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Operator
Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Prestige Brands Holdings, Incorporated earnings conference call.
My name is [Shaquana], and I will be your coordinator for today.
(Operator Instructions).
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, sir.
- Director-IR
Good morning.
Welcome to Prestige Brands fiscal 2009 fourth quarter and year-end 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 are filed with the U.S.
Securities & Exchange Commission.
Now I would like to introduce Mark Pettie, Chairman and CEO.
- Chairman & CEO
Thank you, Dean, and welcome to all of you joining us on the call this morning.
In addition to Dean, with me as usual is Pete Anderson, Prestige's Chief Financial Officer; and also joining us today is Chuck Jolly, our General Counsel.
I will begin today's call with a brief overview of our fourth quarter results.
Pete will then review the full financials for the quarter in more detail.
I'll follow that with highlights of our segment performance and a look ahead.
We'll then open the call for questions.
So getting underway, our reported total revenues for the fourth quarter were $70.9 million, $9.5 million or 11.9% less than last year.
As indicated in our press release, the difficult macroeconomic conditions resulted in revenue declines in all three of our segments, as retailers continued the inventory reductions which began during our fiscal third quarter.
In addition to the broad negative effects of the macroeconomic environment, a much weaker cold and flu season compared to the prior year's fourth quarter negatively impacted Chloraseptic revenues.
Moving to our bottom line, our reported net loss for the quarter was $211.1 million, or $4.22 per share.
As we shared in this morning's earnings release, the negative earnings resulted from a $220.1 million after-tax, non-cash, intangible impairment charge.
Excluding the impairment charge, net income for the quarter was $9 million, $1.4 million or 14% below last year's reported net income of $10.4 million.
This translates to adjusted EPS of $0.18 for the quarter.
The reduction in net income, adjusted to exclude the impairment charge, was due to the sales, decline partially offset by decreases in advertising and promotion, G&A and interest expense.
Finally, cash flow continues to be a bright spot, as we generated $13.2 million of free cash in the quarter, an increase of 38% over the fourth quarter of last year.
Our continued strong cash generation allowed us to resume our debt paydown after accumulating the $30 million cash reserve we discussed on last quarter's call.
Consequently, during the fourth quarter, we repaid an additional $6 million on our term loan.
At March 31st, total debt was reduced to $378.3 million, and cash on hand was $35.2 million.
So that's 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.
Pete?
- CFO, PAO & Treasurer
Thank you, Mark, and good morning, everyone.
I would like to begin my remarks this morning by discussing the reasons for the non-cash asset impairment charge which we booked in the fourth quarter.
As we do every year, we performed our annual impairment (inaudible) on goodwill and other intangible assets to evaluate each reporting unit's carrying value compared to an estimate of its fair market value, as required by U.S.
GAAP.
As a result of that analysis, we reported a non-cash, pretax impairment charge of $249.6 million, $220.1 million after-tax, to reduce the book value of the Company's intangible assets to their estimated fair value in light of current market conditions.
This impairment charge does not impact the Company's debt covenants in any way.
Now I would like to discuss the operating results for the quarter, excluding the impact of the impairment charge.
As Mark mentioned earlier, net revenues for the fourth quarter of $70.9 million, or $9.5 million or 11.9% below last year's net revenues of the $80.4 million.
Approximately $1.5 million or 2 percentage points of the shortfall was due to the negative effects of foreign exchange, as the U.S.
dollar continued the trends we began to see in our third fiscal quarter.
Although the dollar has weakened a bit in recent weeks, we expect the drag from FX to continue through the first two quarters of our new fiscal year.
While the reported operating loss for the quarter was $229.2 million, due to that $249.6 million non-cash intangible write-down, our operating income, excluding the charge was $20.4 million, $4.4 million below last year's operating income of $24.8 million.
The decline was primarily due to the revenue decline, including a straight drop through with the $1.5 million foreign exchange impact.
Partially offsetting the operating income decline in the quarter was a $2.8 million reduction in interest expense in the current 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 fiscal year of 2008.
Net income adjusted to exclude the net impact of the impairment charge was $9 million, or $1.4 million less than last year's net income of $10.4 million.
As I discussed on our last call, our intent was to build a cash reserve on the balance sheet of approximately $30 million before we would resume our debt paydown program.
As Mark indicated in his opening remarks, that's exactly what we did.
The $13.2 million of free cash flow generated in the fourth quarter allowed us to complete our reserve build, pay down an additional $6 million on our bank loan and end the year with a cash balance of $35.2 million.
As Mark indicated in this morning's press release, we continue to be happy with our cash generation and our liquidity position in these challenging economic times.
Due to the consistent debt paydowns that we have made and continue to make, we are also comfortable with our bank covenant situation.
Now I would like to turn back to our operating performance for the quarter.
Cost of sales for the quarter of $35.6 million was $3.6 million or 9% below cost of sales in the prior year's quarter.
As a percent of revenue, cost of sales increased from 48.8% in fiscal year 2008 to 50.2% in the current fiscal year.
The increase in cost of goods for the quarter was driven by an increase in our reserve for obsolescence compared to last year's fourth quarter.
If the obsolescence charge had remained flat year to year, cost of sales as a percent to revenues would have decreased from 48.8% to 48.7%.
Advertising and promotion expense of $5.7 million was $600,000 or 10% less than expenditures of $6.3 million last year.
Despite the overall reduction in A&P expense in what is traditionally our lowest advertising and promotion spending quarter, working media showed an increase of 5% over last year's fourth quarter.
