphics.

As a result, this business was up over 100% in Q4 and is up over 70% for the full fiscal year.

In addition, the Chloraseptic business in the UK experienced increases of over 50% in the quarter due to a truly strong cold/flu season in that market.

Our Canadian business continued to show very nice gains with revenues increasing 25% over the previous year's fourth quarter.

The over the counter portfolio showed especially strong growth and the Comet brand led growth in the household segment.

As we increased our focus on this important piece of our international business in fiscal ' 09, we look forward to strong top line performance.

Now to a discussion of Q4 performance.

We are pleased with the improvement in the fiscal year from both a sales and earnings standpoint, but more importantly we enter fiscal 2009 with a sense of growing momentum.

While fiscal 2008 certainly presented us with our share of unforeseen challenges, we made significant progress in identifying the fundamental building blocks neccessary to achieve our overall goal of sustainable organic growth.

Many of these building blocks such as our inaugural systematic cost reduction program, supply chain simplification efforts, strength in domestic distribution, and focused product innovations made meaningful contributions to our performance in fiscal 2008 that accelerated as the year progressed.

And as I report on our Q3 call, the results of our intensive strategic review helped us further define our pathway to short and longer term organic growth through the articulation of four key thrusts that underpin the new ways we are focusing and leading Prestige Brand in fiscal 2009 and beyond.

Each of these thrusts represents real change in our operating approach and are the pillars supporting our future value creation.

I'd like to now spend a few minutes updating you on these areas.

You will recall the first of these thrusts is a more disciplined and brand specific approach to resource allocation calling for dedication of a meaningfully greater share of our resources to our focused brands.

That roughly two-thirds of our revenue base which we believe has the highest growth prospects going forward.

This much more granular and decisive way of managing our portfolio is truly at the heart of our roadmap and dictates many aspects of our other three trusts.

We have built and are implementing fiscal 2009 plans centered on driving these focused brands in market while continuing to expand our knowledge of their respective consumers to ensure longer term growth as well.

More and better marketing support for these focused brands will be a key to our success and early results are encouraging.

By way of example, beginning in April we added radio to the marketing mix of a large focus brand and are concurrently testing a new media buy-in approach with this franchise.

While it is only one period, in the month of April consumption for this brand was up nearly 15% versus year ago which we attribute to the combination of salient benefit messaging that is delivered to our consumers in a new and more efficient fashion.

By applying this sort of stepped up marketing customization behind validated ideas, we are confident our domestic focused brands can deliver the above average growth we expect of them.

And as I mentioned on our last call, this marketing customization doesn't pertain exclusively to advertising and consumer spending.

Our newly added expertise in trade marketing will result in more differentiation in the retail merchandising vehicles we use across our focus brands and improve the success rate of the second year of our more-from-the-core incremental distribution initiative.

In fact, recent OTC and household distribution wins at several food channel customers can be attributed in large part to our improved fact based selling capabilities.

We are also very pleased with the progress against our second key thrust, an increased emphasis on break through innovation.

As a reminder, we define break through innovation as clearly differentiated new products or product improvements that add meaningful scale to our focused brands enabling us to separate ourselves from category competitors.

As we enter fiscal 2009, our break through innovation headliners from last year, Murine Earigate and Comet Mildew spray gel, continue to perform well and we are committed to aggressively supporting them in our second year to help ensure they realize their full revenue potential; and on the heels of those successful launches, we believe we have an equally high potential: Act II.

Allergies affect an estimated 40 million Americans and currently represent a $700 million plus OTC healthcare category which has been growing at an average of 6% per year for the past two calendar years and over 17% in the latest 52 weeks.

It is also a category where the major consumer offerings all contain drugs; meaning relief from symptoms often comes with unwanted side effects such as drowsiness.

Well, beginning next quarter, Prestige will be offering allergy sufferers a new drug free option to relieve their symptoms with the introduction of Chloraseptic allergen block for adults, and Little Allergies allergen block for kids, which will be marketed under our Little Remedies pediatric trademark.

