Prestige Consumer Healthcare Inc (PBH) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter fiscal year 2009 Prestige Brands Holdings Inc.

earnings conference call.

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

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

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

(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 third-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 risk and uncertainties which in many cases are beyond the control of the Company and may cause actual results to differ materially from management's expectations.

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

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

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

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

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

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

I will follow that with highlights of our segment performance and a look ahead.

We will then open the call for questions.

So getting underway our reported total revenues for the third quarter were $80.3 million, $100,000 above last year.

As indicated in our press release, this slight increase in revenues for the quarter 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 our base Chloraseptic and Little Remedies lines and our Dermoplast, New-Skin, and Cutex franchises.

Partially offsetting those sales increases were declines for certain other OTC, household, and personal care brands.

Moving to our bottom line, reported net income for the quarter of $8 million or $0.16 per share was $400,000 or 5% below last year's reported net income of $8.4 million or $0.17 per share.

The reduction in net income was primarily due to increases in advertising and promotion and G&A expenses partially offset by a significant reduction in interest expense.

Finally, cash flow continues to be a particularly bright spot as we generated $16.4 million of free cash in the quarter, an increase of 20% over the third quarter last year.

Our ongoing, strong cash generation helped us build our cash on hand at December 31 to $27.9 million from $12.6 million at September 30.

Total debt at December 31 was reduced to $384.3 million as planned.

So that is the summary for the quarter and now I would like to turn the call over to Pete, who will provide additional commentary and financial detail.

Thanks, Mark.

Good morning, everyone.

Although net revenues for the quarter of $80.3 million were slightly above last year's net revenues, our operating income for the quarter of $20 million was $2.9 million below last year's operating income of $22.9 million.

Net income of $8 million was $400,000 less than last year's net income of $8.4 million.

The operating income decline on essentially flat revenues was due to increased advertising and promotion expenses of $1.9 million and increased G&A expenses of $2.1 million compared to last year's third quarter.

Partially offsetting the operating income decline in the quarter was a $2.2 million reduction in interest expense in the current year's quarter due to the large pay down of debt over the past year combined with significantly lower interest rates in the current year compared to last year.

Our average interest rate paid on our senior secured term loan facility dropped from 6.76% in last year's quarter to 4.36% in the current year's quarter.

As I discussed on our last call, our intent is to build a cash reserve on our balance sheet of approximately $30 million.

As Mark indicated in his remarks, we ended December with a cash balance of almost $28 million.

That was slightly ahead of the pace that we expected when we put the plan into effect, so towards the end of this fiscal year when we have built our reserve it is our intention to resume the debt pay down.

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

Despite the flat revenues for the quarter, cost of sales of $37.8 million was $1 million or 3% below cost of sales in the prior year's quarter.

As a percent of revenue, cost of sales declined from 48.3% in fiscal year 2008 to 47.1% in 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.

Advertising and promotion expense of $11.4 million was $1.8 million or 19% greater than A&P expenditures of $9.6 million last year.

Introductory A&P spending against new Chloraseptic and Little Remedies Allergen Block products was the primary driver of the increased spending for the quarter.

G&A expense of $8.3 million was $2.1 million greater than prior year's expense of $6.2 million.

This increase was primarily due to two factors.

In last year's third quarter G&A expends benefited from a large reduction in our accrual for long-term incentive compensation, resulting from the reversal of expenses associated with certain stock-based incentive compensation that did not advance because performance targets were not achieved.

The LTIP expends in this current year's quarter was $1.1 million greater than the credit recorded in last year's third quarter.

The second driver of the G&A increase is related to currency translation costs, primarily related to converting Canadian dollar-denominated receivables into US dollar payments.

Although legal expenses in the fiscal 2009 quarter declined compared to last year's comparable quarter, the litigations 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 let's briefly look at third-quarter financial results by segment.