Our G&A expense of $6.2 million was $1.2 million or 15% less than the prior year's expense of $7.4 million.
This decline was due to a reversal of the bonus accrual for fiscal year 2009 compared to the bonus expense in last year's fourth quarter.
Since the operating results for the Company fell short of minimum bonus cut-in targets, no annual incentive bonus will be paid for fiscal year 2009.
Now I'll briefly review the fourth quarter financial results by segment.
Net revenues for the OTC segment of $39.8 million were $6.4 million or 14% below last year.
The sales declines were driven by shortfalls on Chloraseptic Sore Throat products, our Compound W and Wartner wart care brands, Murine Ear, Dermoplast and the Doctor's brands.
Partially offsetting those declines were sales gains for Little Remedies and New-Skin, as well as sales of the new Chloraseptic and Little Remedies Allergen Block SKUs.
Gross profit for the OTC segment was $24 million, 17% below last year's gross profit of $28.9 million.
Gross profit as a percent of revenues was 60.3%, a decline from the prior year's gross profit percentage of 62.6%.
The decline in gross profit as a percent of sales was due to an increase in obsolescence expense in the current year's quarter.
If obsolescence expense had remained flat to last year's fourth quarter, percent -- gross margin as a percent of sales would have improved from 62.6% to 63.2%.
Contribution margin of $19.5 million for the segment was 18% less than last year's contribution margin of $23.8 million for the quarter.
A&P spending for the segment of $4.5 million in the current year was $600,000, or 18% less than last year's A&P spending of $5.1 million.
Although overall A&P spending declined, working media for the segment showed a 7% increase compared to last year's fourth quarter spending.
Household products' net revenues of $26.7 million were $3 million or 10% less than last year.
Spic and Span experienced flat revenues, while both Comet and Chore Boy had sales declines compared to last year's fourth quarter.
Gross profit of $9.4 million was $1.2 million below the prior year.
The decline in gross profit was due to the sales decline, combined with increases in product costs.
As a percent of sales, gross profit declined from 35.6% to 35.1%.
The decline was due to unfavorable product mix, partially offset by reduced transportation expenses.
The household products segment contribution margin for the quarter of $8.3 million was $1.3 million less than last year due to the gross margin decline.
Net revenues of $4.3 million for the personal care segment were $200,000 less than prior year.
A sales increase for the Cutex brand was offset by declines on the Denorex and Prell brands.
Gross profit of $1.9 million was $200,000 better than last year, despite the sales decline.
Product costs and transportation costs were favorable to last year.
Contribution margin of $1.8 million was $300,000 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 $13.2 million.
That represents a $3.6 million improvement over free cash flow of $9.6 million, generated in the quarter ended March 31, 2008.
The improvement, despite the net income decline, was due to an improvement of working capital.
And now, I'll turn the call back to Mark, who will provide additional perspective on the fourth quarter and a look at fiscal year 2010.
- Chairman & CEO
Thanks, Pete.
A few summary comments about Q4 are warranted before I get into the highlights of our segment performance.
You'll remember the discussion on our last call regarding the deterioration we saw in the retail and consumer environment as Q3 progressed and its impact on our third quarter results.
You'll also recall we expected those conditions to continue for the foreseeable future.
Reduced store traffic, consumer pantry deloading and retailer inventory destocking were significant factors at that point, and they continue to impinge on our results in the most recent quarter.
While the impact of these behaviors cut across the majority of the categories in which we compete, they were exacerbated in the fourth quarter by another difficult cough/cold season and unfavorable currency translation affecting our International business that Pete mentioned.
Although we did see some signs of stabilization of these negative trends very late in Q4, as we stated in our press release this morning, we have a cautious outlook as we enter our fiscal 2010.
I will speak more to our outlook for this fiscal year later in my remarks.
Staying at the enterprise level for a few more moments, as was the case last quarter, we take heart from the performance of our focus brands in Q4 relative to their underlying category dynamics.
Once again, we were able to grow share across the majority of our focus brands during the quarter; and all but one grew both revenue and share for the full fiscal year as well.
Among other things, our commitment to maintaining consumer-driven marketing and innovation activity behind these brands has helped anchor these critical anchors of our portfolio to be particularly resilient relative to their competitors during these challenging times.
Moving on to highlights of our segment performance, we begin as we always do with our OTC group, where revenues declined 14%.
Several brands in this segment had unfavorable performance versus a year ago, with our base Chloraseptic Sore Throat business notably impacted by a quarter in which the cough/cold incidents fell by 11%.
Despite the impact that trend had on the category, which contracted 19% during the quarter, Chloraseptic was able to build its category leading share position by a full percentage point to 38.6% on the strength of our new Chloraseptic Max and lozenge items.
Our Murine Ear business was down during the quarter, as consumption of Murine Earigate continued well below year-ago levels.
As I mentioned on our last call, we believe that current economic conditions are partially impeding take away on this unique business, and we are evaluating options to improve its performance.
Net sales of our work care business declined in aggregate 13%, a 4 percentage point improvement from Q3.
This decline was in line with expectations and reflects the continuing revenue impact of the cryogenics segment price decline taken in early fiscal '09.
We'll fully lap the impact of that transition during the course of our second quarter in fiscal year '10.
Revenues for our Doctor's business were off 21% in Q4, as we were comping against the impact of the sell-in of our Night Guard Advanced Comfort anti-bruxism SKU which occurred in Q4 of fiscal '08.
As you may recall, introduction of the Advanced Comfort device marked our move into the one size fits all format.