Both products employ the patented innovative nasal guard technology which blocks allergens by trapping outside the nasal passages.

The greaseless, odorless, and colorless allergen block gel is applied topically around the nostril three to four times a day and provides a barrier to most indoor and outdoor airborne allergens.

This technology has two clear advantages versus current allergy relief products.

First, since the majority of all allergens enter the body through the nasal passages, it works to help prevent allergy symptoms rather than relieve them after they have already occurred.

Second, it is drug free making it ideal not only for adults, but for parents concerned with providing non-medicated allergy relief solutions to their children.

While designed to be used as stand alone allergy prevention products, the drug free nature of Chloraseptic allergen block and Little Allergies allergen block also allow them to be used in combination with traditional allergy medication if desired.

Retailer response to this next round of break through innovation has been overwhelmingly positive and we have acceptances at all major drug chains and wholesalers along with several major food accounts.

Presentations have also been well received and authorizations are pending with our major mass merchandising customers.

We believe the unique technology and broad range of applications for this product also make it ideal for nontraditional distribution channels such as pet stores and garden centers, and we are actively pursuing these options.

Clearly, we are excited by the prospects of this next-generation of break through innovation which takes two of our significant OTC brands into a new and growing category with truly differentiating consumer relevant technology.

Both allergen block products have the potential to mirror the success of last year's Murine Earigate and Comet spray gel introductions and meaningfully contribute to our fiscal '09 organic revenue growth picture.

Before we leave the subject of innovation I want to assure you that although they are the biggest, the allergen block products are certainly not the only new offerings we will be providing to our customers and consumers in this fiscal year.

I've already spoken about the new Clear Eyes one ounce items and the conversion of our ACR eye care product to the much more consumer friendly Clear Eyes for Itchy Eyes name.

While both these initiatives began in Q4 of fiscal '08 the bulk of the growth they will bring will be enjoyed in fiscal '09.

Returning to our Chloraseptic business, in addition to allergen block, we will also be leveraging the success of last season's liquid center lozenge introductions by applying that technology to a new maximum strength lozenge.

This new product is specifically formulated to provide quick and lasting relief to the most severe sore throat pain.

We will also be launching the maximum strength formulation in a directable spray form.

These two new Chloraseptic sore throat items have also played to positive retailer reception and will begin shipping next quarter.

And back on Little Remedies, we will be introducing a second saline product in Q2 which will capitalize on the growing popularity of this form of non-medicated relief of pediatric cold symptoms.

Our current Little Remedies saline product, which is deliverable in a plastic squeezable bottle is the number one SKU in our Little Remedies line.

Our new product utilizes an aerosol deliver system that has the added benefit of being preservative free.

We know the two delivery options appeal to different consumers and we expect them to co-exist happily in many accounts.

Finally, we will be introducing a manicure pen to our Cutex line as we continue to seek value added ways to differentiate ourselves from private label competition in the nail polish remover category.

We are also returning to the iconic clear Cutex bottle for our liquid business which is the largest part of the Cutex line.

Both the new manicure pen and the classic bottle will be on shelf in time for the important summer nail polish season.

As I'm sure you can tell by now, the key message of this portion of my remarks is that we will be sharing a healthy breadth of innovation both break through and basic with our customers and consumers this fiscal year.

Our third key thrust is the continued efforts behind international growth with a sharp increase in focus on our Canadian business.

You may remember my comment on the Q3 call that we believe our Canadian business is undeveloped by up to 50%, in part, due to the lack of specific attention with which we historically manage this market.

We intend to begin closing this gap in fiscal 2009 in three ways.

First, we will have the full year benefit of our consolidation to a single Canadian broker partner that we initiated in Q2 of last year.

Second, we are preparing to launch up to 10 new items into that market over the course of fiscal '09; and third we are planning to develop dedicated advertising to support key OTC brands in Canada such as Compound W, Clear Eyes and Chloraseptic.

We are confident the combination of these factors will allow us to drive further Canadian growth and begin closing the identified market development gap.

We are also working to step up growth in our other international markets.