Net revenues for the OTC segment of $47.6 million were $2.5 million or 6% greater than last year due to the sales of our new Chloraseptic Allergen Block and Little Remedies Little Allergies products plus sales increases on the base Chloraseptic and Little Remedies businesses as well as New-Skin and Dermoplast brands.

These sales gains were partially offset by declines on the Clear Eyes, Compound W, Wartner, and Murine brands.

Gross profit for the segment was $30.7 million, 9% above last year's gross profit of $28.1 million.

Gross profit as a percent of revenues was 64.5%, an improvement over the prior year gross profit of 62.3%.

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

Contribution margin of $21.2 million for the segment was 1% greater than last year's contribution margin of $21 million for the quarter.

A&P spending for the segment of $9.5 million in the current year was $2.5 million or 34% greater than last year's A&P spend of $7 million.

The increase was driven by the introductory television advertising in the Chloraseptic Allergen Block and Little Remedies Little Allergies products.

Household products net revenues of $28.1 million were $2 million or 6% less than last year.

All three brands in the segment experienced sales declines compared to last year's third quarter.

Gross margin for the segment of $9.9 million was $1.9 million below the prior year.

The decline was due to the sales decline combined with increases in product costs.

The Household Products segment contribution margin for the quarter of $8.1 million was $1.4 million less than last year due to the gross margin decline combined with a $500,000 decrease in advertising and promotion spending.

Net revenues of $4.5 million from Personal Care segment were $600,000 less than prior year.

A sales increase for Cutex was offset by the declines on the Denorex and Prell brands.

Gross profit of $1.9 million was $300,000 better than last year despite the sales decline.

Last year's quarter included an obsolescence reserve of $500,000 for discontinued items in the Cutex line.

Contribution margin of $1.7 million was $400,000 greater than last year due to the gross profit increase.

Free cash flow for the quarter, which we define as operating cash flow less capital expenditures, was $16.4 million.

That represents a $2.8 million improvement over free cash flow of $13.6 million generated in last year's quarter.

The improvement was due to an improvement in working capital.

Now I will turn the call back to Mark who will provide additional perspective on the third quarter.

Thanks, Pete.

Before I get underway with my Q3 remarks, I will reintroduce the quick reminder that when I speak of consumption I am talking about consumption across all channels, which includes traditional food, drug, and math as measured by IRI plus actual sales results in non-measured channels.

These non-measure channels, which include dollars 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 be a misleading indicator of our brands' overall performance.

Before I get into performance specifics let me provide some macro perspective on Q3.

For us here at Prestige it was truly a Jekyll and Hyde type of quarter.

When we spoke with you in early November about our Q2 results and outlook we had also just completed an encouraging October month in which factory sales had increased meaningfully over year-ago giving us a degree of comfort about Q3.

Enter November and December when things turned dramatically south in terms of consumer and retail conditions.

As evidence, October same-store sales for our top five customers range from plus 5% to minus 5%.

In November that range eroded to plus 3% to minus 10% and in December comp store sales increases at the best-performing customer in this important group dropped to less than 2%.

I know I don't need to remind you who is at each end of those ranges, but the point is that as our customers' businesses suffered so did our factory shipments.

As a result of the rapid change in consumer purchase behavior retailers also tightened their inventories as the quarter progressed exacerbating the factory shipments impact.

In November, for instance, consumption of our products exceeded factory shipments by over five percentage points.

As we look forward this is a situation that we expect to continue until retailers regain confidence, confidence that will only come with a sustained improvement in consumer purchase behavior.

However, underneath the impact the economy seems to be having on our retailers and categories in general there is good news.

As with last quarter we were once again able to grow share across the majority of our focused brands, a continuing testimony to the strength of our core equities and the innovation and strong marketing we are bringing to them in these most uncertain of times.

In addition, share trends improved on a number of other brands as we moved through the quarter.

That said let's take a closer look at each of our segments.