This introduction has been quite successful for the Doctor's Night Guard business, as it is the number one selling SKU in the segment by a factor of nearly 40% over the nearest competitor.
On the plus side of the ledger, several of our key OTC brands experienced growth in the fourth quarter.
Clear Eyes, our largest OTC business, was up 1% on the strength of solid consumption momentum and the release of a line of New Tears items designed to bolster our participation in the dry eye segment of the eye care category.
This growth was somewhat muted due to lapping an inventory position taken by retailers in Q4 of fiscal '08 ahead of our March price increase.
I'll provide more details on the Tears introduction in a bit; but suffice it to say that we're looking to continue our Clear Eyes growth through the combination of these new items and our unique and differentiating eight-hour duration claim.
Our Little Remedies pediatric business was up 81% in Q4 due to three factors.
The first is very strong underlying consumption, up 33% in the quarter behind solid marketing and improved merchandising at key accounts.
Pipeline shipments behind several new distribution gains across the Little Remedies portfolio was the second driver; and the absence of residual cough/cold SKU returns that we experienced in Q4 of fiscal '08 provided the third benefit.
We're quite pleased with the way in which this business has rebounded from the impact of the fiscal '08 voluntary withdrawal of two cough/cold SKUs.
The product and marketing innovation that has driven its performance this year is expected to continue in fiscal '10, and we're excited by Little Remedies' growth prospects.
Our New-Skin business also experienced growth, up 19% this quarter.
While underlying consumption of plus 3% reflects continued brand consolidation in this category, much of the revenue growth is due to the introduction of New-Skin Poison Ivy Treatment into select accounts.
This new, highly effective wash-type product will be shelved in plenty of time for the peak poison ivy season and backed by a focused consumer advertising effort.
Lastly, the introduction of our new Chloraseptic and Little Remedies allergen block products were a positive contributor to Q4 sales.
While we took our planned hiatus from launch-level marketing of these items in Q4, we did use the quarter to ensure product is on shelf at all authorized points of distribution and that we are as prepared as possible for the restoration of marketing support leading into the peak allergy season, which began in late March and runs into July.
Revenues for our household products segment dropped 10% in Q4.
A decline in our largest brand, Comet, was attributable to two factors.
The first is inventory adjustments reflecting destocking by both retailers and consumers, and the lapping of an inventory position taken by retailers in Q4 fiscal '08 ahead of our late March counterprice increase.
The second is the continuation of intense competitive activity in the bathroom spray category, which is putting downward pressure on that segment of the Comet franchise.
After several quarters of decline, our Spic and Span business was essentially flat in Q4, reflecting improved performance in non-measured channels such as dollar stores, which are encountering for an increasing percentage of consumer spending on household products.
Our Chore Boy business declined in Q4, as the brand continues to face distribution challenges, particularly in the wholesaler class of trade.
We have implemented new programming to stabilize business in this channel and early results are encouraging.
Similar to Comet powder and Clear Eyes, year-ago comparisons are also negatively impacted by lapping retail inventory impacts of the March 2008 price action taking on a portion of our copper ChoreBoy products.
And finally, personal care revenues declined 4% for the quarter, well below the 9% decline they experienced on a full-year basis.
This is due to a 26% increase in Cutex, mitigating ongoing declines in our shampoo brands, particularly Denorex.
The return to the iconic Cutex bottle early in fiscal '09, combined with selective distribution gains, contributed to the growth of the Cutex brand in the second half of fiscal '09.
So that wraps up our discussion of Q4, where our results reflect the continuation of the challenging macroeconomic environment we were faced with in the latter two months of our third quarter.
And as I mentioned earlier, while we saw some incipient signs of stabilization of (inaudible) retailer inventory levels late in Q4, we are maintaining a cautious outlook as we head into fiscal '10.
Let me get a bit more specific in that regard.
From the standpoint of consumer behavior, we expect the current trend toward budget stretching to remain in place until basic consumer confidence in the economy markedly improves.
While we're not economists, we don't foresee that happening in the first half of our new fiscal year.
Although this behavior is most apparent in durable goods and other discretionary spending categories, we certainly saw it permeate our staples turf in recent months as well.
And while retailers may be fast approaching the new equilibrium level for their aggregate inventories, we do expect them to critically review their SKU assortments in each of our categories.
For Prestige, this adds up to an environment where our ability to provide salient consumer-driven innovation and effectively and efficiently market our key brands is especially pivotal to our overall fiscal '10 efforts.
Of course, an important element of our fiscal '10 innovation agenda is realizing the potential of our Chloraseptic and Little Remedies Allergen Block products.
As I mentioned earlier, we have entered the spring allergy season with our authorized distribution fully on shelf and our integrated marketing programs ready to go.
We have also expanded our presence to include the Canadian market.
Consumer support in the U.S.
is already underway, and Canadian support begins this month, reflective of the later arrival of the allergy season in that market.
While the Allergen Block products should generate plenty of excitement for the Chloraseptic and Little Remedies franchises, we plan to continue to drive innovation through these brands in their core cough/cold businesses as well.
In fiscal '08, we launched a differentiating liquid center technology within two of our most popular Chloraseptic Sore Throat Lozenge flavors, Cherry and Honey Lemon.
Last year, we expanded use of that technology with the introduction of our highly successful Chloraseptic Max Strength Lozenge.
Consumers have responded favorably to the liquid center proposition and its dual benefits of pain release and coating protection for irritated throats.
Building on this experience, we will be converting our entire lozenge line to the liquid center format in fiscal '10, making this dual benefit experience available to all Sore Throat Lozenge consumers, regardless of their favorite flavor.
