Prestige Consumer Healthcare Inc (PBH) 2011 Q1 法說會逐字稿

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  • Operator

  • Good day ladies and gentlemen, and welcome to the first quarter 2011 Prestige Brands Holdings Incorporated earnings conference call.

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

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

  • (Operator instructions) I would now like to turn the call over to your host for today's call, Mr.

  • Dean Siegal, Director of Investor Relations.

  • Please proceed, sir.

  • Dean Siegal - Director of IR

  • Good morning.

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

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

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

  • Securities & Exchange Commission.

  • Before I introduce Matt Mannelly, I just wanted to give you a brief rundown of our conference schedule for the remainder of the calendar year.

  • We'll be attending the C.J.S.

  • Securities Conference on August 17th in Westchester, New York; the Sidoti Conference September 24th in San Francisco; the Deutsche Bank Conference in Phoenix on October 6th; and the BofA Merrill Conference in New York City on November 17th, and we hope to meet you all there at that time.

  • Now I'd like to introduce Matt Mannelly, our President and CEO.

  • Matt?

  • Matt Mannelly - President and CEO

  • Thank you Dean, and welcome to all of you joining us this morning.

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

  • I'll speak first about the business and then Pete will present an overview of our financial performance and then I'll come back for a few closing comments and we'll open it up to questions.

  • With that, we'll get into it.

  • I'd start by saying I think we're pleased with our first quarter results, which affirm kind of the strength of our core OTC business model and the overall direction of the company's strategic plan.

  • This new direction has been the focus of much of our attention over the past year.

  • Specifically, we're pleased with the growth of our core OTC brands in aggregate, as well as their long-term potential.

  • We remain confident in achieving our long-term goals, however, we're also realistic about the overall economic environment and the challenges we face for the full year, as has been reported by a number of companies just this week.

  • In particular, given last year's heavy retailer buy in of cough/cold products in anticipation of H1N1, the second quarter will be challenging from a revenue standpoint since retailers have told us as well as all of our competitors that the heavy buy in will not be repeated this year in the second quarter due to last year's H1N1.

  • One of the key changes in direction over the past year was our recommitment to our five core OTC businesses.

  • Those businesses are Clear Eyes, Chloraseptic, Compound W, Little Remedies and Doctor's NightGuard.

  • This group performed extremely well this quarter, up 16% year-over-year in aggregate.

  • As we've previously stated, these brands will be a priority from a resource and support standpoint.

  • For us, we'll measure our success here in this OTC space as a leading indicator of how we are performing overall as a company.

  • Comet is the sixth core brand and is the company's largest brand overall, competing in the household products space.

  • It faces very different retail and competitive pressures than those encountered by the OTC brands.

  • Given Comet's size and importance, we are committed to defending this core brand and bringing news to consumers to draw them into the franchise.

  • Two great examples that come to mind for me, first is the new updated, upscale look of Comet's package graphics and copy which significantly improves our presence at the retail shelf.

  • The new package debuted at Walmart earlier this month and should be available nationally within the next month.

  • Second, all Comet spray products will soon have a new, more contemporary spray bottle which is easier to use and 100% recyclable.

  • You should see the new bottle on shelves beginning later this month.

  • As I know all of you are aware, we completed a refinancing during the fourth quarter of the last fiscal year.

  • This gives us liquidity for another six years and financial structure to add other pillars of growth to the company through acquisitions.

  • We continue to review and pursue acquisition opportunities; virtually all of them are in the OTC space.

  • We believe M&A activity is one of the keys to the company's long-term health and an important component to creating shareholder value.

  • Now let's discuss our business by segment, starting with our OTC products which were up overall 10% year-over-year.

  • Clear Eyes was up an impressive 12% year-over-year and well ahead of the category which was up 3.4%.

  • Next time you go to the store, check out the eye care section, the new Clear Eyes package graphics literally pop off the shelf in a way that consumers can't miss Clear Eyes at retail.

  • We're backing up our great on-shelf presence with print advertising in major consumer magazines and for the first time ever we're communicating with thousands of pharmacists through a special mailing, talking to them about the benefits of Clear Eyes and highlighting this brand as affordable eye care.

  • We are very pleased with the results thus far.

  • Compound W wart treatment was up almost 10% versus the year ago period and also ahead of category which grew at about 8%.

