Prestige Consumer Healthcare Inc (PBH) 2009 Q2 法說會逐字稿

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

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

(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.

Please proceed.

Good morning.

Welcome to Prestige Brands' fiscal 2009 second quarter conference call.

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

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

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

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

Securities & Exchange Commission.

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

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

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

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

Pete will then review the full financials for the quarter in more detail.

I will follow that with highlights of our segment performance and a brief update on our progress against the four strategic growth thrusts guiding our efforts this year.

We'll then open the call for questions.

So, getting underway, our reported total revenues for the second quarter were $88.1 million, a 1% increase over last year.

As indicated in our press release, this increase is in part attributable to the launch of our breakthrough innovation products in the allergy category, Chloraseptic Allergen Block and Little Remedies Little Allergies.

In addition, we saw sales increases on several other brands, most notably Clear Eyes, Comet and our base Little Remedies line.

Partially offsetting those sales increases were declines in Murine Ear and our two wart care brands, Compound W and Wartner.

As you might remember from last quarter's call, the cryogenic portion of the wart remover category took a rather steep price reduction as our fiscal year and the summer wart season began.

During our fiscal first quarter, the Compound W Freeze Off business, in particular, was significantly depressed by the fact that our new lower priced eight-application product did not get into certain retailer sets until late in the quarter, with some of that transition carrying into Q2.

On that call we projected that in the second quarter wart care revenues would continue to be down versus year ago due to the significant cryogenic segment price decline but that we would see meaningfully improved performance relative to Q1.

That has proven to be the case, as the pricing came into line and we restored advertising support to Compound W.

Returning to our overall corporate performance, reported net income for the quarter of $8.5 million, or $0.17 per share, was $1.7 million, or 25%, greater than last year's reported net income of $6.8 income, or $0.14 per share.

The improvement in net income was primarily due to a significant reduction in interest expense resulting from the $51 million of debt paid down over the past 12 months combined with a reduction in interest rates.

Finally, we generated $18.2 million of free cash in the quarter, an increase of 40% over the second quarter last year.

Our continued strong cash generation helped us pay down $11 million of our outstanding term loans during the quarter, reducing total debt to $385.2 million at September 30.

So that's the summary for the quarter, and now I'd like to turn the call over to Pete, who will provide additional commentary and financial details.

Pete?

Thank you.

Thank you, Mark, and good morning, everyone.

As Mark mentioned, net revenues for the second quarter of $88.1 million were 1% above last year's net revenues.

Operating income for the quarter of $20.5 million was essentially even with last year's operating income of $20.6 million, and our net income of $8.5 million was $1.7 million, or 25%, greater than last year's net income of $6.8 million.

The significant net income improvement on essentially flat operating income was due to a $2.8 million reduction in interest expense in this year's quarter due to the large paydown of debt over the past year combined with significantly lower interest rates in the current year compared to last year.

Since September 30, 2007, our senior secured term loan facility has been reduced by $51.9 million, to $259.2 million.

The average interest rate on our senior secured term loan facility dropped from 7.74% for the quarter ended September 30, 2007 to 4.75% in the current year's quarter.

Looking ahead, due to the very difficult borrowing environment we have made a short-term decision to use our strong cash flow to build a cash reserve on our balance sheet to enhance our liquidity position.

Our intent is to build a cash reserve on the balance sheet of approximately $30 million.

That means that for the next two quarters we expect our total debt outstanding to be reduced only modestly from today's level of $385 million.

Towards the end of our fiscal year, when we have built our reserve, it is our intention to resume our debt paydown.

Now I'd like to turn back to our operating performance for the quarter.

Cost of sales for the quarter of $41.8 million was $1 million, or 2%, below cost of sales in the prior year, despite our sales increase.

As a percent of revenue, cost of goods sold declined from 49% in fiscal year 2008 to 47.5% in the fiscal year 2009.

During the quarter we benefited from a positive sales mix combined with the continuing positive effects of our systematic cost reduction program, which continued to mitigate cost increases on packaging, raw material and transportation which we continued to experience into the second quarter.

In addition, obsolescence expense was favorable to last year's second quarter, which included a provision for the Little Remedies cough and cold products voluntarily withdrawn from the market.

Advertising and promotion expense of $13.6 million was $2.6 million, or 24%, greater than spending of $11 million last year.

Introductory A&P spending against the new Chloraseptic and Little Remedies allergen block products, combined with continued strong support against last year's breakthrough innovation products, Murine Earigate and Comet Mildew Spray Gel, were the drivers of the increase in spending for the quarter.

G&A expenses of $9.4 million were $800,000 less than the prior year's expense of $10.2 million.