In addition, we are introducing two new lozenge items, Green Tea Flavor and Chloraseptic Total.
Both utilize liquid center technology, with the Total product providing the additional benefit of multi-symptom relief.
We're also bringing a new mom-friendly dosing technology to our Little Remedies cough/cold business in fiscal '10.
Little Remedies Melt Aways utilize a fast melt delivery system to provide appropriately medicated, pleasant-tasting relief in convenient, single-dose packets.
The two new Melt Away SKUs extend Little Remedies' presence into the sore throat and mucous relief segments of the pediatric cough/cold category.
In keeping with the core Little Remedies equities, these new items contain no artificial colors, saccharin or dye, and are gluten-free, which make them uniquely attractive offerings to moms looking for options to provide fast, effective relief for their children and greater peace of mind for themselves.
Retailers are still in the process of making their final cough/cold decisions, but reaction to both the Chloraseptic and Little Remedies innovations has been positive to date, and we look forward to their contributions in the back half of this fiscal year.
Earlier, I touched on the launch of a line of Clear Eyes tear products designed to build our presence in the dry eye segment of the eye care category.
While we have had a modest presence in this segment for a number of years, we now believe we have the products, packaging and differentiating claims that will enable us to stake out a more meaningful position in this large and growing segment.
Dry eye segment sales account for over 50% of the total measured eye care category, and we believe demographic trends will accelerate growth of this segment in the coming years.
To capitalize on these trends and the solid momentum of our current Clear Eyes business, we're launching a new six-item line of Clear Eyes tears products.
A modest level of early shipments took place in Q4, and consumer support will begin in earnest next quarter.
Designed to address the full spectrum of dry eye conditions, the line also features fresh new packaging graphics which will be rolled out across the entire Clear Eyes line as the year progresses.
Most importantly, every formulation in the Tears line is clinically proven to provide consumers with up to eight hours of soothing relief.
This compelling and differentiating claim, which we touched on in our last call, is currently debuting at retail on the New Tears packaging and is a focal point of all of our advertising.
Trade response to all aspects of this launch has been very favorable, and we look forward to the results of this significant innovation against our largest OTC brand.
Two other brands within our OTC portfolio are also bringing innovation to market in fiscal '10.
New-Skin, historically exclusively known as the leading liquid bandage brand, is introducing a poison ivy wash which has already begun shipping to retail accounts.
Similar to the insights behind Chloraseptic and Little Remedies' move into the little allergy category, consumers have told us that the versatile New-Skin brand name is capable of broader application across a variety of therapeutic skin care segments.
While introduction of the poison ivy product represents our first significant step outside New-Skin's core liquid bandage heritage, needless to say, we're enthused by the potential to build a therapeutic skin care platform around the New-Skin brand over time.
To support the poison ivy launch and bring awareness to the overall New-Skin brand, a targeted radio campaign will begin later this quarter in selected markets.
In addition, we are rolling out revised graphics on all New-Skin items, which will improve shelf presence and provide a common modernized look designed to accommodate future brand extensions.
Finally, after a difficult fiscal '09, we are anticipating improved performance from our Compound-W Freeze Off cryogenic wart care business.
Aiding this improvement is the introduction of Freeze Off for Plantar Warts.
This specialized version of the base Freeze Off franchise is being introduced on a limited basis for the current wart season and will be more broadly available in Q4.
This is a logical extension of our Freeze Off brand and technology, as specific plantar wart products account for nearly 15% of total wart product sales.
This product introduction, combined with a restoration of full in-season Compound W equity support and the lapping of last year's cryo pricing transition is expected to yield improved Compound-W results in fiscal '10.
Rounding out our full domestic innovation agenda are reformulations of our two most popular Spic and Span dilutable cleaner offerings, Sun Fresh and Citrus.
These new formulations comply with the EPA's Designed For the Environment, or DFE guidelines.
DFE certification is an increasingly recognized reassurance to consumers that the product they're buying is environmentally friendly.
Additionally, EPA considers formulas with DFE certification to exhibit more positive environmental and human health characteristics than conventional cleaning formulations.
The percentage of consumers that take environmental considerations into account in their purchase decisions is rapidly growing, and our ability to deliver this important added benefit without any compromise in product efficacy represents meaningful new news to our Spic and Span franchise.
We'll be communicating this news across all elements of the Spic and Span marketing mix, including distinct new packaging graphics, arriving at retail next quarter.
Finally, product innovation remains at the center of our continuing drive to realize the full potential of our Canadian business, where we introduced eight new items in fiscal '09.
This year, we're building on that momentum with four more introductions.
Our innovation plans include the launch of both Chloraseptic and Little Remedies Allergen Block products, which I touched on earlier.
In addition, coming off its successful U.S.
launch last year, we're taking Chloraseptic Max Sore Throat Spray north of the border, and we're rounding out our Canadian plans with the introduction of a fast-melt product within our Sleep-Eze sleeping aids line.
So that's a summary of the product innovation we have planned for the coming year, a broader array of activity and news than we've had some quite some time.
The key, as always, will be executing these new item launches with excellence while continuing to extend the new product pipeline for the months and years ahead.
But that's only part of the equation that's essential to competing effectively, particularly in these difficult times.
We must also continue to raise the bar on the effectiveness and efficiency of all our marketing spending to lever our innovation news and ultimately further build brand loyalty.
We began this process in fiscal '09 by implementing brand-specific marketing mix optimization initiatives and testing more efficient media buying partners and methods.
This year, we'll be building on those learnings in several ways.