The UK is a case in point where we plan to follow-up last year's introduction of three new Murine eye care SKUs and our listing in the number one UK pharmacy chain with our inaugural Murine television advertising campaign; and from a longer term standpoint we made considerable progress in fiscal '08 in new item dossier preparation and are now in the process of filing these dossiers with regulatory agencies in several of our existing and potential international markets.

Given the vagaries of the international regulatory approval process, these filings may not pay off for us in new '09 revenue but the stage is being effectively set for their contribution to our growth in the not too distant future.

Our fourth key thrust is to build our internal and external organization effectiveness.

Said another way this is essentially about getting our organization fully aligned or wired to maximize the returns on our other key thrusts and therefore achieve our sustainable organic growth objectives.

In this regard our progress to date is also satisfying.

From an internal standpoint, we have substantially reorganized our marketing function to fully align with the priorities dictated by our portfolio management model.

At the top of the house we have consolidated all OTC and personal care marketing responsibilities under Jim Kelly.

These were previously shared by Jim and Charlie Schrank, our other senior marketing executive.

Charlie now exclusively heads up our important household products business, as well as providing leadership to marketing services.

Jim Kelly has in turn aligned his marketing team against our portfolio priorities.

Importantly, he has carved out specific resources to focus on two of our most important growth areas: break through innovation and Canada.

This dedicated approach is neccessary to ensure these two initiatives along with performance of our domestic focus brands contribute to the near end attainment and ultimate acceleration of our organic growth profile.

Going hand in hand with the improved alignment of human resources, is the need to provide our people with continuously upgraded analytical tools to drive efficiency and decision making capabilities.

Our recently installed financial reporting package has allowed for more real time access to key performance indicators at the brand level and we are on the cusp of beginning implementation of an integrated sales forecasting and demand planning system.

The benefits of this system, which will take several months to fully bring up to speed, include improve sales forecast and merchandising program communications and better inventory management.

From an external standpoint, our major initiative is the movement of the majority of our revenue from a brokered sales force to our own direct selling organization.

You may recall that we have less than 40% of our revenues under the direct selling model today.

We project this number to be approaching 70% when our transition is complete.

We expect the result in more intimate relationships with our key customers to translate to improved growth prospects via enhanced idea exchanges, broadened new distribution opportunities, and greater return on trade marketing spend among other benefits.

While we have not converted any business to date, we have identified a number of talented direct sales candidates and expect to begin our transition in the second quarter.

So that's a progress report on the four strategic thrusts underpinning our organic growth roadmap as we head into fiscal '09.

Although we are clearly in the early stages of their implementation, I know I speak for the entire Prestige team when I say we are fully committed to their successful execution and the realization of the growth they will provide.

Now let me wrap up by speaking briefly about how this all translates into our anticipated fiscal 2009 performance.

I will begin by reaffirming the 2% to 4% revenue growth range indicated on our last call.

We expect this growth to begin in earnest in Q2 as Q1 comps are impacted by, among other things, the presence of international diversion and the Little Remedies cough/cold sales in the Q1 fiscal '08 base, along with the modest forward buy impact of our Q4 pricing action.

Our annual A&P support is also planned to grow behind the new item launches: a full year of spending for Earigate and spray gel, and continued investment in expanding our consumer knowledge base.

However, with the stabilization of our G&A spending and continued delevering, beginning in the second quarter, we expect full year net income and EPS to grow at a rate meaningfully higher than our projected rate of sales growth.

With respect to M&A activity, we enter fiscal '09 with the same stance as last year.

We did not build any acquisitions into our annual plan and, while we were always attentive to strategically appropriate opportunities, our bias entering this year continues to be a focus on fully implementing our key organic growth thrusts; however, we do continue to see a regular flow of acquisition opportunities and remain capable of acting rapidly on those that make sense.

Similarly we have not projected any divestitures in our fiscal '09 plans, but remain interested in selling our personal care and certain small OTC brands for the right value.

In closing, I'm enthusiastic about our prospects for fiscal '09 after the challenging year we just completed.