The decrease was primarily due to lower legal expenses versus last year's second quarter.

As we mentioned on the 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 case is concluded.

Now I'll briefly review the second quarter results by segment.

Net revenues for the OTC segment of $50.3 million were $300,000, or 1%, greater than last year due to the sales of our new Chloraseptic Allergen Block, the Little Remedies Little Allergies products, plus sales increases on the Clear Eyes, the balance of the Little Remedies line and The Doctor's brand.

Those sales gains were partially offset by declines on Compound W, Wartner, Dermoplast and the Murine brand.

Gross profit for the segment was $32.8 million, 8% above last year's gross profit of $30.3 million.

Gross profit as a percent of revenues was 65.1%, a substantial improvement over the prior year gross profit (inaudible) 60.6%.

The improvement over last year was due to favorable product mix, continuing benefits from the cost reduction program and the positive benefits of the pricing actions taken on some of our OTC items last March.

In addition, gross profit for the OTC segment last year was negatively impacted by the reserve for obsolescence on Little Remedies, which I mentioned earlier.

Contribution margin of $22.1 million for the segment was essentially flat with the year-ago quarter.

A&P spending for the segment of $10.7 million in the current year was $2.5 million, or 31%, greater than last year's A&P spending of $8.2 million.

The increase was driven by the introductory television advertising for Chloraseptic Allergen Block and Little Remedies' Little Allergies and continuing spending against Murine Earigate.

Our household products net revenues of $32.1 million were $700,000, or 2%, greater than last year.

Sales increases for Comet, led by Comet Mildew Spray Gel, were offset by declines on the Chore Boy and Spic and Span brands.

Gross margin of $11.2 million was $600,000, or 5%, below the prior year.

The decline was due to increases in product and freight costs.

The household product segment contribution margin for the quarter of $8.5 million was $800,000 less than last year due to the gross margin decline combined with an increase in advertising and promotional spending in support of Comet Mildew Spray Gel.

Net revenues of $5.6 million for the personal care segment were $300,000 less than prior year.

Gross profit of $2.3 million was $100,000 less than last year due to the sales decline.

Our contribution margin of $2 million was $100,000 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 $18.2 million.

That represents a $5.2 million improvement over precash flow of $13 million generated in the quarter ended September 30, 2007.

The improvement was due to the increase in net income and an improvement in working capital.

As Mark mentioned, our continued strong cash flow in the second quarter helped us to pay down $11 million on our term loan during the quarter.

On a trailing 12 months basis we have paid down $51.2 million on our term loan debt.

And now I'd like to turn the call back to Mark, who will provide additional Q1 -- Q2 perspective and discuss progress against our four strategic thrusts.

Thanks, Pete.

Let's begin, as we usually do, with our OTC business, where revenue growth of 1% mirrored our overall corporate growth.

This performance reflects a number of factors, led by the continuing strength of our Clear Eyes franchise, the success of new items in our Little Remedies and The Doctor's brands and the launch of our new breakthrough innovation allergen blocking products.

Partially offsetting these gains is the continuing impact of the pricing dynamics in the cryogenic wart care segment that I mentioned earlier and that we detailed for you on our first quarter call.

As we projected in that call, the unfavorable impact of these dynamics has diminished significantly versus our first quarter but continues to hinder overall OTC performance.

And, as we also mentioned in our last call, in Q2 we lapped last year's very successful introduction of Murine Earigate, resulting in unfavorable comps for that business.

Touching briefly on each of these items, Clear Eyes continues to exhibit solid momentum, with factory sales up 4% and consumption up 9%.

This performance continues to be reflective of the combination of the new item launches and pricing actions of late Q4 last year combined with a very effective integrated television and radio advertising campaign.

Little Remedies grew 37% in Q2, driven by three factors.

The first factor has been the introduction of our Little Noses saline mist, which delivers non-medicated pediatric cough/cold relief in a new form.

This product supplements our existing nasal spray business and is providing considerable incremental growth in the expanding pediatric saline segment.

The second factor has been securing dual placement of many of our Little Remedies items with one of our major drug customers.

Early returns on this program indicate strong incrementality for this customer, and we expect continued success will make for a compelling selling story with other customers.

Our lapping of the one-time costs associated with last year's industry-wide voluntary withdrawal of medicated oral pediatric cough/cold products is the final driver of our Little Remedies growth.

As you may have heard, it was announced in early October that the industry, in consultation with the FDA, is proactively moving to revise graphics and dosage labeling for these products, raising the threshold for usage to age four and above.

This change has allowed us to get our two voluntarily withdrawn SKUs reinstated in a number of accounts.