First, we'll be bringing on additional media planning and buying partners and coupling their capabilities with selective increases in working A&P spending.
Secondly, we'll be expanding (inaudible) of radio and web-based marketing vehicles across our portfolio as we continue to seek the best ways to reach consumers when and where they want.
Finally, we will begin fully reaping the benefits of our move to a direct selling model; specifically in this case, realizing our ingoing expectation of an improved ROI on our trade merchandising spending.
The net is, we expect to get a bigger bang for each A&P buck we spend in fiscal '10, regardless of whether it's spent on consumer media and promotion, trade merchandising, public relations or other marketing vehicles; and we plan to direct a higher percentage of our total spend toward what we call working A&P -- dollars that reach the consumer directly to drive purchase intent or provide an improved value on shelf for our brands.
As I mentioned on our last call, to ensure we have adequate support for our innovations plate and the marketing programs imperative to the success of our brands, we have also been aggressively reviewing all aspects of our cost structure.
As has been the case for the past two years, at the heart of this effort is our systematic cost production program which focuses on manufacturing and distribution costs.
These areas account for over 80% of our total non-marketing costs; and once again, we have a comprehensive program in place to take as much cost out of these buckets as possible without compromising the end consumer experience.
As I'm sure you can appreciate, the fruit on this tree gets progressively harder to reach each year, and it's a testimony to the passion and diligence of the entire Prestige team that we once again expect to realize healthy savings from this program.
As you've probably gathered by now, we have also taken a critical look at the non-working components of our A&P spending, primarily market research and advertising agency costs, and have meaningfully reduced those while maintaining the funding necessary to evolve our new product pipeline beyond this year's introductions.
The steps I've just discussed -- differentiating consumer-driven innovation, effective and efficient marketing and vigorous cost containment -- are certainly key success drivers in any environment.
But to reiterate my opening point, never more so than under today's macroeconomic conditions.
They represent the overarching mandates that will govern all our actions this fiscal year, and we're confident their excellent execution will result in improved top and bottom line performance after a very challenging fiscal '09.
So what does all of this mean from a go-forward standpoint?
Speaking first to revenue, although we expect to be below our stated long-term goal of plus 2% to 4%, we do project improved full-year performance versus the minus 4% we experienced in fiscal '09, even after accounting for the continuing unfavorable impacts of foreign exchange.
It is important to note that those FX unfavorabilities will affect our first half revenue performance in particular, as will the fact that we'll be lapping the majority of our Allergen Block pipeline sell-in, which took place in Q2 of last year.
Moving to A&P, while our aggregate spending for the full year is expected to decline very modestly as a percent of sales, I'll remind you that a higher portion of it will be of the working variety.
This translates to more absolute dollars being spent against the consumer in fiscal '10; so be assured that we're absolutely not in any way reducing our commitment to this most impactful aspect of marketing spending.
With respect to Q1 in particular, we do expect our A&P spend as a percentage of sales to be somewhat above a year ago, as we invest behind our Allergen Block products in the heart of the spring allergy season.
Finally, having improved our liquidity position by $30 million in the second half last year, we'll once again be directing our substantial 50 to $60 million of free cash flow into debt paydown, absent any M&A activity.
This aggressive delevering, combined with improved operating income, is projected to result in adjusted EPS growth, despite top-line expectations that fall below our long-term range.
So that's the recap for Q4 and a look ahead at what we expect will be improved performance in fiscal '10, relatively speaking.
As I indicated on the last call, we gain a greater appreciation each day for the impact of the recession on our categories, our consumers and our business.
And while the picture isn't necessarily as pretty as we would like, we believe we have the plans and programs in place for fiscal '10 to make the best out of a difficult situation.
Importantly, the lessons we learned in fiscal '09 not only provide the foundation for improved performance in fiscal '10, but also arm us with new disciplines and practices that will make us an even stronger, more resilient and more capable enterprise for many years to come.
Thank you.
We would be happy to take any questions.
Operator
(Operator Instructions).
Your first question comes from the line of Bill Chappell with SunTrust.
Please proceed.
- Analyst
Good morning.
- Chairman & CEO
Good morning, Bill.
- Analyst
I guess first on the top line trends, I understand the macroenvironment and the de-stock, but your year over year sales seem to be worse than some of the other personal care product companies out there.
I'm trying to understand, on the destock, are you getting hurt more just because of positioning of your brands or the SKU rationalization, and are you seeing permanent loss of shelf space that will affect through 2010?
- Chairman & CEO
Bill, I don't think -- this is Mark -- I don't think we're getting hurt necessarily any worse than our competitors out there.
I think a couple of things we need to keep in mind when looking at our Q4 performance in particular that compounds the macroeconomic environment.
One is the impact on Chloraseptic which, as you know is, a key component of our historical fourth quarter sales and the cough/cold environment that we encountered this year.
The second is the fact that we are lapping the impacts of some of the inventory positions taken by retailers Q4 a year ago against the pricing actions on a couple of our household items and some of our OTC products as well.
So we've got more running through the Q4 revenue performance than purely the macro piece.
But to circle back and specifically answer your question, my sense is at this stage of the game that we're not being negatively impacted from a shelf space standpoint in any way more dramatically than anybody else.
- Analyst
Okay.
And then moving to kind of the new product launches, should I consider -- I think you had the strategy of kind of one or two big new products per year.
Is that how you're looking at the Clear Eyes and maybe the Chloraseptic launches or the New-Skin launch?
And with that, combined with the Little Remedies Allergen Block products?
I mean, are you advertising enough over 2010 to support all of these products?