In our OTC segment, revenues grew 6% led by the introduction of our innovative new Chloraseptic and Little Remedies Allergen Block products.

Increased sales of our base Chloraseptic and Little Remedies businesses and improvements in New-Skin and Dermoplast performance.

As I recounted on our last call, our Allergen Block products were sold into retail during Q2 with introductory consumer support beginning late September during the latter half of the fall allergy season.

That support continued as planned through mid-November and consumption during that supported period was in line with our expectations.

Consistent with historical category behavior, a consumption slowdown was projected heading into the winter months.

While that did occur, it appears to have been somewhat exacerbated by the simultaneous sharp decline in economic conditions further reducing the rate of consumer take-away and consequently factory reorders during the unadvertised period we are currently in.

However, consumer and customer feedback on both Allergen Block products remains very positive.

We are allergy eagerly looking forward to fully participating in the spring allergy season, which begins in earnest in March and generally runs through our fiscal first quarter.

Category consumption during this period is historically around 80% greater than the fall season.

We expect to meaningfully capitalize on that opportunity when we re-engage our multiple Allergen Block consumer support vehicles next month.

Strength in our base Chloraseptic and Little Remedies businesses quarter was driven by the continued success of our innovative new cough/cold items and the absence of certain residual one-time costs associated with the year-ago voluntary withdrawal of two Little Remedies medicated cough/cold SKUs.

The fact that both brands were able to build share in declining categories this quarter is further testimony to the contribution of these new items -- Chloraseptic Max Spray and Lozenges and Little Remedies Saline Mist -- and the underlying strength of the brand equities.

We also believe these businesses are benefiting from the halo effect of the Allergen Block introductory support.

Despite this success I do want to point out that category performance is a washout for us in Q4 as once again the first portion of this cough/cold season is softer than prior year with cough/cold incidences down 5% to 6% to date and sore throat incidences down 3% to 4%.

New-Skin and Dermoplast growth during the quarter primarily reflects promotional timing changes versus year-ago, although New-Skin continues to extend its sizable share leadership position in the liquid bandage category.

Partially offsetting these strong OTC performers was our Murine Ear business.

We have now fully lapped last year's Murine Earigate introduction and trial building period and consumption has declined on this unique earwax prevention product.

While we strongly believe that prevailing economic conditions are also having some effect on consumption of Earigate, we are aggressively working to understand what other factors may be suppressing take-away and we will be developing remediation plans with equal urgency.

Work Care revenues declined 17% in Q3, reflective of the continuing impact of the price decline taken in the Cryogenics segment entering this fiscal year.

The performance is in line with our expectation for this business since we cleared the pricing transition period that occurred in Q1 and early Q2.

Lastly, Clear Eyes revenues were off versus year ago, also principally due to changes in promotion program timing.

Importantly, underlying consumption for this largest of our OTC brands remained quite strong in Q3 at plus 8% reflecting the impact of both our March pricing action and underlying unit growth.

In addition, we have a new and powerfully differentiating claim that we are currently introducing on our packaging and through our radio advertising.

Specifically, Clear Eyes is the first brand of eye care products to offer up to eight hours of soothing relief across every item in our line.

This tangible indication of the duration of relief provided by every Clear Eyes product is a strong purchase motivator with category consumers that effectively distinguishes us from the competitive set.

We look forward to its role in continuing Clear Eyes growth momentum.

Turning to our Household Products business, revenues were off 6% in Q3.

After two quarters of strong growth, Comet, our largest business, leveled off to essentially flat year-on-year revenues.

This is primarily the result of fully lapping last year's successful introduction of Comet Mildew Spray Gel combined with increased competitive activity in the bathroom spray category.

As we have previously mentioned, Household Products is the segment where we have seen the most pronounced channel shifting by consumers.

And in those mass and dollar accounts we can measure, Comet is doing well with consumption up over 5%.

Our Spic and Span and Chore Boy businesses declined during the quarter leading to the overall decline in Household performance.