But it came too late to influence the seasonal cough/cold recess in the majority of our customers.

As a result, there will be a modest benefit to Little Remedies in fiscal '09, but broad reinstatement will not be possible until the fiscal year '10 cough/cold season.

During the quarter The Doctor's brand of oral care products grew 9%, reversing a trend of five quarters of declines.

The Doctor's NightGuard Advanced Comfort anti-bruxism product, introduced in late Q4, was a key driver of this improved performance.

In Q1 it staked out the position as the number one selling anti-bruxism device in the category, and it grew that position during a strong Q2.

This performance was augmented by strong sales of The Doctor's Brush Picks, driven by distribution gains and improved sales velocity at key drug and mass customers.

Moving to our allergen block launch, in Q2 we successfully completed the sell-in and pipeline fill of both the Chloraseptic and Little Allergies versions of this breakthrough innovation.

Public relations support began in mid-August with introductory television and consumer trial building initiatives kicking off in mid-September, when retail distribution reached critical mass.

While it is still very early in the launch, we are pleased with the consumption we have seen during the latter half of the fall allergy season.

Unsolicited consumer feedback has been very positive, and A&P support for this exciting new launch will continue through the fall.

As we saw with last year's breakthrough innovation introductions, Comet Mildew Spray Gel and Murine Earigate, we can also look forward to some halo impact from this advertising support benefiting our overall Chloraseptic and Little Remedies franchises.

Offsetting these strong gains was a 13% decline in our wart care revenues.

While down versus year ago behind the cryogenic segment list price reductions, this represents a significant improvement from the 44% decline we experienced in Q1.

As we discussed on our last call, during Q2 we successfully completed the pricing transition of our Compound W cryogenic product at all major retailers and restored support behind our proven advertising copy.

As a result, Compound W Freeze Off consumption grew over 5% in unit terms during the second quarter.

At the same time, the salicylic acid segment of Compound W remained relatively stable, indicative of the strong loyalty our consumers have for this Compound W form.

It is important to reiterate that we expect second half wart care revenues to be down versus year ago, driven by the cryogenic price decline, but to remain significantly improved from our Q1 performance now that the new pricing paradigm has been established.

Lastly, sales of our total Murine ear business were off 28% in Q2, as we lapped a very successful pipeline sale and trial building support behind last year's Murine Earigate introduction.

Underlying consumption for the total Murine ear business was up 4% in Q2, with Murine Earigate itself up 27%.

The strong Earigate consumption was partially offset by a decline in the base earwax drops and kit business due to heightened competitive activity and isolated inventory issues and distribution losses.

Shifting to our household business, the 2%-plus overall revenue growth was once again led by our largest brand, Comet, which was up 9% over a year ago.

This growth continues to reflect the year two success of Comet Mildew Spray Gel combined with a strengthening of the base Comet powder business.

The spray gel factory sales growth of 52% was driven by distribution gains and continued advertising support, while Comet powder, at plus 13%, reflects our late Q4 price increase and improved velocities at a major mass merchandiser customer.

The strong performance of these two key Comet forms was partially offset by declines in bathroom spray and Comet Cream.

Our Spic and Span and Chore Boy businesses declined during Q2, reflective of heavy levels of competitive activity.

In the case of Chore Boy, we also lapped a large forward buy position taken last year in advance of a September price increase.

And, finally, personal care revenues were down 6% for the quarter.

It is noteworthy that this represents an 11 percentage point improvement from the trailing 12-month trend of minus 17%.

As we mentioned on our last call, the return to the iconic Cutex teardrop bottle is having a positive effect on that business, and its 16% factory sales growth in Q2 is largely responsible for the current amelioration of the negative trend in personal care revenues.

Moving to our international business, revenues were essentially flat, with continued growth in our Canadian business offset by declines in the balance of our international portfolio as we lap the final effects of last year's diversion eradication.

Many of the new items we planned to launch in Canada have successfully entered the market, and dedicated consumer support is underway.

With the impact of diversion now thoroughly behind us, we look forward to accelerated aggregate international performance in the second half.

So that wraps up a review of Q2.

We are generally pleased with the overall results and the restoration of organic sales growth after a challenging first quarter.

We are also fundamentally happy with the quality of our earnings, with gross margin expansion reinvested in A&P, including a 31% increase in advertising spending.

As we indicated in last quarter's call, the investments that we made during the quarter, particularly behind our allergen block launches, should set the stage for improved organic growth in our second half.

Q2 was also another period of progress against our four key strategic thrusts.

As I've touched on certain of these earlier in my remarks, I'll keep this update brief.