- Chairman & CEO
Yes, we believe we are, Bill.
And as I mentioned earlier, a key piece of that support comes from significantly reworking the equation inside our A&P budget away from non-working and toward working ,so that versus an FY '09 where we did spend a considerable amount of our money against the consumer and working media, as Pete mentioned, we'll be stepping that up even more.
So as I mentioned, while as a percent of sales we'll take a slight decline in A&P, we'll actually be spending more dollars supporting the items you mentioned, directing those dollars against the consumer.
- CFO, PAO & Treasurer
But Bill, I think it is important to note that the Clear Eyes and Chloraseptic initiatives that Mark talked about are not what we would consider the breakthrough innovation that an Allergen Block is.
They're more -- as we referred to before -- in the singles, doubles category, as opposed to the breakthrough innovation that is a brand new effort that requires dedicated advertising as opposed to shifting Chloraseptic, for instance, from what was the new news last year, we'll now shift the advertising to the new news this year.
- Analyst
So they're not going to be big breakthrough innovation products this year?
- CFO, PAO & Treasurer
If you want to go to baseball analogy, we see them as the singles and doubles as opposed to the home runs.
- Analyst
Okay, and when -- just last question -- what was the actual amount of the accrual reversal for fourth quarter?
- CFO, PAO & Treasurer
For bonus?
- Analyst
For bonuses, yes.
- CFO, PAO & Treasurer
About a million two.
- Analyst
A million two?
Thanks so much.
- CFO, PAO & Treasurer
You're welcome.
Operator
Your next question comes from the line of Joe Altobello with Oppenheimer.
Please proceed.
- Analyst
Thanks, good morning, guys.
- Chairman & CEO
Good morning, Joe.
- Analyst
Just first, a quick question just to follow up on Bill's question regarding the shelf space.
Mark, in your remarks about 2010, one of the reasons that you cited as being a little bit cautious at this point is that retailers are reviewing their SKU assortments.
Is it your sense that you may lose shelf space in the future after that review is done?
- Chairman & CEO
Well, I think, as we've stated before, Joe, those reviews continue on a regular basis.
And in several of our segments, it is too early to tell how things will sort themselves out.
While we remain confident in the strength of the program we've got and the innovations that we've presented to retailers in categories like cough/cold, because we don't know exactly where the chips are going to fall until we hear back from the retailers, the smart thing to do now is to err on the cautious side, and that's what we're doing.
- Analyst
Okay.
But is on your mind, because you obviously did mention it in your remarks?
- Chairman & CEO
Yes, it's certainly on our minds.
And as we stated before, when you move beyond our focus brands -- and particularly when you talk about some of our tail brands -- we know we have got some particular vulnerabilities there, given the strategic de-emphasis we've placed on those over time.
But again, we're looking to offset any vulnerabilities there with the innovation and the programming we're bringing behind our focus brands.
- Analyst
Got it.
Okay.
And then secondly, I'm not sure if you broke this out, but how much in lower Chloraseptic cough/cold sales did you see this year versus last year in terms of millions of dollars roughly?
- CFO, PAO & Treasurer
We didn't break it out and we're not going to.
But suffice it to say, if you recall the fourth quarter of last year, fiscal '08, that was a particularly strong cough/cold season.
We had gone through the first nine months of fiscal '08, and we really were down dramatically compared to the prior year.
And then there was a late cold/cough -- flu season that took place February, March and a little bit into April, and that just did not at all materialize this year.
- Analyst
Okay.
But could it be as much as half of the decline?
- Chairman & CEO
Half of which decline, Joe?
- Analyst
The year-over-year revenue decline in the fourth quarter.
- Chairman & CEO
For the enterprise?
- Analyst
Yes.
- Chairman & CEO
No, no, no way.
- Analyst
It's less than that, okay.
Got it.
And then lastly, the increased obsolescence charge seems pretty big.
What was that due to?
I mean, you guys don't carry that much inventory.
- CFO, PAO & Treasurer
It was a combination of a -- we look every month at what are accruals are and what our viability is.
So this was a case that, in the fourth quarter of last year, there was a -- virtually zero need; so you're comparing a charge this year which was more normal, but also because all of our OTC products have expiration dating on them, as the retail environments slowed down and therefore the water pattern slowed down, there are more expiration dating issues.
Our policy is that if products have -- that we're holding -- have a shelf life that's 12 months or less, we just record a full reserve for them.
That's not to say that in some instances some of that may ultimately be sold.
But we were comparing against the quarter that there was virtually no expense to a quarter where there was a bit of a heightened expense; and the difference was about -- between $900 and $1 million difference.
- Analyst
Got it.
Okay, great.
Thank you.
- Chairman & CEO
You're welcome, Joe.
Operator
Your next question comes from the line of Olivia Tong with Bank of America, Merrill Lynch.
Please proceed.
- Analyst
Hi, good morning.
- Chairman & CEO
Good morning, Olivia.
- Analyst
Hi.
Just wondering if you could talk a little bit about the sales decline, what you think may be the breakdown consumption versus destocking.
- Chairman & CEO
Well, I would say that the majority of what we saw in the year-over-year basis had more to do with what was happening at the retail environment than what the heck was going on from a consumption standpoint.
Consumption for the quarter was off, no doubt about that, but not off nearly as dramatically as what the total revenue decline was.
I would say consumption -- without getting specific on the numbers -- consumption was the minority factor in this.
- Analyst
Okay.
Can you talk about more sort of like which categories were hit more, maybe why?