  • Importantly, Compound W gained market share this period while our key competitor lost share.

  • Our cryogenic SKU, Freeze Off is leading the way for this brand, largely as the result of new distribution, but the entire brand is doing quite well across the board in the sal-acid SKUs as well.

  • You may not realize that we're a very small team of 90 people at the company, so when something good happens, we like to celebrate together.

  • A few weeks ago we celebrated the official launch of Compound W skin tag treatment in Canada.

  • We have high hopes for this brand, which just began a full TV ad schedule this week.

  • The compelling commercial tells the viewers straight on, you could see a dermatologist for skin tags, but now you can treat them at home.

  • I love the last line of the commercial; no appointment necessary.

  • It's our hope that we'll be able to expand this product into other geographies in the future.

  • Chloraseptic, America's number one sore throat relief product, has a revamped line with a new look, just in time for the upcoming cough/cold season.

  • On shelf very soon this fall you'll see a full line of unique liquid center lozenges which relieve sore throat pain, some treat cough too and some are even sugar-free.

  • We meet the needs of every consumer with a sore throat.

  • We will also introduce a new shaped bottle which will be easier for the consumers to use with one hand.

  • For the first quarter, Chloraseptic spray, the leading SKU in the category, was down slightly at 2.5% but that was much less than the category decline of 6%.

  • You can rest assured we're prepared to stay the number one brand in sore throat relief.

  • Little Remedies, our full line of pediatric OTC healthcare products for infants and children was down this period approximately 4% primarily as a result of softness in our saline SKU due to competitive pressures.

  • It's been a very business time for this line in particular.

  • In July we launched Little Fevers, a new infant fever and pain relief product which meets consumer and customer needs following the national recall of similar brands from major manufacturers.

  • I'm very proud of the team that created this product in an amazingly short amount of time.

  • From concept to retail shelf took about eight weeks.

  • This is another example of the importance leadership plays in an organization like ours and it's a characteristic that we continue to encourage throughout the company.

  • This new SKU will add revenue to Little Remedies line and enhance the shelf presence of the great Little Remedies lineup.

  • We also launched Little Remedies honey elixir nationally, which is a non-medicated cough treatment for kids age one and older.

  • We are also currently testing three new Little Remedies products in other categories as well.

  • Remember, the Little Remedies line is especially appealing to parents these days because the products contain everything parents want and nothing they don't; meaning the line has no artificial ingredients, alcohol or dyes.

  • On Little Remedies we're also continuing to use social media like Twitter and FaceBook to support our marketing efforts and talk directly to parents and we have a number of other innovate new digital marketing ideas now in development which could really make a difference for the brand with our consumers.

  • I hope to be able to talk more about those when we report the second quarter in November.

  • Next, household products; Comet cleanser, the segment's largest brand, was down 6% over the prior period but outperformed the abrasive segment which declined double-digit over 10%.

  • We're pleased that our market share increased almost 3 share points, gaining on our nearest competitor in the abrasive category and I think, as I stated earlier, everyone is aware that there continues to be significant competition and price pressure throughout the entire household segment, as I said was evidenced by a number of earnings releases this week by companies in the household segment.

  • Spic and Span performed quite well this quarter, up an impressive 12% versus year ago and ahead of the all purpose spray cleaner segment which was up modest single-digit.

  • We recently added the DFE seal to certain Spic and Span liquid products.

  • DFE stands for Designed For the Environment; this is the Environmental Protection Agency's label that tells consumers that the ingredients contained in this product are safer for the environment and for use around children and pets.

  • It appears this product benefit is bringing news to this brand and it's having a favorable effect on consumer buying patterns.

  • Here's a great example of how we're enhancing the consumer and customer appeal of a product by bringing news to it.

  • This 76 year old product is going strong and is current with today's household cleaning product trends.

  • Our smallest business segment, personal care, which represents only 3.5% of the portfolio, was down 22% to $2.6 million this quarter.

  • This results largely from sales declines in Cutex nail polish remover, the segment's largest brand, following distribution losses last fall.

  • I'll now turn the call over to Pete who will take you through the details of the financial performance.

  • Pete Anderson - CFO

  • Thank you Matt and good morning everyone.

  • As you may have seen in this morning's earnings release, reported net revenues for the first quarter were $73.4 million, $2.4 million or 3% better than last year's net revenues of $71 million.