The first of these thrusts is a more granular approach to running our business by marshalling the majority of our resources against our focus brands, that subset of brands in our portfolio with the highest long-term growth potential.

We built our fiscal '09 plans around this revised portfolio management approach and subsequently reorganized internally to support it.

In Q1 our focus brands grew 6%.

In Q2 that growth reached 8%.

While we're only six months into execution of this key thrust, these numbers tell us we're on the right track.

Our second thrust is increased emphasis on breakthrough innovation.

I've already spoken to the status of our fiscal '09 breakthrough innovation, Chloraseptic Allergen Block and Little Remedies' Little Allergies.

Equally importantly, our breakthrough innovation pipeline, and particularly our fiscal '10 lead candidates, continue to advance in Q2, and I look forward to providing more details on both the allergen block launch and our future breakthrough innovation ideas in the quarters ahead.

An increased emphasis on international growth, with Canada as the centerpiece, is our third key thrust.

In this regard, we are happy with our underlying Canadian performance year to date and expect continued growth in the second half behind our new products, stepped-up advertising and dedicated internal focus.

With respect to our other international markets, as I mentioned, we are expecting growth contributions from them in the second half, as we will have completely lapped last quarter's -- or rather last year's diversion impacts.

In particular, we are projecting growth in our established markets such as the UK, Australia and Hong Kong, behind new products, new marketing initiatives and selective pricing.

Our fourth thrust is building our internal and external organizational effectiveness.

I've already mentioned our internal moves, realigning our organization behind our new portfolio management approach and carving out dedicated resources to support breakthrough innovation and our Canadian emphasis.

From an external standpoint, our primary initiative is our move to a direct selling organization covering most of our key sales channels.

Here I'm pleased to report that we've made significant recent progress in bringing strong new talent on board, and we are targeting early Q4 for completion of this transition.

So that's a brief update on where we stand against the four key strategic thrusts.

We remain satisfied with our progress to date in these areas, and, while there is still much in front of us, confident that continued diligence will result in improved organic growth in our second half.

And now, some final but important thoughts before we open the call to questions.

Clearly, a lot has changed in our collective world in just the three short months since we last spoke with you.

The economic situation is putting considerable pressure on any number of consumer companies, including ours, and is likely to for some time to come.

While we cannot predict the specific impact to Prestige of rapidly evolving consumer sentiment, we're certainly not entirely immune to its effects or those of a recessionary economy.

However, I feel it is useful to note three areas that provide some measure of comfort as we look ahead.

First, the majority of the products in our portfolio are true consumer staples, and their purchases are incident-driven.

People are still inclined to treat their sore throats, warts, red and dry eyes and children's discomforts despite the prevailing economic situation.

They're also still inclined to keep their bathrooms and kitchens clean, all the more so if in fact they find themselves staying and eating at home more often.

Secondly, although private label products will certainly receive considerably increased consumer consideration in times like these, we believe our emphasis on driving frequent innovation through our focus brands combined with compelling advertising will help insulate them during this period by continuing to build brand loyalty.

As current evidence, with one modest exception all our focus brands have built share in both Q2 and on a year-to-date basis.

And, lastly, as I profiled on our Q1 call, despite recent jumps in input costs, we believe the combination of our systematic cost reduction program, improving product mix and selective pricing will allow us to minimally maintain, if not enhance, our gross margins versus year ago for the balance of the fiscal year.

So, to sum up, we are generally pleased with our Q2 results and the strategic progress that underlies them and acknowledge that continuing this progress is essential to achieving the improved organic growth we anticipate in the second half.

Thanks for your attention.

The call is now open to questions.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Bill Chappell, from SunTrust.

Please proceed.

Good morning.

Hey, good morning, Bill.

I guess if you could talk a little bit more about the A&P spend in the quarter, maybe give us an idea of how much of it was launch-related costs and how much of it we should see as kind of ongoing costs.

And then if there is any more granularity you can give around the new allergen block products in terms of ACV or market share or what gives you the enthusiasm you talked about.

Yes, Bill, obviously, as you know, we're not going to be specific around the spend and how much we put behind each product.

But I would say that what you see in the increase versus year ago primarily is support behind the launch of the allergen block products.

We also have, as we have committed to, second-year spend behind Murine Earigate and Comet Mildew Spray Gel inside those numbers.

So I think you can expect that level of spend, particularly behind the allergen block products, to continue as we move forward and get those established.

Now, clearly, we're moving out of the allergy season and into the winter.

So, while we will continue to spend through the fall, we will go into a somewhat lower level of spend as we head toward the spring allergy season, and then you can expect it obviously to ramp up again as we get toward that time of year.

