Prestige Consumer Healthcare Inc (PBH) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal 2010 Prestige Brands Holdings Inc.

earnings conference call.

My name is Ann and I will be your coordinator for today's call.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

We will be facilitating a question-and-answer session following the presentation.

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

Dean Siegal, Director of Investor Relations.

Please proceed, sir.

Good morning and welcome to our third fiscal quarter conference call.

I am required to remind you that during this call statements may be made by management of their beliefs and expectations as to the Company's future operating results.

Statements of our 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 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 Matt Mannelly, President and CEO.

Thank you, Dean.

Welcome to everyone joining us on the call this morning.

In addition to Dean joining me is Pete Anderson, our Chief Financial Officer.

I will begin today's call with an overview of our third-quarter results and Pete will then review the full financials for the quarter in more detail.

I will follow-up with some highlights of our segment performance and thoughts about the business environment for the remainder of the fiscal year and then we will open the call up for questions.

As I am sure you have seen in this morning's earnings release, our profitability and our net income from continued operations for the quarter was $10.3 million, which is $2.6 million or 34% greater than last year's net income from continued operations of $7.7 million.

Earnings per share for the current year's quarter was $0.21 compared to the $0.15 earnings per share last year.

Our reported total revenue for the third quarter was $75.4 million, which is $2.6 million or 3% below last year.

The reported results reflect divestitures of our shampoo brands, Denorex, Prell, and Zincon, as discontinued operations.

Revenues from these three brands are not reported in either the current year or FY 2009.

We generated $10.4 million of free cash in the quarter.

Based on our continued strong cash flow and the sale of the shampoo brands in October, we paid down an additional $19 million on our current loan during this quarter which means as of December 31 total debt has been reduced to $319.3 million.

That is a high-level look at the quarter and now I would like to turn the call over to Pete to provide you some additional commentary and the financial details.

Thanks, Matt, and good morning, everyone.

As Matt just mentioned, our reported net revenues for the quarter of $75.4 million were 3% below last year's net revenues.

Despite the revenue decline, operating income for the quarter was $23.7 million, $4.2 million or 22% greater than last year's operating income of $19.5 million.

The operating income increase resulted from decreased advertising and promotion and G&A expenses compared to last year's quarter.

Our interest expense for the quarter was $5.6 million.

That is a reduction of $1.5 million or 21% from the prior year and our income from continuing operations of $10.3 million was $2.6 million or 34% greater than last year.

Net income inclusive of the shampoo results of $10.6 million was $2.6 million or 33% greater than last year.

This quarter's results reflects a change in our corporate book income tax rate from 37.9% to 38.3% and that resulted from the shampoo divestiture as some of our state tax rates changed slightly.

The non-cash increase to income tax expense in the quarter as a result of this change was $900,000 which results from applying the new tax rate to our remaining deductible tax asset of $280 million.

During the third quarter we generated $10.4 million in free cash flow.

That represents a $6 million decline from last year's free cash flow of $16.4 million for the quarter.

The driver of this year's free cash flow decline was an increase in inventory.

The primary reason for the increase in inventory was that during this quarter we changed manufacturing partners for portions of our Clear Eyes and Comet businesses.

In order to ensure that there would be no customer disruptions during those startups, we built safety stock.

Happily there were no major disruptions, but the result of that is that our inventory levels were a bit higher in the quarter than they otherwise would have been.

We used our free cash flow and the $8 million of proceeds from the shampoo divestiture to pay down $19 million of debt during the quarter, and as Matt mentioned that brought total debt down to $319.3 million at December 31.

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

Cost of sales for the quarter of $35.6 million was $900,000 or 2% less than the prior year's quarter primarily due to the sales decline.

As a percent of revenue, cost of sales increased slightly from 46.8% in fiscal year 2009 to 47.2% in fiscal year 2010.

Our A&P expense of $6.1 million was $5.2 million or 46% less than A&P expenditures of $11.3 million last year.

The decreased spending year to year was primarily due to decreased spending on Allergen Block in the current year compared to heavy introductory spending levels last year.

Our G&A expense of $7.4 million was $900,000 or 11% less than the prior year's third quarter expense of $8.3 million.

The reduction in G&A expenses compared to last year's third quarter was due to decreased legal, salary, and currency valuation expenses.