We have done the hard work and made the tough decisions required to chart a course of growth, and though it's early, our progress against our roadmap is encouraging.

We have the brands, the innovation, and the organizational focus and energy to achieve our goals and I look forward to speaking with you about them in the months ahead.

Thank you and I will now open the call to questions.

(OPERATOR INSTRUCTIONS)

Your first question will be from the line of Bill Chappell of SunTrust Robinson Humphrey, please proceed.

Good morning.

Hi, Bill, how are you?

Good.

I will dig into my favorite question of your guidance.

I understand on the topline 2% to 4% growth and that makes sense, but on the bottom line you should be able to do 8% to 10% EPS growth just with delevering.

Can you give us an idea, can operating income grow faster than EPS this year or are we still kind of in rebuilding mode?

I think we are still primarily in investment mode when you talk to that level of the P&L, Bill, but we do expect certainly--expect growth in the operating income line this year.

Okay, and then in terms of looking kind of at the personal care side of the business, is it a sense that we have hit some stabilization, it seems just to continue to be a drag on topline growth and what are your expectations there to still get that 2% to 4% growth?

You may recall from the Q3 call, Bill, that that entire set of businesses including personal care and the small OTC brands that we remain interested in divesting for the right value represents an aggregate about a 1% drag on our total topline expectations.

I would say that within personal care we are seeing kind of a mixed bag.

A couple of the brands do seem to be finding their new equilibriums, Prell in particular seems to be stabilizing and although it's very early, the move we've made on Cutex back to the classic iconic clear bottle in the course of April seems to have done some good things for our POS.

So there is perhaps the opportunity as we head into this year for the ray of decent on that business to start to moderate as well.

So I mean is a 1% drag still a good metric to use for this year?

I think in aggregate it's still the right number to use, Bill.

It is early days on the stuff I just mentioned.

Since you've kind of reclassified the business, is there any way to look at it of how fast your two-thirds of the business which you are investing in is growing versus the one-third where you are not?

Yes, I would just offer that certainly we expect the two-thirds to grow at a rate faster than that 2% to 4% in the aggregate, and I would leave it at that.

Okay, and then just one last question just for my own personal understanding, the new Chloraseptic and Little Remedies products am I walking around with kind of goop under my nose three or four times during the day or does this actually blend in?

No, as I mentioned in the remarks, Bill, it is clear, it is odorless, it's invisible, it's colorless, so while you do apply it topically right underneath your nostrils, if you and I were looking at each other from two feet away, I would not recognize it.

I'm much relieved by that.

All right, thanks a lot.

Your next question will be from the line of Joe Altobello of Oppenheimer, please proceed.

Thanks.

Good morning, guys.

Hey, Joe, how are you?

Good, good.

First question, just want to go back to the price increases.

First could you sort of layout what price increases you took in the quarter and then secondly, how much of a pre-buying occurred during the quarter?

Joe, we took pricing on about--just a little under 40% of the volume of U.S.

so it was kind of across the board.

It ranged from Clear Eyes to Comet powder to Chloraseptic lozenges.

So again, very much in line with how we previously have taken price increases.

We look at the--the competition.

We look at our cost profile, etc., so it was about 40% of U.S.

volume and we believe that the forward buying was in the range of maybe 1%.

It was not huge.

Okay.

Now, of the 40% of the volumes that you did take pricing on, what was the average price increase?

About 6%.

Okay, and then secondly, if you go back to sort of February, you guys were still looking towards 1% to 3% organic growth this year; and as you said you did come below--or actually at the low end of that range, maybe slightly below that.

What was sort of going on in the third and maybe fourth quarter that caused you to be at the low end of that range?

Was it the recall or the cough/cold season?

Yes.

When we identified the 1% to 3%, Joe, we had already instituted the withdrawal on Little Remedies.

That was factored into that number.

Obviously the cough/cold season, while it came back at the end, took some time to come back; and so--through December and even into January we were under water on that, and that certainly pushed down our performance.

Those were the two major factors.