With respect to the allergen block launch, it's very, very early, and the metrics we are taking our enthusiasm from really are early POS movement that we chart through some of our major retailers.

And we had obviously set internal metrics for how many units per week we expected to move, and right now we're very pleased with the performance against those sets of internal expectations.

Okay.

And switching just to the balance sheet, I didn't fully understand the rationale for the near-term cash build.

Can you just help me understand why do that versus paying down debt in the near term and maybe what your interest, overall interest rate looks like on a fixed to floating?

So, Bill, on the fixed, we are, as you may know, we've had just $175 million of our senior bank debt at LIBOR 2.88.

So that leaves about $75 million that's floating.

And then obviously the $126 million of bonds is 9.25%.

So that's fixed, as well.

And our decision to build cash on the balance sheet is simply because lending, as I'm sure you know, has gotten very tough to come by, and what we want to do is just be sure that we've got sufficient cash so that if we need it we've got it.

So the reason that we wanted to highlight this was because people's models that would normally predict that we're going to pay down between $10 million and $15 million a quarter, certainly that's going to be affected in the short term.

Presumably the cash [here] on the balance sheet is at least earning 2%?

It varies by the day.

It's tiny.

And at the end of the day, what it's earning certainly is less than interest rates that we're paying, even with (inaudible).

Got it.

And one last, can you tell us what the legal expenses were in the quarter?

No, we never say that.

But was it meaningful to EPS?

It was down to year ago, Bill.

That's all we can offer.

Okay, great.

Thanks.

And your next question comes from the line of Joe Altobello, from Oppenheimer.

Please proceed.

Thanks.

Good morning, guys.

Hey, Joe.

How are you?

Good, good.

First question, and I apologize if I missed this, in terms of your top line, it sounded like, Mark, you still expect in the second half to see some improvement, but in regards to your guidance you gave out earlier this year, are you still backing the 2% to 4% growth?

You know, Joe, I think the key message that I want to deliver today is we really are in uncertain times here, and in many ways in uncharted waters.

As we look at that internally, that is obviously still our goal.

If I were to, based on what we do know, and there's a lot we don't know, and more will become clear as we move forward, based on what we do know, my guidance would be to the low end of that range at this point.

Okay.

Fair enough.

And then, secondly, in terms of the economy, obviously you did mention that most of your businesses are staples oriented.

Which brands and categories are most impacted by consumer downturn?

Well, I think it's not so much brands and categories, specifically, as it is when we look at our portfolio some of the items.

The ones that we think may be most sensitive are the higher range items.

For instance, we've got items that are in the $20 range, like our Doctor's business and thinks like that.

And they can be considered to be perhaps more discretionary purchases.

Now, that business has continued to strengthen for us, as I mentioned in my remarks, but an example of the types of specific areas we've got to keep an eye on as we move forward.

I think the vast preponderance of our products, again, in incident-driven categories, we can expect to hold up reasonably well.

Okay.

So it sounds like you're not seeing any major slowdown in your categories, or major trade-downs to private label.

Nothing of significance yet, but I really do need to emphasize that we're still very much in early days on this, and more will be unveiled as we move forward.

Okay.

And then lastly, if I could, in terms of the A&P spend, particularly in the OTC healthcare business, it looks like year over year the spend was up, what, $2.5 million, and your sales are relatively flat, and I was just curious if that was more of a timing issue or was there spending that fell into this quarter where the revenue wouldn't be felt until next quarter?

Did the allergen block launch maybe go a little slower than you guys had thought originally?

You may recall, Joe, that in our last call and I think also in our Q1 press release we specifically mentioned that we'd be making investments in the very latter part of Q2 around the allergen block launch, with the expectation that the preponderance of the revenue we'd get back from that would fall into Q3.

So that's exactly what you're seeing play out here, simply because -- it has nothing to do with the timing of the selling or anything like that.

It simply has to do with the timing of the start of our advertising relative to when we expect the consumption-driven reorders to occur and fall to revenue.

Got it.

Okay.

Great.

Thank you.

You bet.

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

Please proceed.

Good morning.

Hi, Mimi.

I have one relatively simple big picture question.

While it seems as though your new product introductions are relatively successful, they kind of fizzle out after call it 12 months.

So it just -- it makes me wonder, I mean, it seems like you're really having difficulty maintaining a baseline, baseline sales.

So what would you tell me to reassure me that that's not going to be an ongoing problem?

Because it does seem like every quarter there's some slippage in the legacy or not-so-legacy products.