Our salary expenses for the quarter declined from last year as a result of the reduction in force which took place in the second quarter.

Last year in the third quarter we incurred a large currency valuation expense as the US dollar strengthened dramatically compared to the Canadian dollar.

In the current year's quarter we experienced a modest currency valuation benefit.

Now let's briefly review the third quarter financial results by segment.

Net revenues for the OTC segment of $46.2 million or $1.4 million were 3% below last year.

Increased sales for Cloraseptic, Clear Eyes, and Little Remedies were more than offset by declines on our Allergen Block products and the Murine ear line.

Gross profit for the segment was $29.3 million, 5% less than last year's gross profit of $30.7 million primarily due to the sales shortfall.

Gross profit as a percent of revenues was 63.3%, a decline from last year's quarter of 64.5% and that was primarily due to an unfavorable sales mix.

Contribution margin of $24.1 million for the segment was 14% greater than last year's contribution margin of $21.2 million due to the decrease in A&P spending on Allergen Block products which I spoke about previously.

A&P spending for the segment of $5.1 million in the current year quarter was $4.4 million or 45% less than last year's spending of $9.5 million.

Household products net revenues of $27.3 million were $800,000 or 3% less than last year.

Sales increases for the Spic and Span and Chore Boy brands were offset by a decline on the Comet brands.

Gross profit of $9.8 million was $100,000 below the prior year.

The decline in gross profit was due to the sales decline partially offset by a favorable sales mix.

As a percent of sales, gross profit for the segment improved from 35.1% to 36%.

Household products segment contribution margin for the quarter of $8.9 million was $800,000 greater than last year's contribution margin of $8.1 million.

The gross margin decline was partially offset by a $900,000 reduction in advertising and promotion expense.

Turning to the personal care segment.

As Matt indicated earlier, results for our divested shampoo brands are excluded from the results of this segment.

Net revenues for the segment of $2 million were $200,000 or 10% below last year's third quarter.

The sales decline was primarily due to decreased sales for Cutex.

Gross profit of $800,000 was $100,000 below last year and contribution margin of $700,000 was $100,000 less than last year as a result of the sales decline.

Now I will turn the call back to Matt who will provide additional perspective on the third quarter and the remainder of fiscal year 2010.

Thanks, Pete.

I will give some additional comments on the performance of some of our segments in the third quarter and then talk a little bit about Prestige moving forward.

The numbers that Pete quoted you were all global numbers.

I am going to give you some perspective in terms of some of the segments as it relates to the US.

So just so you know I just want to give you a little color in terms of the US since that is the bulk of the business.

We will begin with the OTC business.

As Pete mentioned, total reported OTC revenues were down about 3%.

However, in this segment in the US we saw impressive increases in sales in three of our core products -- Clear Eyes, Little Remedies and New-Skin.

Clear Eyes specifically enjoyed another strong quarter with consumption, consumer pull, up 6.2%.

That is in response to the new consumer advertising campaign and the launch of our new six-item Clear Eyes Tears line in the first quarter this fiscal year.

This brand new TV radio and print advertising campaign focuses on maintaining good eye health with the help of Clear Eyes.

In this quarter the stars in this line were our Maximum Redness and our Itchy Eye SKUs.

Little Remedies revenues were up again in the third quarter -- revenues were up 15.2% in the United States.

This brand's continued success is highlighted by Saline Drops and the Saline Mist SKUs with strong performance also from our Melt Aways and Multi-Symptom Cold products.

We are also currently test marketing other brands under the Little Remedies brand name.

This has really been a terrific brand for us and it really contains the ingredients today's health-conscious parents and moms are looking for.

Being New-Skin line continues to perform well with the total brand up again in the quarter by 6% and that includes liquid bandage, spray, scar therapy, as well as new poison ivy treatment.

Our liquid bandage product remains the number one brand in the category with more than half of the market share and was up 5%.

New package graphics have improved the product's appearance on shelf and we believe this has contributed to additional consumer pull at retail.

Cloraseptic in the US, it benefited as you recall in the second quarter in terms of retail inventory builds in preparation for the onset of the flu and the swine flu season.

However, the season for flu and cough cold products hasn't really met expectations at retail, as I am sure you are aware from a lot of people.

As well as H1N1 vaccinations and flu shots to cold which has led to considerably fewer incidences of illness this year.