One of which we had accounted for in the 1% to 3%, one of which has continued at substandard levels during an important part of the year for the Chloraseptic business.

Okay, and then lastly for modeling purpose if I could, how much were your legal expenses in fiscal '08 and what are you sort of baking in for '09?

Good try, but we don't give it any exact numbers there.

It will be up directionally though?

For ' 09?

For '09, yes.

No, legal expenses will definitely be below unless something we do not foresee now happens.

They will be above--what Pete said in his remarks, Joe, is that they'll be above our historical run rates; but certainly below the dramatic spike we took in fiscal ' 08.

Got it.

Okay, thanks.

Your next question will be from the line of Neely Tamminga of Piper Jaffray, please proceed.

Great, good morning.

Just for my understanding I was hoping if you guys could give a little bit of explanation when--in the market you have got Zyrtec, which just launched--is a strong launch in OTC allergy relief.

Historically do you think that when Claritin did this, was this a good move for the category because it raises awareness in general, keeps people in that aisle, or is this kind of a take share potential issue?

Just wondering if you could help frame that up a little bit for me.

In terms of the allergy category in general, or in terms of our proposed in the market?

Your offering within the allergy category specifically.

I think that our offering, because of its unique nature the fact that it is A, drug free and B, more preventive and curative is going to build the category more than be in there trying to steal share.

It is a totally different method of addressing allergies, and I think folks that have been previously reluctant to get into the category because they didn't like the medicated effects of the current offerings, are going to be much more attracted to the category now that there is an alternative out there.

I also think that the pediatric market is going to respond favorably particularly given the drug free nature of this.

As we look at this, we look at this as an opportunity to attract more consumers to the category and further build out the growth the category is already experiencing.

That's great.

Good luck.

Your next question will be from the line of Chris Ferrara of Merrill Lynch, please proceed.

Hey, Chris.

I think we lost Chris.

Chris?

--in total company sales?

Chris, I'm sorry we didn't hear the first part of your remarks.

We were cut off for some reason.

Oh, sorry about that.

So the pre-buy I think Pete, you said it was 1%; is that 1% of total company sales for the quarter?

Yes, correct.

So in other words, you'd expect that would be the drag that you would expect to Q1 sales as well, right?

Yes, absolutely.

Okay, then I just wanted to ask about the price--I guess the down count of pricing coming down in the cryogenic wart remover business; I guess that won't really show up until wart season hits, is that right?

And how big a deal, can you give us--sort of try and size that for us as far as what kind of percentage or what kind of dollar impact you think that can have on your business?

We took the price reductions effective with shipments starting on April 1.

So in terms of its impact on our revenue, it will show up this quarter; and in fact, the prices are already starting to be reflected in market in certain accounts.

It is a fairly sizable decrease.

If you recall we also took a downsize in the number of applications at the same time.

So the decreases on our Compound W cryogenic product and our Wartner product were in the 35% to 35%-plus range and the expectation is that will stimulate unit growth in the cryogenic category, so some of the revenue decline will be recovered by increased unit sales as we move forward.

And Chris, just to add to that for those of you out there who are updating your models, we looked at a combination of the price increases that we took in the month of March and netted that against the price decreases on the cryogenic business and it amounts to approximately one-half of one percent of a net price increase or a benefit that we'll get throughout FY ' 09.

Wow.

So I thought you said you took, of course, 40% of the U.S.

volume roughly a 6% price increase, is that right?

Yes.

So that would have been a little less than 3 points for the business end, it gets knocked all the way down to plus a half because of the cryogenic change, am I thinking about that right?

Yes, a sizable change in the cryogenic segment led by Doctor Scholl's.

Got it, got it.

And then just on the Chloraseptic--I guess on your innovation in the allergy side, did you guys do a lot of research on the portability of the Chloraseptic brand to allergy?

I get the relevance between the sore throat and allergy, but just wondering how you guys thought about that and whether you guys did new consumer testing as far as the receptivity of that to the Chloraseptic brand.

Very good question and you are absolutely right.