Well, first of all, I would say that we are pleased -- and I think this was the point you were making; if not I'll emphasize it -- we are pleased with year two performance of our new items, in particular the continued growth of spray gel and consumption growth on Earigate.

So we're happy with how those introductions are standing up on a post-12 month basis.

What I think you're referring to in terms of base slippage I think needs to be brought into focus around the primary factor in OTC, which is what's happening in wart care.

You recall that that was the major contributor, if not the sole contributor, to the overall slippage in the category, or overall offsets in the category last quarter.

And that's going to continue to be the primary drag on us for the balance of the year, simply because of what happened in the cryogenic segment.

But beyond that, the balance of the products in the OTC portfolio, with one or two modest exceptions, are performing as we expect and I think holding up well.

Okay.

I understand.

And a follow-up related question would be you talked about your focus brands versus your non-focus brands, and I understand how perhaps non-focus brands could be a source of cash flow, but beyond that why hang on to them?

Well, again, you'll recall that there is a subset of those as you call non-focus brands that we are clearly intending to divest when we can get appropriate value for them.

It's a very, very uncertain market now.

Sure.

The timing on that remains TBD.

We continue to dialog with prospective parties on that subset of brands, which represents about 10% of our revenue base, on a regular basis.

But we --

Are they products outside of personal care, as well, or just personal care brands that you've talked about in the past?

Yes, it's the personal care brands represent the majority of that, as they consistently have.

But as we embarked on our new strategy you may also recall that we added a number of our very small [tail] OTC brands to that group.

Okay.

Those [tail] OTC brands represent about 3 or 4 percentage points of that total 10% revenue, and we're adopting the same stance with those as we have for some time with personal care, which is they are ones that are not key to our future strategy.

They are a drag on our top-line growth.

And while they are contributing cash, they are not part of our long-term picture.

However, they are providing value.

They are providing cash.

And so we're being discriminating in terms of the values we're looking to receive for them.

Okay.

That's helpful.

Thank you.

You bet.

And your next question comes from the line of Neely Tamminga, from Piper Jaffray.

Please proceed.

Good morning, gentlemen.

I just want to flush out a little bit more on the relationship with the retailers right now.

As you may be aware, October same-store sales are being reported this morning, and it is grim, indeed, and the expectations are for an even grimmer outlook in November, whether you're talking to Wal-Mart or Target and what have you.

And just really kind of two questions here.

One would be, could you give us a sense of maybe how the different types of retailers, whether you're talking to the mass merchants, drugstores or food outlets, traditional food outlets, how they might differ in terms of how they're asking to have product flow to them in weeks of supply, etc.?

Are they looking to take those weeks of supply down as they've done historically in crunchier times?

And then maybe secondly, not intending to be the grim reaper on the call here, but it is very clear, at least from a retail analyst here on this side of the phone, that we potentially may be seeing some store closings and chain closings next year.

Just wondering what sort of smaller chain percentage makes up some of your distribution and then whether or not you've actually taken in an allowance for doubtful accounts?

Thanks.

Sure, Neely.

Let me try and take those in the order that you asked them.

I would say as far as inventory positions, the retailers that we deal with, we haven't seen any significant change in their approach to that in terms of the overall level that they're trying to hold from weeks of supply standpoint.

They have generally kept a very low weeks of supply on our products historically, and Wal-Mart continues to keep the pressure on, obviously, as the kind of industry leader or the vanguard leader in that regard, but our sense is we are at comfortable levels with even them at this stage of the game.

We haven't seen any meaningful change in their behavior nor the behavior of the other channels.

What we are seeing is the channel shifting in terms of where our purchases are coming from.

This continues a trend that we saw actually in the first quarter where some of the purchases that historically may have been made in the food channel seem to migrating over to the mass channel and some of the mass channel purchases seem to be migrating even further downstream, if you will, to the dollar stores.

And so we're keeping a close eye on that trend.

Overall, it's not impinging on our business, but it is causing us to revisit the emphasis we place on each of those particular channels.

With respect to the question on -- I'm sorry, the third part of your question?

The smaller chains, how much of your business is smaller chains?

Yes, the smaller chains, yes, that's right.

We do about 65% to 70% of our business with our top 10 retailers and the balance of it with the smaller chains.

We're keeping a very close eye on the smaller chains.

So far the cash flow coming from them, their payment streams have been consistent with history.

But our credit department has done a very good job isolating the potential risk in that downstream set of accounts and stepping up our vigilance on them.

We haven't done anything in particular with respect to upping reserves at this point, but we are paying much closer attention to that group of accounts than we have historically, and I think that's what's called for at this stage of the game.