  • Net income from continuing operations of $9.6 million or $0.19 per share for the quarter was $1.6 million or 20% greater than last year's net income from continuing operations of $8 million or $0.16 per share.

  • Our operating income for the first quarter was $21.3 million; that's 15% greater than last year's $18.5 million.

  • The operating income increase resulted from an increase in gross profit due to the revenue increase, combined with favorable A&P and G&A expenses.

  • During the quarter we generated $20.6 million of free cash flow, a $2.6 million improvement over last year's free cash of $18 million.

  • As you may recall from our last call, we ended March with a cash balance of $41.1 million because we had approximately $28 million of untendered 9.25% bonds to redeem.

  • That was accomplished in early April.

  • At the end of June, our cash on hand was $33.1 million.

  • We have chosen to hold the cash rather than pay down debt, in order to provide ourselves with maximum flexibility as we access potential acquisition opportunities over the coming months.

  • Now let's look at the operating performance for the quarter in more detail.

  • Cost of sales for the quarter of $34.5 million was $1.3 million or 4% more than last year.

  • As a percent of revenue, cost of sales increased from 46.7% to 47% A&P expense of $7.6 million was $1.2 million or 13% less than $8.8 million last year.

  • The decreased spending year-to-year was due to a significant reduction in A&P spending against Chloraseptic Allergen block and Little Allergies, which was partially offset by a 79% increase in A&P support against our core brands.

  • G&A expense of $7.4 million was $800,000 less than prior year.

  • The primary driver of the decrease was reduced salary and legal expenses.

  • Now let's take a look at the first quarter results by segment.

  • Net revenues for the OTC segment of $44.3 million were $4 million or 10% greater than last year.

  • We had increased sales for Clear Eyes, Compound W, Wartner, New-Skin, Murine Tears, Percogesic and the Sleep-Eze brand in Canada.

  • Those sales were partially offset by declines for the Allergen Block products as well as irrigate.

  • Gross profit for the segment was $28.8 million, 8% higher than last year's gross profit of $26.8 million, and that was due to the revenue increase.

  • Cost of sales as a percent of revenues was 35.1% compared to 33.6% in the prior year's quarter and that was primarily due to mix, as the Allergen Block products have an above average gross margin.

  • However, in addition to that, Clear Eyes costs have increased and that's a result of the manufacturing change made last year.

  • Our contribution margin of $23.6 million for this segment was 18% greater than last year, when the contribution margin was $20 million.

  • That was due to the gross profit increase and reduced advertising expenses of $1.6 million.

  • Our A&P spending for the segment of $5.2 million in the current year was 23% less than last year's spend of $6.7 million, due to the significant reduction in A&P spending for the Allergen Block products.

  • That was partially offset by A&P spending increases of 85% against the core OTC brands.

  • Household products net revenues of $26.5 million were $900,000 or 3% less than last year.

  • The sales increase on the Spic and Span brand was offset by declines on the Comet and Chore Boy brands.

  • Gross profit of $9.1 million was $500,000 below the prior year.

  • The decline in gross profit was due to the sales decline.

  • The household products segment contribution margin for the quarter of $6.8 million was $900,000 below last year's contribution margin of $7.7 million.

  • A&P expense of $2.3 million was $400,000 greater than the prior year's expenditure of $1.9 million.

  • Finally, net revenues from the personal care segment of $2.6 million were $700,000 or 22% below last year's first quarter net revenues of $3.3 million.

  • The sales decline was primarily due to decreased sales for Cutex, resulting from distribution losses last fall.

  • Our gross profit of $1 million was $400,000 below last year and contribution margin of $900,000 was $400,000 less than last year, again as a result of the sales decline.

  • And now, I'll turn the call back over to Matt, who will provide additional perspective on the quarter.

  • Matt Mannelly - President and CEO

  • Thanks Pete.

  • So briefly to sum up, first quarter performance speaks for itself, I think; a solid 3% increase in revenues in a very difficult economic environment, combined with a 20% increase in net income from continuing operations.

  • Our core OTC brands were up 16% in aggregate and I'm hopeful and confident that they will continue to gain strength based on the new strategic direction that we've laid in place this year.

  • We're very excited about the marketing and advertising plans for our core brands for the remainder of the year.

  • I think the organization has greater focus than ever before against the consumer and the customer and financially we are very sound.