One of the things we did last year, and you may recall me remarking on this in one or more of the calls in fiscal ' 08 is really one up to get a better understanding of the extendibility of our brands.

We had some imperical evidence of brand extendibility with Comet in '08 stretching itself very successfully into the mildew category which it had never been; and so we wanted to consumer test the extendibility of certain of our other leading brands and Chloraseptic was right at the top of the list.

We did extensive research in Chloraseptic in terms of how far the consumer would give us permission to move that beyond purely sore throat and we were very encouraged by what we heard.

In addition to allergy, which came back very strongly, there are other areas that are adjacent too, but not directly on top of sore throat that represent fertile ground for Chloraseptic going forward.

Yes, we got a lot of consumer confirmation that allergy was a very acceptable place for the Chloraseptic market to stretch to.

Got it.

Thanks a lot, guys, I appreciate it.

(OPERATOR INSTRUCTIONS)

Your next question will be from the line of Jon Andersen.

Good morning.

Hi, Jon.

Two quick questions and then I'll hang up and listen.

First, just was wondering if you could provide some commentary on retail inventory levels, what you're seeing there, what your level of comfort is at present?

And then second, just and update with respect to your debt covenants and whether you can go out into the market now and repurchase shares and if not when you kind of see that on the horizon?

So I'll take the inventory question, Jon, and I'll let Pete take the covenant question.

With respect to current inventory, we are very comfortable with where they are on virtually all our brands.

If there's one area of softness or load if you will that we see coming into this year, it's in Murine Earigate where the tray took a very strong position against some merchandising programs in Q4 and, frankly, probably overbought a little bit.

So we have turned the television back on effective with the start of April, and we're seeing the lifts and response to that advertising to be as impressive as they were when we first turned it on last fall.

So we're confident that we'll move through that inventory overhang quickly at retail, but it does represent one area of watch out for us as we head into this fiscal year.

Otherwise, we feel like we're in good shape from a retail inventory standpoint on virtually all of our other goods.

Okay, and on the covenant issue, the debt to EBITDA ratio is what limits our ability to potentially buy back shares or do a dividend, and we've got to get down to 3.5 to be able to do anything.

We are, at the end of the year, about 3.97, so we're moving towards the 3.5 and I would expect that it would be not until the end of the FY ' 09 fiscal year that we would get it down to about the 3.5 level or just below.

Thanks a lot and good luck.

Your next question is a follow-up from the line of Chris Ferrara of Merrill Lynch, please proceed.

Hi again, guys.

Just following up on the pricing so the raw material--would you say that the--how do I do this?

The dollar amount of your price increases that you are doing excluding the cryogenic reduction in price, is that a fair reflection of the type of raw materials inflation you are seeing in your cost of goods sold line?

Yes, definitely.

Did you hear that, Chris?

So that means I guess that--is it a fair characterization that you are offsetting 100% of your raw materials price increases?

In those products that we took price increases on, yes.

Now, as we have consistently said over the years, there are some categories and some brands where because of our competitive position in the marketplace, we have had cost increases like everybody else, but we have not been able to take pricing actions because the leaders in the segment have not raised their prices.

So for the products that we have taken the price increases on, yes; but there are some products out there where costs have gone up and just because of competitive pressures we have not been able to take a price increase.

Are you there, Chris?

Your next question will be from the line of Reza Vahabzadeh of Lehman Brothers, please proceed.

Good morning.

Good morning.

As far as the POS data that you provided, which was very helpful what I wasn't sure is on a consolidated basis if you were to gauge your own consumer take away at retail, where would you put the number for the quarter?

Our aggregate POF?

Yes, your best guess of your aggregate POS for the quarter.

It differs by brand on our--on the focus brands I spoke about, it was up 2% to 3%; and on some of the brands that are down on the--we call the divest list, obviously, continue to drag on us and those were down in the high single digit area.

It is a mix of pluses and minuses across the portfolio, but importantly, where we are electing to focus our energy and resources the consumption measures are positive.

Right.

But if I were to kind of get through a weighted average of all that, would you be neutral, slightly higher, slightly lower for the quarter?