I'll ask Pete to comment further if he'd like.

The other thing we've done, Neely, is that we have insured a group of smaller accounts, so there's insurance out there in the event any of them (inaudible).

Okay, interesting.

And have you actually changed any of your payment requirements for some of these smaller chains for payment up front or something to that effect?

No.

We traditionally have been pretty well right on top of them.

So what we are doing is if anybody misses a payment or starts to slow down, they get a call very quickly.

All right.

Excellent.

You guys, good luck out there.

Okay?

Thank you.

Thanks, Neely.

And your next question comes from the line of Olivia Tong, from Merrill Lynch.

Please proceed.

Hi, good morning.

Good morning.

How are you?

Good, thanks.

Good.

Just wanted to get back to the top-line outlook of sort of at the low end of the 2 to 4.

I think that still, if my math is correct, still implies 7% growth in the second half.

I'm just wondering sort of if you could walk me through a little bit the components of that.

Without being specific, because we don't go to that level of detail, I will tell you that the same drivers that we discussed on the first quarter call prevail, and that principally is our new item launches, led by the allergen block products, and also there are several other new items in our cough/cold categories that are just gaining traction as we head into this season.

So the combination of the allergen block launches and the cough/cold new items are a key part of that change.

The other thing I'd say is from -- back to a little bit of what Neely was asking -- from an inventory standpoint, starting last year the retailers in their cough/cold sets went to more of a consumption-driven purchase cycle on their cough/cold products, meaning that instead of taking a big load, or a big preseason buy at the end of the second quarter, they pushed more of those sales into the third and fourth quarter as they waited to see how the cough/cold season played out.

This year we're seeing even more of that, and, as a result, on a year-over-year basis we'd expect the cough/cold business for our second half, just in general, baseline, forgetting even the introduction of new products, to be up versus year ago.

And then the last piece of it is our Little Remedies business was really affected last year in the second half by the absence of the two cough/cold SKUs that we voluntarily withdrew.

This year on a year-over-year basis we actually have those back with a few of the retailers, as I mentioned, so the comps this year to last year on the back half on Little Remedies are much more generous.

So if you take all those factors and roll them up, that -- those are the key drivers that are pushing us to, as I said, improve organic growth in the back half.

Okay.

Thanks.

That's very helpful.

On Compound W, I know you're expecting it to continue to be down year over year in the second half, but should the slowing -- should the slowdown continue at this run rate, or do you expect it to -- the deceleration to get better?

Yes, well, again, we won't give out specific numbers from a forward-looking standpoint, but I would offer that we would expect the run rate in the back half to be much closer to what we experienced in the second quarter than what we experienced in the first.

And the other point there, Olivia, is that the winter months are the lower sales months for the wart removal products.

Right.

Right.

Okay.

In the last call you had referenced there may be a price increase on about 10% of the business.

Is that still the case?

Yes.

Yes, that is.

And the average price increase on that 10% of the business is about 5%.

Okay.

Can you talk about which brands that's affecting?

It's across SKUs primarily within the household segment, not the whole brands, but the various SKUs.

Got it.

And on G&A, the decline as a percentage of sales, is that all from legal expense, or are there other pieces in there, as well?

Primarily legal is the big one.

Most of the other categories were pretty flat the last year.

Okay.

Got it.

Thanks very much.

You're welcome.

And your next question comes from the line of John Anderson, from William Blair.

Please proceed.

Hi, guys.

This is actually Ryan Sundby, for John.

How are you doing?

Hey, Ryan.

How are you?

I'm doing good.

Hey, just real quick, it sounds like the allergen launch went pretty well.

I was just wondering, as you're working with retailers here, are you getting an idea is this going to be a bigger opportunity than you thought, or is it kind of just meeting your expectations?

How do we kind of think of it?

Again, Ryan, it's very early days.

The launch is meeting our expectations based on the metrics we have in hand right now.

So it would be, I think, inappropriate to forecast either way off it right now.

We'll obviously have a better look at it to share with you as we get through our third and then certainly our fourth quarters.

Okay.

And then just from, just to understand that, how does the seasonality in that business work?

There are really two allergy seasons -- outdoor allergy seasons in the US.

There is a fall allergy season, which generally tends to run from mid-September through late October, and then there is a spring allergy season, which actually is the bigger of the two seasons, which tends to run kind of April through June.

And so obviously retailers will take a position on allergy products in advance of each of those seasons.

We caught the second season with our sell-in simply because that's when they tend to reset that part of the category.

But obviously we're looking forward to the benefits of their advance buys on the bigger April-June season as we look to our fourth quarter.

Okay.

Thank you very much.