Spic and Span softness reflects a challenging competitive environment partially offset by modest category growth as consumers look to consolidate their household cleaner purchases into fewer more multi-purpose products.

The Chore Boy decline is principally centered in the wholesaler class of trade.

This represents a large piece of the Chore Boy Copper Scrubber business and flows to consumers via unique unmeasured distribution channels such as bodegas and small C stores.

We are actively evaluating options to stabilize this important piece of the Chore Boy business in these difficult times.

Finally, on the domestic front, Personal Care revenues were down 10% with modest growth in the Cutex business offset by anticipated declines in our shampoo brands, primarily Denorex.

Moving to our international businesses, reported revenues were off 11%.

However, it is important to note that our underlying revenues after the removal of unfavorable currency impacts were up over 7%.

This principally reflects for the first time in a long while growth in our non-North American markets.

This increase is driven by organic growth from new product introductions and distribution gains in the UK coupled with finally having completely lapped last year's diversion issue.

So that is a review of the key drivers underpinning our Q3 performance.

It was clearly a very challenging quarter for us, particularly the months of November and December, as consumer and retailer behavior adjusted significantly.

It was also a quarter that gave us a better look at the difficult conditions ahead and their likely consequences.

While the fog is not entirely off the window, what we are seeing does make us quite cautious as we head into our fourth quarter and develop our plans for next fiscal year.

Although I have touched on a number of these areas in my earlier remarks, let me amplify just a bit on what we see occurring across two of our most important constituents -- our retail customers and our consumers.

First, with respect to our retail customers, we are seeing an emphasis on continuing inventory reduction and working capital conservation unlike anything I have witnessed in my career.

While it is actually [axiomatic] that this trend must stabilize at some point, it may be a while before that occurs with a strong possibility of some over correction by retailers before the new equilibrium is reached.

Simultaneously, customers are rationalizing SKUs at an unprecedented rate.

For us that increases the pressure on our smaller Personal Care and OTC brands that 10% or so of our revenue base that is already declining at a steady rate.

And compounding this pressure on national brands is the increasingly aggressive stance on private label and store brands being taken by many retailers.

At the same time consumer behavior is changing even to some extent in the traditionally stable areas where the vast majority of our business resides.

As I mentioned earlier, overall store traffic is down and that is showing up in the short-term trends across a number of our categories.

We believe consumers are showing a reluctance to spend their shrinking dollar on new technologies no matter how compelling the propositions, particularly where they have a familiar alternative.

These trends and mindsets are very likely to continue until the macroeconomic environment appreciably improves and restores basic consumer confidence.

So what does this mean for Prestige in Q4?

We do expect a Q4 that presents a full three months of the same type of challenging environment we encountered in the latter two months of Q3.

While our brands enjoy the number one or number two position in the majority of categories in which we compete, much will depend on the underlying performance of the categories themselves.

And in addition to the retailer and consumer dynamics I described, currency will also continue its drag on our international business revenues in Q4.

Net for this year is that where we had previously projected reported sales growth at the low end of our 2% to 4% long-term range, we now see ourselves falling short of that goal.

Needless to say, we are preparing our plans for fiscal '10 with a clear and objective appreciation of the lessons of Q3 and this outlook for Q4.

While our focus brands provide the strong foundation from which to build, we must make adjustments in certain areas.

For instance, we must broaden the scope of our smaller scale, sustaining innovation initiatives to protect our distribution base and continue to present consumers with attractive value-added alternatives to private label and branded competitors.

At the same time, on the breakthrough innovation front we must work to get our Murine Earigate business back on track and prove the considerable potential of our Allergen Block products in the upcoming spring season while continuing to advance our pipeline of future opportunities.

In addition, where we have an advantage price value story to tell, such as with our Wartner Cryogenic Wart Care business, we must effectively do so.