  • As Pete said, we generated $20.6 million in free cash flow during the first quarter, we are very well financed and both these things provide many options for us moving forward.

  • Thanks for your attention this morning.

  • We'd be happy to take your questions at this time.

  • Operator

  • (Operator instructions) Our first question is from Joe Altobello representing Oppenheimer.

  • Joe Altobello - Analyst

  • First, the number that jumps out obviously in the quarter was the OTC healthcare business and the 10% growth there.

  • It seems like you had some decent category growth but you also gained some market share across a lot of your core brands.

  • Can you talk about just beyond the new packaging that's on the new products, what's really driving that number?

  • It's probably not sustainable, but still it's a nice improvement over what you've done in the last few quarters.

  • Matt Mannelly - President and CEO

  • Joe, if you think about the last few quarterly calls, I think our strategic direction change that we've been talking about for a couple of quarters is really to get back to those core brands and to start supporting those core brands on an ongoing basis.

  • So we said over the last couple of quarters, we're not going to increase A&P overall significantly; it's going to be low single digits, but we're going to increase our A&P support behind the core brands.

  • We started doing that.

  • I think it's starting to pay off.

  • Do I think it can hold, we can grow it 16% against the core OTC brands long-term?

  • Probably not sustainable, to your point.

  • But I think for us, this is just the beginning of laying the foundation for those core OTC brands through support and there's more to come and it's going to give us a really solid foundation for future growth I think.

  • Joe Altobello - Analyst

  • That's a good segue to my second question, which is, I think in the last call you mentioned that you expected A&P spend in dollars to be roughly flat in this year versus last year, given what we're hearing from a lot of companies this quarter about a shift in spending from traditional advertising toward promotion, does that still hold and are you seeing that shift as well?

  • Matt Mannelly - President and CEO

  • The answer is as of right now, yes, it still holds what we said at the beginning of the year and I think we set up very modest single digits, low single digits for the overall A&P and I think we also said that we're going to increase for the year our A&P spending against core OTC products by 20-some percent.

  • I think the second part of your question as far as that spending mix; I think there are potential implications for the household business, not for the OTC business.

  • So my feeling right now is, steady as she goes on OTC; I think we're doing the right things and household I think you have to assess based on the marketplace.

  • And as I kind of mentioned a couple of times in the call, look at the earnings releases this year from Clorox and P&G and everyone and what their comments are about household.

  • I think any manufacturer needs to address value in household right now and if you don't, you do so at your own peril.

  • So I think there may be a required shift in mix and household to address the marketplace.

  • I think OTC stays the course.

  • Operator

  • Your next question is from John San Marco representing Janney Montgomery Scott.

  • John San Marco - Analyst

  • Congratulations on a good quarter.

  • It seems like the abrasive cleaners category I think you called it out as being down 10%.

  • I know there's weakness across much of household cleaning segments but that seems like a surprisingly severe contraction to me.

  • Can you just talk about maybe why you think that was?

  • Matt Mannelly - President and CEO

  • There's probably two things that contribute to it, Joe.

  • One is maybe a little bit of shift from abrasive to nonabrasive cleaners, but I think the bigger one is when we talk about what's going on in the category, we use IRI and POS data which is food/drug, mass and Walmart, so when we talk about category numbers what's not picked up in the category numbers is everything that's going on with the dollar channel, so that down 10% for the category doesn't incorporate for anyone what's happening in dollar.

  • And as I think you're probably aware, a lot of that business is moving to dollar.

  • And we're actually pretty well positioned in dollar, to be honest with you.

  • We've had some good success in dollar.

  • So that's part of it.

  • That number's a little bit misleading because it's not capturing the whole marketplace.

  • John San Marco - Analyst

  • I guess as a follow-up to that comment, more big picture, can you talk about channel mix?

  • This isn't the first year we've seen some fairly rapid change in channel mix; can you just talk about that strategically, how you think it changes your margin structure, etc?

  • Matt Mannelly - President and CEO

  • I don't think it changes it that much, because John, obviously with the strength of OTC and our strategy of OTC focus, I think the channels we're in, specifically drug, Walmart, etc., I think our mix and our margin stays the same.

  • So I don't see a big shift in margin as a result of what's going on with channels.