So the fall in incidences versus prior year alone with the strong beginning of the season inventory build which occurred in the second quarter resulted in Cloraseptic sales down slightly 2.2% in the US in the third quarter.

Moving to our household products segment.

Revenues declined by approximately 3% in the third quarter.

Spic and Span and Chore Boy experienced revenue increases while Comet had a slight decline.

The household products arena continues to be a very competitive one and sensitive to pricing, especially during these challenging economic times.

We are now in the process of refreshing the Comet line with a complete new look that is going to be coming this spring that will start to ship in April.

In the personal care segment revenues declined by about $200,000 year over year and this is primarily due to decreased sales of Cutex.

And as we mentioned in our release, from this quarter forward the results of this segment excludes the sale of the three shampoo brands that we divested in October of 2009.

Focusing on our international business, revenues from outside North America for the quarter were actually up 12% versus year ago.

We are also pleased with our Canadian business which now represents over 5% of overall sales, and our Canadian business was up 20% this quarter as a result of improved volume for Cloraseptic and Clear Eyes as well as more favorable exchange rates.

So that wraps up our review of Q3.

Last just a few comments as we head toward the close of FY '10 and into FY '11.

We are already planning for FY '11 which begins April 1, and as you know when you plan you try to predict the future.

You try to see what you want the future to be and then plan the ways to make it come out that way.

And while we can't fully predict what the future holds for this economy and the changing retail environment as well as some changing consumer behaviors, we can plan for how we expect to build our core brands for the future.

With that in mind from a priority standpoint we are focused on building those core brands.

Step one in our strategy is really to invest more in the core in order to get more from the core.

So our FY '11 plans include bringing as much news as possible to our core franchises and we have built some compelling FY '11 plans for our key brands with that in mind.

Now as you recall from last quarter's earnings call, we discussed our need to increase our advertising and promotional support to reinvigorate our core key franchises.

We must continue to provide compelling support to keep them fresh and top-of-mind with our consumers and our customers.

However, a key point is, although we anticipate A&P spending will increase against the core brands, this increase will primarily be reallocated from G&A and reduced spending against some of the non-core brands.

So the overall impact of A&P year over year will be minimal.

For the balance of the year our attitude continues to be one of cautious optimism.

I think the macroeconomic environment really dictates this attitude.

However, given the strength of our brands with roughly three-quarters of them as a number one or a number two brand in their categories and our commitment to supporting our core brands as well as some of the exciting plans that we have in place for FY '11, I am hopeful and confident that we have a very bright future.

With that I would like to thank you and now open the call up for any questions.

(Operator Instructions) Joe Altobello, Oppenheimer.

Good morning, guys.

First question, I just wanted to go to the top line for a second.

Obviously down 3%, but how much of that was the impact of sales of Allergen Block from the year-ago period that didn't recur?

If you could quantify that for us.

Allergen Block sales year-over-year are down well over 2% of that 3% number.

Okay.

Close to 3% of it.

So it really is almost the entire amount.

So ex-Allergen Block you were almost flat actually?

Yes, we were down very slightly.

Okay.

And then terms of Comet you mentioned it was down.

Could you talk about why that was the case?

I think the big reason for that -- and, Joe, I think you are familiar with what is going on at retail and specifically Wal-Mart where they have really gone to this clean aisle initiative.

We had a major promotion last year in the third quarter for Comet, a major in-aisle display promotion that was not repeated this year.

And that was really the primary cause for Comet's decline.

And then continuing softness on the bathroom spray product which we have been talking about for the last couple of quarters.

Got it, okay.

And then SG&A, is this a good indicator of what a steady state run rate should be in terms of quarterly SG&A spent?

You know, with the major caveat, Joe, that barring any unforeseen leap in legal expenses I would say this is pretty indicative.

Okay, perfect.

And just one last one.

The tax rate you mentioned it was higher this quarter than normal.

It sounded like that was a bit of a catch up.

So going forward your tax rate is going to be that 38.3% that you talked about earlier?

Correct.

With the one exception of the quarter that we are in right now, my tax gurus tell me that the tax rate for this fourth quarter is going to be the same 37.9% and then it goes up beginning with the next fiscal year.

But when you know that you have got a change in the rate, you have got a tax effect your deferred taxes.