I think when you roll all of our businesses in together, it would be up.

Businesses and channels, you recall my opening remarks about unmeasured channels as well and we do a considerable amount of our business in the unmeasured channels.

So on average if you take a look at the businesses, we call it up.

Okay, and then Pete, you mentioned that the advanced buying ahead of the price increase was just 1% of aggregate sales, so just under $1 million.

That seems kind of low for the kind of price increase you took 6% on almost half of your business.

What is your level of visibility on that advanced buying?

Well, one thing that we are happy about and one thing that gives us pretty good confidence that indeed it was about 1%, is that we very deliberately took the price increases not at the end of March, but in the middle of March; and the reason we did that was because the last thing we wanted to do was to have a flurry of sales that took place right before the end of the fourth quarter and then wind up having no business in the month of April.

So when we talk about 1%, what we have done is taken from our sales group and from subsequent sales that we have seen through April and basically looked at the amount of the extra inventories that retailers took in.

So a large amount of what was purchased before the price increase was sold through in the last two weeks of the month of March.

The worst thing in the world is to sit here and do a price increase right at the end of a quarter or a month, pat yourself on the back, and then find out that gee, you've got absolutely no business after that.

So we very deliberately wanted to do that pricing action so that it wouldn't crazily skew our results.

Okay, and then you talked about the price increase on roughly after business, what kind of a cost increase or cost inflation are you anticipating in the year ahead?

Like everybody else.

We are sitting here with bated breath to see what a barrel of oil is going to do because for us, that really is the biggest driver.

It obviously affects both transportation costs as well as probably the biggest single other item that we have which is resin which is--goes into plastic bottles.

It is anybody's guess what oil is going to do.

Right, but on a per unit basis for your products, are we expecting 3% to 4% cost inflation, 2% to 3%, something higher, lower?

Just trying to see how much of the price increase is going to flow to the bottom line if any.

Where we expect it going into the year about a 3% to 4% increase.

If I could just build on Pete's remarks, one of the things that we were quite pleased with last year was the impact our inaugural cost reduction program had on our overall COGs profile, and it was quite helpful in offsetting inflationary impacts that accelerated as we went through the year and we are counting on that program to continue to deliver benefits to us this year.

So the 3% to 4% increase that Pete was alluding to, we don't expect to be able to mitigate all of that, obviously, but we do expect to be able to claw back some of that as we move through the year and build out year two of our specific cost reduction program.

Okay.

On the use of free cash flow in fiscal ' 09, will it be for debt repayment, acquisitions, any color on that?

Just the same perspective that we have been providing all along which is absent any acquisitions, and you heard my remarks about a strong bias against those as we head into the fiscal year and continue to focus on driving organic growth, but absent any acquisitions, it goes right to paying down our debt.

Okay, and on SG&A or really selling, advertising, and promotional spending, the number has kind of moved around in recent quarters and it also moves around as a percentage of sales.

Is there any color on that for the year ahead?

Do we expect that to be more level, do we expect that to be somewhat higher as a percentage of sales as you support your brands more?

If you are talking about the advertising and promotion component of that, we would expect that to be higher as we get into full year support behind the new products we introduced last year; in particular Earigate and spray gel and also put the appropriate level of marketing support behind the innovation I spoke about that is coming forward in ' 09.

As far as our G&A component, which we isolate from advertising and promotion, and was influenced in large part by legal expenses last year, as a percent of sales we do expect that to decline in the coming year.

Okay, but the A&P spending increase would be of what kind of magnitude?

Well, we don't give out specific numbers, but we are committed to supporting our new item introductions very, very strongly.

So I will leave you with that for now.

Thank you much.

There are no more questions at this time.

I will turn the call back over to Mark for closing remarks.

Just want to thank you all for listening and your questions throughout the last fiscal year and look forward to talking with you in the months ahead about our progress against the four strategic thrusts and our performance that results.

Thank you.

Have a great day.

Thank you for your participation in today's conference.

This concludes our presentation and you may now disconnect.

Have a wonderful day.