We must maintain our emphasis on marketing spending innovation so we can continue to efficiently build brand equities and loyalty across a broader cross-section of our portfolio.

Coupling selective increases in working A&P support with a broader, sustaining innovation agenda we expect to better insulate our distribution base and growth prospects as we face the realities of our current and foreseeable operating environment.

Complementing these actions in fiscal '10 will be full realization of the benefits of our move to a direct-selling model for the majority of our business which we will complete early this quarter.

To ensure we have adequate support for these essential in market activities we are reviewing every aspect of our cost structure looking for opportunities to further improve on our already very efficient operating model.

We are also assisting our major work processes to increase our probability of executing with both speed and excellence in everything we do.

We believe all the steps I have described are critical to succeeding in this turbulent time and to maximizing our prospects in fiscal '10.

In our last call I pointed out that despite the strength and composition of our portfolio we are not entirely immune to the effects of rapidly evolving consumer and retailer sentiment and the overarching effects of a recessionary economy.

That proved to be the case in the latter part of Q3 and will continue to be so in Q4 and into fiscal '10.

However, our understanding of the situation grows daily and with it our appreciation of and appetite for the things we must do to successfully navigate these choppy waters.

While we expect to fall short of our growth objectives for this year and in fiscal '10 we anticipate we will see a continuation of this difficult environment, I am confident that we have the brands, the people, and the passion to emerge an even stronger company than we are today.

I look forward to speaking with you more specifically about Q4 and our fiscal '10 plans and outlook on our next call.

So for now thank you and we would be happy to take questions.

(Operator Instructions) Bill Chappell, SunTrust.

Good morning.

I guess the first question on the inventory destock issue, have you seen any kind of improvement as we move to January or early February?

Or do you expect it's an ongoing process; it's going to carry throughout this quarter?

Bill, from our perspective as we look at December and January we have seen no improvement.

And so as we think ahead we expect it to continue until some new equilibrium is reached.

I think it will be interesting as we get into what for many of these retailers is their new fiscal year to see if there is any short-term change in their behavior.

But as far as we are concerned, as we look ahead and construct our plans we are not anticipating that.

And in terms of the new product commentary that you need to step up some of the secondary new products, does that imply that by focusing too much on the two or three big products per year you had kind of neglected some of the brands and the retailers are kind of penalizing you for it?

I wouldn't say they are penalizing us, Bill, but I would say there is a recognition that as shelf space becomes even more of a premium that to protect the distribution on our brands we are going to need to push our innovation agenda kind of further down the brand continuum.

So it's not an acknowledgment of too much focus on the big initiatives.

We certainly feel like that approach is one that we want to continue into the future, but it is a recognition that there are some vulnerabilities further down our portfolio that we need to address via some additional innovation on a smaller level on some of our other brands.

One separate one, I don't claim to be a healthcare specialist but what is going on with kind of the cough/cold season?

It seems like every year it's down and I can't imagine a better climate in terms of cold, wet weather over the past three or four months that should have helped the season.

Is there something going on where we should expect it to be constantly to be flat to slightly down?

Yes, Bill, we have touched on this before and I think the comments we have made previously are more and more becoming part of the reality.

And that is that as consumers get more conscious about preventative measures that they can take and more and more opportunities such as hand sanitizers, flu shots, etc., are out there on the market to help them address their preventative behavior, preventative interest, it is reasonable to expect that cough/cold -- the structure of the cough/cold environment is going to continue to decline until it levels off at some sort of new lower equilibrium.

I think it would be overly optimistic to expect that after three or four consecutive years of decline that this thing is all of a sudden going to bounce back to the norms that we saw three or four years ago.

I think there really are some structural things going on and it's evidenced by consumer behavior.

That is a reality we are going to have to deal with going forward with our cough/cold products.

I think the good news for us and one of the things that we were keenly interested in with our move into the allergy category with Chloraseptic and Little Remedies was to diversify some of that potential risk on those key brands by getting into additional growth categories.