If you saw any major differences by channel, club stores, dollar, mass, anything like that?
- Chairman & CEO
Well, first with respect to categories, we've already touched on the cough/cold category.
- Analyst
Other than that, right.
- Chairman & CEO
The other one -- where we are still battling some issues of significance is in the ear category, and I've touched on Murine Earigate and the consumption declines we've experienced there.
And so we've got some work to do on that one, no doubt.
When it comes to channel, we did see continued evidence of classic channel shifting -- the food and drug purchases migrating over to the mass and mass moving over to dollar.
And in particular, as has been the case in recent quarters, evidence of that is most pronounced in the household product segment.
I mentioned in my remarks about Spic and Span, which relative to most recent performance had a good quarter at flat revenues, and that's reflective of strength in the dollar stores where a lot of the household traffic is migrating and where Spic and Span has a particularly strong presence.
- Analyst
Sorry, Mark, I guess I wasn't clear.
But what I meant more was do you see more destocking in particular channels or more destocking in particular categories relative to each other?
- Chairman & CEO
Oh, I'm sorry.
No, as far as categories go, no.
It is fairly consistent across the board.
I would say from a channel standpoint, where we're seeing the most pronounced effect is in the drug channel, and you have varying degrees of destocking going on there.
The mass channel and particularly the major mass retailer, while continuing to do some destocking, has always run a pretty tight ship; and we don't see much, if any, going on in the dollar store accounts, as they tend to run with pretty lean inventories as well.
So I would put the drug class of trade as the one that has -- is having the most pronounced impact or effect on us from a destocking standpoint.
- Analyst
Got it.
Okay.
And then on the shortfall versus the two to four long-term target, can you talk about each segment relative to that target?
Is OTC probably going to be still sort of on the higher end and then personal care on the lower end and household in between?
Or is there going to be a little bit of shifting in that?
- Chairman & CEO
No, I think that's exactly the way to continue to think about it, Olivia.
As you know, our emphasis has been and continues to be -- from both an innovation standpoint as well as from a pure marketing support standpoint -- on the OTC segment, and to a lesser extent on the household segment, with very little support in the personal care segment.
That's been an ongoing strategy for us, and we'll continue on a go-forward basis for the reasons we've mentioned before.
We think just the inherent underlying growth potential in OTC, in addition to the margins it affords us, make it the most attractive place for us to invest.
And we have good, solid positions in the household category as well, a nd we want to make sure that we're adequately supporting those.
So from a growth or a performance expectations, OTC, household and personal care, in that order, is the right way to continue to think about it.
- Analyst
Okay.
And I also just want to confirm, you said that you're expecting EPS growth in fiscal '10, correct?
- Chairman & CEO
Correct.
- Analyst
Okay.
And then lastly, on ad spend, you said that ads as a percentage of sales in fiscal '10 are probably going to be down but working media will is going to be up.
What is nonworking media, and so what is it that you're cutting back on?
- Chairman & CEO
Non-working media in large buckets for us is market research, is agency fees and commissions, is production costs for the advertising that we create.
So those types of things, which can be sizable, where we took a very, very aggressive look at as we went into fiscal '10 because we wanted to be able to dedicate as much of the A&P spend as we could toward the things that are going to drive business in the marketplace in the short run.
That does not mean -- and I want to reiterate that, although I mentioned it in my remarks -- that we are cutting back to the point where we cannot do the research necessary to continue to fund a satisfactory innovation pipeline.
That would not be the appropriate place to go.
But there were opportunities to make some choices and reduce those costs so that we could drive more dollars in fiscal '10 toward the consumer.
- Analyst
Okay.
So then should I assume that you're probably -- your advertising the same, but maybe using older ads or something like that?
- Chairman & CEO
Yes.
- Analyst
Older copy?
- Chairman & CEO
We created a lot of new copy within the last 12 to 18 months that still has an awful lot of life left in it.
So we're using -- you may call it old, but they're really recently created and far from worn out advertising that will be modifying modestly but not drawing up from scratch next year, and -- which still have plenty of power in them to drive the consumer interest and purchase intent in the market place in fiscal '10.
- Analyst
Got it.
Thank you very much.
- Chairman & CEO
You bet.
Operator
Your next question comes from the line of Jon Andersen with William Blair.
Please proceed.
- Analyst
Good morning, everyone.
It is actually Ryan filling in for Jon here.
- Chairman & CEO
Hi, Ryan.
- Analyst
Hey, how are you you doing?
Just quickly here on the fourth quarter, it seems like it is kind of a tough comp, the sell-in leading into the price increases at the beginning of this year.
Does that give you a little more confidence for the first quarter top line?
- Chairman & CEO
You're talking about the fact that our fourth quarter is down 11.9, includes an overlap of --
- Analyst
Of a tougher comp in the fourth quarter of '08.
- Chairman & CEO
Yes, I mean, we certainly aren't up against that kind of a comp in the first quarter.
So if the core question is do we expect our first quarter of fiscal '10 to look like our fourth quarter of '09, the answer is absolutely not.
- Analyst
Got you.
And secondly, I guess, just any more color on the spring allergy season here, and is there any kind of halo benefit that comes from the H1N1 outbreak?
[LAUGHTER]
- Chairman & CEO
You know, that's not the first time that question has been asked.
I have to tell you there's really no evidence of that.
I mean, the spring allergy season is developing as we would have projected; albeit we're tracking this now, it seems to be developing a little bit later than what the historical norms would be.
It is still developing from a magnitude standpoint of the same size that the history would indicate.