You're welcome.

And your next question comes from the line of (inaudible), from Barclays Capital.

Please proceed.

Yes, actually, my questions have largely been asked, but I'm just wondering, how closely do you monitor and how accurately inventory at retail?

Well, we keep an eye on inventory at retail two ways.

We basically have consumption models that we run in-house, where we use factory sales, IRI and POS data to drive our own calculations.

And then what we try and do is corroborate those by spot retail audits with our field regional vice presidents, who periodically go in to the customers and do some cross-checking with them to determine what the actual inventories are from the customer's standpoint.

But unlike POS you're not getting actual physical inventory estimates from your key customers?

We don't get them on a regular basis, but, as I mentioned, when we ask for them we can get them.

I see.

Okay.

And you talked about some higher costs.

Are you largely able to offset those costs, whether it's through pricing, mix or any kind of efficiencies?

Yes.

As you may recall, we've had ongoing cost reduction programs virtually since Mark walked in the door, and that has served us well.

In fact, up until probably the first quarter of this fiscal year, when oil prices went crazy, we largely were ahead of the curve.

First quarter, because of that dramatic rise, we held our own, and now we'll see where we go from here.

Certainly the downward oil pricing and other commodity pricing is -- looks like it's going to moderate those increases.

Okay.

And are there product lines that you are more concerned around unfavorable mix trends than others?

I'm not sure specifically (inaudible).

Where would you possibly see potential trade-down and therefore negative sales mix in your product portfolio?

Well, again, as to my earlier remarks, the ones that we will be monitoring most closely will be the items in our line that have the individual SKU high range.

I used The Doctor's NightGuard, which is our anti-bruxism device, as an example, because our average retails there are between $20 and $25, and there is a private-label alternative in that category.

So when you get to that kind of out-of-pocket expenditure for an individual item, particularly one that can be judged to be somewhat more discretionary, it's an example of one that I would consider to be more vulnerable than a $5 or $6 purchase of a strong brand like Chloraseptic in the sore throat category, where the differences in price between us and private label coupled with the strength of our brand give us what I believe is more insulation.

Got it.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS)

And your next question is a follow-up question from Joe Altobello, from Oppenheimer.

Please proceed.

Hey, guys.

Just very quickly, in terms of, Mark, your comments earlier to Neely's question regarding the shift amongst channels from food to mass and mass to dollar, what kind of impact is that having on margins, and what we should we expect going forward?

You know, it's really having a de minimus impact on margins, Joe, in particular, on the food to mass changes, because the margins we earn for our mass customers are essentially equivalent to the ones we earn with our food customers.

The mass to dollar is generally happening in our household business, in particular, which is -- household is the piece of our business where we do -- we have the biggest presence with dollar.

And there, through cost reductions that Pete was talking about and specific pricing actions, we've also been able to hold our own.

So we're not really feeling as though that kind of channel shifting, at least at this stage of the game, is going to be a real impediment to what we expect to get out of our gross margin profile.

You know, Joe, just to add to that, the dollar store products we size to fit the dollar store price point.

So, to Mark's earlier point, the margins are very similar dollar to mass.

Got it.

Okay.

In some cases the dollar store customers also pick up, which helps us on the distribution leg of the margin structure.

I see.

Okay.

Thanks a lot.

And your next question is another follow-up question from Mimi Noel, from Sidoti and Company.

Please proceed.

Hi again.

I wanted to ask about advertising.

Have you seen reduced rates in the marketplace lately?

We haven't seen reduced rates per se in terms of rate (inaudible), Mimi.

Yes.

But you may recall that one of our marketing innovation initiatives this year was to take a look at how we as Prestige buy advertising.

Okay.

And we've been experimenting with different approaches to buying this year across a handful of our brands.

And it's really a walk before we run sort of thing.

But on the brands where we have gone to a different approach to buying, utilizing a different buying agency and a different mix of media, we've been very happy with the results, in terms of the efficiencies we've been able to get.

Now, that's a statement for our buying, Prestige, not an industry statement that I think you were asking.

But I just wanted to bring that out, because we have talked to that in the past.

Yes, yes, more to the heart of the matter, so that was helpful.

And how much do you spend annually on advertising, if you strip out the promotional expenditure?

Well, we don't give those specific numbers either, Mimi, but I will say that the majority of what you see in the A&P line is advertising.

All right.

That's helpful.

Thank you very much.

You bet.

You have no questions at this time, sir, and I would now like to turn the call over to Mark Pettie for closing remarks.

Just thanks again, folks, very much for listening in today.

We look forward to chatting with you again with our Q3 results.

Have a great day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.