  • I think from a channel standpoint what you're seeing -- I know you guys are all seeing the same thing we are and that is the drugstore channel continues to struggle just to get flat year-over-year in comp store sales.

  • It's really down about 1%.

  • I think Walmart is struggling to get comp store sales, which hopefully they're starting to turn that around.

  • I think the dollar channel continues to perform strongly.

  • But with what's going on, I don't see us as having a dramatic shift in terms of our margin.

  • And that's primarily because of our OTC focus that I don't think it's going to happen.

  • John San Marco - Analyst

  • Then one sort of housecleaning item.

  • Can you quantify the softness you sort of alluded to that you expect this quarter from lapping H1N1 and then secondly whether you expect any of that negative effect to leak into the third quarter also?

  • Matt Mannelly - President and CEO

  • I can tell you John, obviously we don't give guidance on the specific numbers but everyone says they want us to be transparent so we have been saying -- we said in the last quarter and we're saying it again now and we're no different than anyone else.

  • Every manufacturer is saying H1N1.

  • I just read Clorox's release this morning; they're talking about this quarter and H1N1, so it's affecting everyone.

  • So I think it will result in softness against some key brands like Chloraseptic, Little Remedies, etc.

  • However, to your point, that will smooth out as the year goes on, so that will fall into Q3 and Q4, so for the year, I think it will be pretty close to a wash but for the second quarter there was a real heavy load last year by the trade, which is why the trade and all the manufacturers have been talking about it.

  • John San Marco - Analyst

  • A heavy load that ended up being too much, would you agree with that?

  • Matt Mannelly - President and CEO

  • Yes, it was too much, because there was a real anticipation of significant H1N1 that didn't materialize, so then it really took -- that load in Q2 took Q3 and Q4 to pull all that product out.

  • John San Marco - Analyst

  • Thank you so much for taking my questions and congratulations.

  • Operator

  • Your next question is from Torin Eastburn representing CJS Securities.

  • Torin Eastburn - Analyst

  • I think all my questions have been answered, but thank you.

  • Operator

  • Your next question is from Mr.

  • Reza representing Barclay's Capital.

  • Reza Vahabzadeh - Analyst

  • Just on the abrasives category and the weakness there, do you anticipate either the category or your share of it to remain soft for the balance of the year whether it's because of general (inaudible) weakness or shift to other nonabrasive products?

  • Matt Mannelly - President and CEO

  • We don't call that but again, based on what everyone's seeing right now in household, I think we expect household, the category overall to continue to be challenging for all manufacturers for the foreseeable future.

  • Pete Anderson - CFO

  • But I don't think that we're going to lose share.

  • I mean, we haven't lost share and we certainly don't intend to lose share.

  • Reza Vahabzadeh - Analyst

  • Have you seen much of an increase in promotional intensity in any of your key categories in the recent quarter?

  • Matt Mannelly - President and CEO

  • I think again, Reza, that's happening in household.

  • I don't think it's happening in OTC.

  • We're not seeing an increase in promotional spending in OTC like everyone is in household.

  • Reza Vahabzadeh - Analyst

  • Then my last question, you talked about the appetite for acquisitions; can you just talk about activity levels there and if targets are starting to look like something that you might actually see targets that are attractive to you?

  • Matt Mannelly - President and CEO

  • I'll say two things.

  • One, I think the appetite level and what we're seeing is greater than a year ago for a couple of reasons I think.

  • First of all, we weren't really in the market a year ago, so we weren't seeing as much stuff, because we didn't have the balance sheet and the wherewithal to do acquisitions so we weren't really in the game so we weren't seeing as much.

  • So we're seeing more today just by the fact that we're in the game.

  • Second of all, I think some people are saying hey, I think there are some large companies that are willing to think about whittling down their portfolio and there's some smaller companies out there that it might be the right time to sell, so I think people are seeing that activity is picking up in the last six months.

  • So I think we're just trying to be active in that pool in terms of looking at those companies.

  • Operator

  • Your next question is from Mimi Noel representing Sidoti & Company.

  • Mimi Noel - Analyst

  • Just a couple of questions.

  • I know last quarter it came up; I didn't hear you talk about it this quarter.

  • But any revenue from the legal agreement that you had reached previously; did that affect this quarter?

  • Pete Anderson - CFO

  • Not at all.

  • Mimi Noel - Analyst

  • Very good.