So for the quarter we are in right now it will still be the 37.9% and then beginning with next fiscal year with the June quarter it will go up to 38.3%.

Okay, great.

Thank you.

Mimi Noel, Sidoti & Co.

Good morning.

Just a couple of questions.

First, can you elaborate on what made the mix shift so negative with OTC and household products?

Well, the good news is household products, if you look at just that segment, the mix actually was helpful.

Right.

Okay, you said that.

So then just OTC.

Yes, it really just is, Mimi, we have so many products that the cost profile of the products this year that were up compared to the ones that were down drove that mix shift.

It was no real product that was a primary driver.

Is that influenced more by consumer behavior rather than new product introductions or anything like that?

Not -- I mean --

Can you tell me anything to give me an idea of predictability?

It's always going to be within -- my suspicion is that the OTC is going to fluctuate between what it was last quarter or last year's third quarter and what it is this year's third quarter.

If you go back and you look at any quarter, there is always tweaks one way or the other.

Okay.

Pete, can you comment on the status of the refinancing at all?

We are working diligently to make my last quarter prediction come true, which is that our anticipation is that we will do a refi before the end of this fiscal year.

That, of course, is subject to the overall market conditions.

But assuming that everything hangs in there, our intent is that by the time we next speak we will have refinanced.

Okay.

Can you tell me has it been an encouraging process or more along the lines of frustrating?

It has been as -- with the exception of a lot of work to get it together, it has been just fine.

Okay.

And then the last question I have would be for Matt.

Can you comment -- perhaps a bit premature -- but would you comment on how the acquisition landscape looks to you?

I think, Mimi, we have talked about this a little bit on the call and with people saying that assuming the refinancing goes through that we expect to be looking at some opportunities.

And from everything I am hearing in terms of talking to people and everything I am reading, I think the landscape is going to be fertile over the next 12 to 24 months.

In terms of quality too or just in terms of volume?

I think it's too soon to tell in terms of what kind of quality there is going to be.

We don't have visibility to that yet.

Okay.

Those are all the questions I have.

Thank you.

Reza Vahabzadeh, Barclays Capital.

Good morning.

Just on an overall basis, excluding the discontinued operations as well as the year-over-year comparison of the Allergen product loss last year, was POS on a consolidated basis in line with your shipments?

Yes.

Overall.

Reza, it varies a little bit brand to brand.

But I think overall it was pretty much in line.

Got it.

Is there any overall negative price mix in your business?

Again, excluding the discontinued ops in Allergen.

You mean compare a la the price declines that took place in the wart category a year and a half ago?

Price as well as mix, yes.

There hasn't been anything other than the normal retailers trying to get promotional allowances and things like that.

But nothing on the scale of the cryogenic wart products having dramatic price reductions.

You mentioned the Comet category is very price competitive right now, so I guess that is why I was asking that question.

But it's promotion driven.

Go to Wal-Mart as an example.

It's TPRs or it's rollbacks, but it's not that people are going out there and saying I am going to reduce my everyday shelf price.

Right.

Well, that is what I was really referring to is on a net price basis net of rebates and TPRs.

Is that stable or is that down year over year?

I don't think we are seeing undue pressures there.

It's not undue pressure.

But I think as a result of the economy that if you were to look at the nine months this year compared to the nine months last year that there definitely is higher allowances in gross to net simply because the economy, especially in households, has dictated that there is a lot of price competition.

Yes, got it.

Then as far as the increase in promotional support around your three core brands is that going to be funded by even lower G&A expense than there is today or you are already where you need to be in terms of G&A expense?

I think partly it goes to the kind of full year effects of the reduction in force that we did back in the second quarter.

So if you take Joe Altobello's question, we began to see in this quarter the positive effects of that.

Okay.

So that is going to fund a higher A&P?

Well, that and reallocating some spending from some of the initiatives we did this year, for instance, or last year where there was a lot of spending around products like Allergen Block, which in some cases came from some of the core brands.

Okay.

And then as far as acquisitions is concerned, Matt, you mentioned the environment will be more fertile for you.

If the right acquisition shows up and the right price what is the kind of maximum debt to EBITDA that you think you are willing to tolerate?

Reza, right now we are in the low threes.

Absent any acquisition we would hope to be in the high twos pretty quickly.

But if the right acquisition came along, we would feel very comfortable going up into the high threes to maybe four.