One last question, on the wart remover category was the decline all price or are you still losing some market share?

We are still losing some market share, but the rate of decline in market share is moderating for us considerably and in line with the expectations we said as we looked at how we thought this year would play out.

Okay.

Thanks.

We are satisfied with the way things are shaking out in those dynamics as we head to the fourth quarter of this year.

Got it.

Thank you.

Olivia Tong, Bank of America Merrill Lynch.

Good morning.

Just wanted to see if you could give us any sense of how much the inventory destocking played a part and are certain categories more impacted than others?

We don't have a firm number to give you on that, Olivia.

I gave you some evidence in terms of the difference between our factory shipments and the underlying consumption of our businesses in the month of November and that trend continued into December.

As far as categories that seem to be more affected versus others, it seems to be occurring across the board at retailers seem more and more willing to thin the number of items on their shelves and in their backrooms as they try and conserve cash and improve their working capital position as well.

Obviously, it's something we are paying very, very close attention to.

And as I mentioned, a keen point of interest for us as many of these retailers click into their new fiscal years will be to see if any of that behavior moderates through February and March.

Got it.

Are you seeing any loss in shelf space at this point?

No, not really.

Many of the resets that we go through in a number of our categories have already taken place and so we have been able to hold our own on our key brands through those.

The watch out for us going ahead as I mentioned is the increase in interest in private label products by a number of our retailers.

And while that hasn't evidenced itself or manifested itself in major shelf changes yet, it's certainly something that is going to be part of the dynamic in the months ahead.

Got it.

Taking into account move more towards private label and consumers looking for -- looking at price of a lot more and the inventory destocking things like that, I know it's still a little bit early but is it prudent to assume that the 2% to 4% long-term growth on the top line, the long-term target, is someone at risk for fiscal '10 as well?

We haven't completed our fiscal '10 plans yet, Olivia, so I will be prepared to talk to you about that more in May.

But as far as the long-term target of 2% to 4% goes, which as we have always said in any given year we could be above that or we could be below that, we have not come off that as our long-term goal at this point.

Got it.

Lastly, on advertising expense in Q4 should we expect a similar run rate to what you saw in Q3 as you sort of continue to build support for the new products?

I think in Q4 you wouldn't expect the rate in Q3.

Remember that Q3 has a heavy dose of spending behind our allergen product introductions.

We got those set in and turned on the consumer support at the tail end of September.

The fall allergy season basically ran out through October into the middle of November, so we were strongly supporting our Allergen Block products during that period.

We are now in the down trough of the allergy season and it really doesn't start picking up in earnest, as I said, until March.

So while we will be back on air in supporting those products in March, for a couple of months that type of support will not be repeating itself in the way it did in Q3.

So the bottom line is, no, the run rate for Q4 you should expect to diminish.

Got it.

Thank you very much.

Joe Altobello, Oppenheimer.

Good morning, guys.

First question, Mark, I just wanted to go back to what you mentioned with the question from Olivia earlier about the private label.

Which categories are you seeing the most emphasis by the retailer in private label?

It sounds like it's mostly household care but I just wanted to confirm that.

No, we have seen them, Joe, express a strong interest in the OTC side as well, in moving their presence in OTC up.

As you know most of our OTC categories the private-label presence is under double-digits.

It's mid to high single-digits and it has been fairly stable over time.

But as they look at opportunities to improve their margin structure and certainly look at the opportunities that this economy is giving them to provide a different value equation to their consumers.

They are getting more aggressive and publicly stating that in terms of wanting to build their store brands pretty much throughout every aisle in the store.

So it's certainly not restricted to just household.

We are seeing increasing pressure and increasing interest in their part in the OTC aisles as well.

Where is the pressure the most acute?

Is it Chloraseptic?

Is it Clear Eyes for example?

No, again, there is no one category and they haven't really started to build out their presence in any category yet, Joe.