  • And then you touched on just broadly your excitement about you're A&P plans for the balance of the year and I think you did clarify a little bit, but the overall spending should be up modestly in dollars year-over-year but dedicated to the core brands up about 20%.

  • Did I understand that correctly?

  • Matt Mannelly - President and CEO

  • Correct.

  • Core OTC brands are going to be up over 20% spending for the year, Mimi.

  • Mimi Noel - Analyst

  • Okay.

  • Are there product launches, is there timing to be aware of as to how that might be concentrated quarter to quarter or are you thinking it's relatively smooth?

  • Pete Anderson - CFO

  • This is a great question for those of you on the call who love linear spending, the one thing that we've been telling people for the last six months is that our patterns, as you saw in the first quarter, are going to be remarkably different than they were last year, because we really have shifted that overall spend away from the allergy products where we spend the preponderance of our money last year, and now we're going back to spending against the core brands and basically the spend, as you saw in the first quarter, is going to be when those products are in season.

  • So for instance, Chloraseptic, a core brand, had very little spend in the first quarter because the season doesn't kick in until the fall and the winter.

  • So what I've been telling people throughout is that -- again, we're not going to give guidance, but the way that the spending falls is going to go back to the way that the brands are in season and that's when we're going to spend against it.

  • Sorry that I'm not being specific but I think the point is that when you're building the models, you can't just say okay they said they were going to be flat spend so we'll just take each quarter last year and mimic what the quarter was, because it won't fall that way.

  • Mimi Noel - Analyst

  • I understand it will swing with the timing of the seasonality.

  • Matt Mannelly - President and CEO

  • I think for me also, from a marketing standpoint, it's not just about the absolute dollars, but there's a couple of things.

  • One, I talked about, the shift in those dollars back to the core OTC brands and the other part that doesn't come through in the numbers is the impact that's having on our organization, in our marketing organization specifically.

  • We now have a number of brand managers in a marketing group that's getting to spend against their core businesses; that is energizing the marketing group and it's challenging people now creatively to think about how can they creatively best maximize their brand.

  • So, if you're a marketing person, that's what you want and they're now being given that and they're kind of rising up to the challenge.

  • We have a new CMO and I think we're seeing a renewed level of energy from the marketing group that's going to result in greater and more creative marketing.

  • So, my hats off to Tim Connors and the marketing group for the job they're doing.

  • Mimi Noel - Analyst

  • Okay.

  • Then one or two more questions.

  • There was I think an 85% increase for the core brands A&P this latest quarter?

  • Pete Anderson - CFO

  • Yes.

  • Mimi Noel - Analyst

  • So what products' peak seasonality does that reflect?

  • Pete Anderson - CFO

  • That reflects Clear Eyes for one and Clear Eyes is certainly not a brand that only has one season but due last year to the fact that we were putting a lot of money behind the Allergen products, we cut back on some of the spend behind Clear Eyes as well as the other core brands.

  • That's one that just comes to mind that there was a significant increase year-on-year, but that's one also that you can expect that they'll be advertising spread throughout the year this year, where we didn't do it last year.

  • Mimi Noel - Analyst

  • And I heard correctly when Matt said Clear Eyes was up 12% in the quarter?

  • Pete Anderson - CFO

  • Correct.

  • And that was Clear Eyes consumption.

  • Mimi Noel - Analyst

  • Those were all consumption numbers then?

  • Pete Anderson - CFO

  • Correct.

  • Matt Mannelly - President and CEO

  • Clear Eyes continues with strong performance.

  • Mimi Noel - Analyst

  • Then I think you disclosed in the past those core brands you speak of account for about 50% of revenue.

  • If you just isolate the OTC products core brands, what percentage of revenue is that?

  • Can you give us a little context?

  • Pete Anderson - CFO

  • Yes.

  • It's in the 45% range.

  • Operator

  • Your next question is from Chris Serra representing Banc of America.

  • Chris Serra - Analyst

  • On the big growth number obviously in OTC, how much of that is specifically the increase in marketing spend?

  • In other words, what's the innovation pipeline look like?

  • And I know that's an initiative going forward and I understand it's a marathon and not a sprint, but can you just give a little progress update on what you're doing to change the innovation process and have we seen any of that hit in these numbers or are we just looking at an increase in sales because of an increase in marketing?

  • Matt Mannelly - President and CEO

  • Chris, it's a good question but I think that's a work in progress.