Then the characteristics of what ever we acquired in the past we would expect to happen again and we would very quickly use the cash flow to get back down into the low threes.

Got it.

Thank you.

Chris Ferrara, Bank of America-Merrill Lynch.

I just wanted to get on A&P.

So I know in the December quarter the nature of the comp is that you had a lot of spending on the Allergen Block.

But if you look back over time, like over the last five years, this is the lowest A&P spend level in the December quarter that we have seen.

At least since 2004 I think.

Is this the right level or was this an unusually low level of A&P in your view?

I would expect, Chris, as I have said, that our A&P against our core businesses will increase significantly and that our A&P would increase moderately overall.

And that would be partially funded by G&A.

So to answer your question I would expect our A&P that this is kind of a low and that we are going to be moving back to a more historical level, especially against the core brands.

Got it.

That is helpful.

And just one other one with respect to we are in reset season for a lot of retailers.

Matt, can you just give an update on what we see?

I know you talked about it last quarter.

What the winners and the losers are across your portfolio?

How you are feeling about your shelf space moving into the next calendar year?

Yes, I think it's still kind of a dynamic and changing environment at drug retail and mass a little bit, right?

But I feel really good about our core brands, and especially our core OTC brands are really performing from a consumption standpoint in terms of consumer pull.

And then some of those secondary brands maybe aren't moving as much as we would like.

But the core brands, I think in general, we are pretty pleased with where we stand right now heading into the year with the core brands.

Great, thanks a lot.

(Operator Instructions) [Garrett King], Truffle Hound Capital.

I wanted to talk a bit about the shampoo divestiture.

It seems that these brands were sold at about a 20% EBIT to enterprise value ratio.

And seeing as the Company is currently trading at about a 14% ratio, could you explain why this made sense from a capital allocation standpoint?

Because the shampoo business, if you look at it over the last five years that we have owned it, has done nothing but go south.

One of the strategic initiatives that we have got is to basically look at our portfolio, try to wind up with brands that are meaningful and able to grow.

What we looked at in the case of the shampoos -- and we have got a whole bunch of other brands that we have made no bones about the fact that are non-strategic for us and that we would be willing to sell if we got the right price.

But we don't look at where it is the day that it sold; we look at what the projection is for that business going forward.

In our opinion this was a deal amongst the many that we have looked at and have not felt that we were getting value that gave us the value that we were looking for.

Okay.

And you have talked about looking at acquisition candidates once you get the -- if the debt is refinanced.

But why -- what would cause a large consumer goods company to sell you a strong growing brand for a greater than 15% EBIT to enterprise value yield?

I think it depends on the size of the Company.

It depends on that company's focus just like our focus.

We are willing to give up some brands that aren't our core focus.

Other companies are willing to do the same possibly.

And if you go back, and I don't know that you have been following this story since we came into being, but virtually all of our brands were acquired from large companies.

Clear Eyes, a great example; Comet, another great example.

The corporate parents have it and P&G at the time that they divested those brands did it because Comet wasn't a global brand and it wasn't a brand that P&G at the time thought that they wanted to grow or fit their size profile.

Abbott was at the time largely getting out of consumer goods.

So really it depends on, I hate to say it, but the consulting group that has kind of got the ear of the chairman of any of these companies and what is their strategic direction at the time.

So if you were to make an acquisition though we would expect to see a higher yield than the Company is currently yielding, right?

Or else you could just buy back your own stock?

We have the ability to buy back our own stock.

Right, right.

Okay.

I haven't been following the story for years but I have read the disclosures for the last several years, and the Company's share price is less than half of what it was at the IPO.

So I think that looking at history maybe it doesn't offer the best guidance for what to do going forward.

I am sure you are going to get pressure from analysts and investment banks to do an acquisition so they can get fees, but I think it's really important to make sure that the price of the acquisition is accretive using conservative estimates for what that company or that acquisition will earn going forward.

Okay, thank you.

Thank you.

Ladies and gentlemen, this concludes today's question-and-answer session.

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

Matt Mannelly for closing remarks.

All right.

Thank you, everybody.

We appreciate everyone taking the time and interest in Prestige and sitting in on the call today and some of the questions asked.

We appreciate your support and look forward to the call next quarter.

Thank you.

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

This concludes the presentation and you may now disconnect.

Have a good day.