They are talking about this more than acting on it right now, but it's clear from their rhetoric that they are more determined in this area than they perhaps have been in the past.

And so we will have to see where they elect to really marshal their resources and place their emphasis.

I would suspect that they will look at categories that are perhaps more fragmented as the opportunity to drive their presence first versus ones where there are a handful of strong national brands.

But it's early days and it's tough to give you any particular guidance about where they might place a particular degree of emphasis at this point.

And this is not one retail or one channel, it seems like it's across the board?

Yes, it is across the board.

We are hearing it as much from the national chain drug guys as we are from the big mass players.

The only ones that aren't making a big play in this is the dollar guys at this point.

But where we have a lot of our revenue streams in mass and drug is where we are hearing a lot of this and it is, as you said, not restricted to one or two players.

It's a fairly consistent message from the major players in those channels.

Got it.

In terms of the top line, obviously sales were flat.

And I apologize if you gave this, but what was overall consumption in the quarter for your brands?

Overall consumption --

I know you gave some monthly numbers.

Yes, overall consumption in the quarter for our brands, and this is without some of the unmeasured channels that we don't have visibility to which is dollar stores and things like that, but it was about flat as well.

Okay.

Lastly, if I could, in terms of the direct-selling model you guys are moving to now in fiscal 2010 I guess, how is that going to change the overall P&L?

I imagine you will probably get some higher gross margins coupled with some higher SG&As, but how will the model change or will it change dramatically as we move into next year?

No, it won't change dramatically at all, Joe.

If you recall what we are really doing is we are taking in our drug, mass, and dollar channels what we are really trying to do is move to a model where we have a direct relationship with the key buyers in each of those channels.

Meaning that the person that calls on the key buyers is a Prestige employee, Prestige salesperson instead of a broker, which we have had in many of the cases as an intermediary between us and that customer.

So we are basically swapping broker commission expense out for direct expense.

All of that falls below the gross margin line and we were able to do that -- we have stated we were planning to do that and we have been able to do that is essentially breakeven to our EBITDA numbers.

So what we get out of it is we get, we believe, considerably improved line of sight to our key buyers, better ongoing relationships with them, stronger dialogue with them around trade promotion programs, around new product innovations, we get to engage them in our innovation planning on a more direct basis.

All of which at the end of the day builds stronger relationships with them which are obviously increasingly important in these types of economic times.

And are those benefits a 2010 event or beyond?

2010.

We have basically done all the restructuring that we need to do, hiring the folks that we want to hire to fill out and round out the direct side of the model.

And by the time we exit this quarter we will have effectively transitioned where transitions need to take place out of our broker network and into that direct selling.

So we expect to accrue the soft benefits of that fully in F10.

Okay, thank you.

(Operator Instructions) Reza Vahabzadeh, Barclays Capital.

Good morning.

You touched on the private label issue and yet your POS was relatively flat.

You touched on some inventory destocking.

Do you think that the quarter also experienced some pantry destocking by consumers in the quarter?

And also have price gaps with private label or with other value brands, have price gaps remained about where they have been historically or have they changed?

Thanks much.

Let me just circle back on the private label things first.

The point I made, and this is an important distinction, is not that private label has had a major impact in the current quarter.

It's as we look ahead and as we dialogue with our retail partners, it's clear that they want to place an increasing emphasis of the presence of their private label or store bands in the aisles in which we compete.

And in fact across, as I mentioned earlier, basically all of the aisles in their store.

So that is more of a forward-looking concern of ours that we are going to need to deal with and it was an impact in the third quarter.

To your specific question about price gaps in private label, no, we have really seen no changes there.

That has been fairly status quo.

In fact, over the last year, particularly during the period where the underlying input costs to our products were increasing dramatically, the private label folks saw that same level of increase and a lot of their prices moved up simultaneous with ours.

So gaps have pretty much been maintained.