But no, there is no indication that the overlay of swine flu is pushing that to higher levels; or as some have speculated, that it is pushing sales of kind of cough/cold and throat remedies to higher levels either.
- Analyst
Got you.
Thanks a lot, guys.
- Chairman & CEO
Sure.
Operator
(Operator Instructions).
Your next question comes from the line of Mr.
Reza with Barclays Capital.
Please proceed.
- Analyst
Good morning, Reza Vahabzadeh from Barclays.
- Chairman & CEO
Good morning.
- CFO, PAO & Treasurer
How are you doing, Reza?
- Analyst
Morning.
So just on the inventory destocking issue -- and I apologize for just circling back on this issue -- of the $9.5 million of the sales decline year-over-year, I mean, was inventory destocking maybe half of that, more than that?
Can you provide some color on that?
- Chairman & CEO
No, it is really difficult to put a number on that one, other than to say that it is one of the three significant influencing factors along with underlying consumption and the pricing overlap that we talked about.
If I had to try and force rank them for you without assigning any specific quantification to them, I would say that that would be -- number one was consumption, number two, and price lap effect number three.
- Analyst
Got it.
And obviously revenues were off about 11.9%.
I mean, what's your best gauge of POS across multiple products and channels?
- Chairman & CEO
In terms of the underlying consumption?
- Analyst
Yes.
- Chairman & CEO
Yes, as I said earlier, it is a fraction of that, and I would say it is less than a third of that.
- Analyst
Okay.
And then on the revolver maturity, did you just let that lapse, and you're just going to finance working capital if needed from a cash position?
- CFO, PAO & Treasurer
Yes.
- Analyst
Okay.
And obviously the term loan matures in roughly two years.
Any thoughts on that?
- CFO, PAO & Treasurer
We're continuing to talk to virtually every bank that exists in the United States, and many have come up with proposed solutions.
The credit environment for our grade of debt is improving gradually; at the end of last year it was totally shot, but things are starting to open up.
So the good news is, is that there are potentials for us to explore now, where a few months ago there probably weren't.
And we are in active discussions with various banks to determine exactly what we should do; and more importantly, when we should do.
- Analyst
Got it.
Just two housekeeping items.
What was the variable -- what was the contribution margin for the OTC business, and the gross profit as well for that division?
You went over it but I missed it.
- CFO, PAO & Treasurer
Yes, hold on.
I'm just going to make sure I give you the correct number .
Wait a minute.
Okay.
So the gross margin was -- hold on, let me pull out my other sheet here.
Gross profit was 60.3%.
Contribution margin was
- Analyst
Okay And then for the A&P spending for fiscal '09, is that going to be higher year-over-year as a percentage of sales or just higher on a dollar basis?
- Chairman & CEO
You mean for fiscal '10?
- Analyst
Yes, sorry.
Yes.
- Chairman & CEO
Yes, as I mentioned earlier, it will be down modestly as a percent of sales; but the absolute working dollars -- the dollars that a consumer like you or I would see, either via television, a consumer promotion, a coupon, or a spend on a lower shelf price -- will be actually higher.
- Analyst
Got it.
Thank you much.
- Chairman & CEO
You're welcome.
Operator
Your next question comes from the line of MiMi Noel with Sidoti & Co.
Please proceed.
- Analyst
Thank you.
Hi, Mark.
Hi, Pete.
- Chairman & CEO
Hey, MiMi, how are you?
- CFO, PAO & Treasurer
Hi, Mimi.
- Analyst
Very good, thank you.
You've given us the facts on the current inventory levels, but I just wanted to get your opinion on how you feel about inventory at retail at this point.
I mean, do you think that retailers are operating in a manner which will require unusual replenishment later in fiscal 2010, or do you think, as it sounds like you suggest, is with the ear category that there's still risks that inventories could come down?
- Chairman & CEO
Yes, I think, MiMi, from an inventory standpoint, we started to see, as I mentioned; signs of stabilization very late in the quarter.
There are probably a handful of retailers out there still kind of working their way to the new equilibrium; but it is my sense that the majority of that impact is probably behind us.
- Analyst
Okay.
- Chairman & CEO
And the thing we need to keep our eye on, as I mentioned in response to an earlier question, is what retailers do going forward from a kind -- of a SKU rationalization standpoint.
- Analyst
Understand.
- Chairman & CEO
So absolute inventory levels, probably getting close to equilibrium, and now it is just a question of what assortment they would like to go forward with on shelf.
- Analyst
Okay.
And Pete, do you think the risk of taking inventory write-downs further -- accounting for the reserve there -- do you think that's much alleviated now that you have it out of the way?
Or do you think -- commensurate with any kind of inventory reductions you could see, that there's still real risk there?
- CFO, PAO & Treasurer
No, I don't think so.
- Analyst
Okay.
- CFO, PAO & Treasurer
I mean, I think as I remarked, our cash flow was certainly helped by the fact that although inventories and sales did come down at retailers, we equally reacted very quickly and our inventory position also was reduced.
- Analyst
Okay, great.
- CFO, PAO & Treasurer
So, yes.
So I don't see any unusual bogey out there.
- Analyst
Okay.
That's all I have.
Thank you.
- Chairman & CEO
Okay, MiMi.
- CFO, PAO & Treasurer
Have a good day.
Operator
I would now like to turn the call over to Mr.
Mark Pettie for closing remarks.
- Chairman & CEO
Just as always, I want to thank everybody for spending your time with us this morning and your attention.
We look forward to talking with you with an outlook in fiscal '10 and an improved top line look in the first quarter in about three months.
Thank you.