With respect to the pantry destocking question, we think absolutely and I know we share that point of view with other CPG firms.

That in this economic environment people are using up what they have at home with much more diligence than they historically might have had.

So as a for instance in our category, our Chloraseptic products are good for 24 to 36 months in terms of the dating on them.

And yet with the advent of any cough/cold season a consumer might look in their pantry and see that they have got a third of a box left of Chloraseptic lozenges.

In prior years might have just tossed out and gone ahead and bought a new box.

This year we firmly believe some of those consumers are choosing to use up what they have got in the pantry, fully use it up, before they go out and make that next purchase.

Got it.

And do you think you have to promote significantly more at store level than in the past to be able to maintain traction at store level and with your key customers?

I think that is going to be a selective question and we are going to look at that on a brand by brand basis.

Clearly, consumers are evaluating the value equation more rigorously than ever and probably placing more emphasis on the price side of that value equation that they ever have before.

And so as we move forward we are going to need to be very cognizant of that and in categories where we deem it appropriate without sacrificing or undermining our core equities.

It's conceivable that price promotion will become a bigger part of our short-term marketing mix.

But I would not make that an across-the-board statement at this point.

We are going to evaluate that, obviously, as I said selectively.

Got it.

Thank you.

John Anderson, William Blair.

Good morning.

A couple of questions.

One, in light of your comments on private label and retailers wanting to emphasize private label across the store more broadly, how does that impact the way you approach or organize your research and development function and activities as it sounds like you look at pushing innovation down the brand continuum?

Absolutely, John, you hit the nail on the head to my earlier comment.

The way to succeed in a private label environment going forward I don't think changes dramatically from what the formula for success has been in the past, which is to continue to be able to offer the retailer a national brand that is fully supported and that continues to innovate so that they have that equation to offer their consumers at the same time they are coming in with their private label.

And that is part and parcel of the reason we want to push the innovation down our continuum.

So that across a broader spectrum of our brands we can continue to offer not just the national brand that has a high consumer IQ, if you will, or a high recognition factor with consumers, but one that continues to provide the retailer with a reason for being and a reason for sticking on the shelf.

And that is where innovation comes in.

Do you think there are some cost implications, looking ahead in terms of the amount of investment in R&D and/or advertising and promotional spending?

No, I don't think there are dramatic ones, John.

Clearly we will need to continue to spend against our R&D efforts as we historically have, but remember our model is not heavily reliant on internal expenditures.

We are doing an awful lot of that cost sharing with the partners that ultimately provide us the innovation and the commercialization and scale up of that innovation.

So we outsource an awful lot of that and that model we don't expect to change.

I think to your point about the A&P side of it.

I think, yes, we will also need to move our A&P support or strengthen our A&P support across a broader set or spectrum of our brands.

But as I also mentioned, we believe we can find the ways to do that through other cost savings opportunities inside our model.

And so not dramatically increase the impact to the bottom line if anything moves in our A&P structure.

Last question.

With the flat top line in the third quarter can you give us any color on how the sales progressed through the quarter?

Did you see the growth rate deteriorate as you moved through the quarter in light of the expectation that Q4 would continue to be challenging?

Q4 will no doubt be challenging.

You may recall from my remarks that I said it was a tale of two cities or a Jekyll and Hyde, I think I used the expression on Q3/Q4.

We had a strong October, but November and December both saw an erosion versus year-ago.

It wouldn't be surprising to us to see that continue into Q4.

It really was an almost overnight change in seeing the way both consumers and retailers behave as we moved through the quarter.

Terrific.

Thank you, guys.

You are welcome.

As there are no further questions in queue, I would now like to turn the call back to Mr.

Mark Pettie for closing remarks.

Again we appreciate your time and your interest this morning.

As I said, we will look forward to talking with you all in about three months.

We will spend certainly more time on Q4 and also on our plans for fiscal '10.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.