  • We're just starting -- when we talk about a shift in our strategy and our strategic direction for the company, this rededication to core OTC brands just happened in the last nine months and so it's all just starting to come to fruition.

  • We're still very early on in this whole situation, so I'm more bullish about the future of the OTC brands than I am about the present, because I think watt we do over the next year is going to have a bigger impact for the long term.

  • So I can't sit here and tell you the increase in spending is worth X versus the innovative part of the marketing is worth Y.

  • Pete Anderson - CFO

  • The one thing, Chris that did help the OTC was the introduction of the skin tag product in Canada.

  • But again, in Canada, compared to the US market, it was nice for Canada but that didn't dramatically move the needle for the whole OTC.

  • Chris Serra - Analyst

  • That makes sense.

  • And then the number I guess is 79% or the 89% or the 85% increase that you cited in marketing for your core brands, I guess that seems like it was funded by the reduction in spending from the Allergen side.

  • Obviously the other segments don't have as much advertising spend to source it to.

  • How do I think about it going forward?

  • In other words, if you were to sustain a base level of stepped up advertising across all of your core brands, does that mean that when you have a big new product like you had with Allergen or like you had with Irrigate that you will not see as big a push up in marketing spending or might you still see that, it's just that the overall added spending would end up being higher where you see a big new product?

  • Matt Mannelly - President and CEO

  • I think it depends Chris on the level of the introduction, number one, and how much you would increase overall spending and I think the second thing I would say is I think historically we have always said well we have finite A&P dollars so if we're going to do this big bang introduction, we're going to pull it all from the core businesses.

  • The direction today is saying keep the core businesses flowing on a steady basis; don't pull support from them like a yo-yo.

  • So I think we're committed to supporting those core OTC brands on a regular basis and then depending on the introduction and the level of it, and the level of innovation, will determine how much incremental spending will go behind it.

  • Chris Serra - Analyst

  • Okay.

  • If I picked two of your products in the recent past like Irrigate and Allergen, what's your feeling on the success of those two products?

  • Pretty good starts, I think we've probably seen them cool off and decline.

  • Is the innovation going to have to be to some extent big bang and then cool off or do you think you'll be able to get past that and have new products with a greater degree of sustainability or is that not fair?

  • Am I not being fair?

  • Are those products' sustainability better than maybe what I'm giving them credit for right now?

  • Matt Mannelly - President and CEO

  • I think it's a good question and I think you're representing it pretty well.

  • We've talked about this, we have a change in direction with regard to new products so for example, let's use Allergen Block, I think we've put a lot of resources, human and financial resources behind Allergen Block and I think it performed okay.

  • You don't put a lot of resources behind things that perform okay; you put a lot of resources behind things that perform well.

  • I think one of the reasons we've talked about is if you look at Chloraseptic Allergen Block and the category it went into was Zyrtec, Benadryl, Claritin and while we put significant dollars behind it, in the neighborhood of potentially $10 million in spending, when Zyrtec is spending $150 million and we have one SKU in the aisle and they have a ton of them, I don't think we can make the impact with the consumer.

  • So rather I think we, from or strategy at this point is those new product introductions, let's use Chloraseptic Allergen Block, that went into a new category for us.

  • Maybe Chloraseptic, we should be looking at new items innovation for Chloraseptic Allergen Block was all about allergies for your nose, applied to the outside.

  • Maybe we should be thinking more along the lines of Chloraseptic -- Chloraseptic has tremendous brand equity.

  • Where does it have tremendous brand equity?

  • It's all about your throat, right?

  • So maybe future innovation in new products for Chloraseptic should think about in the mouth cavity.

  • It doesn't have to just be the throat; it could be anywhere in the mouth cavity and maybe that's closer to home and resonates more with consumers.

  • So I hope that gives you a flavor of where we'd be going.

  • Operator

  • (Operator instructions) Your next question is from Jon Andersen representing William Blair.

  • Jon Andersen - Analyst

  • Quick question just on gross margin, with the strong performance in OTC, I might have expected gross margin to maybe be up year-on-year, it's kind of flattish to slightly down.

  • Are there some offsets there that are impacting the gross margin line?

  • Pete Anderson - CFO

  • Jon, the two things are that household was down and household as we've been talking about all morning, that's the category where those pricing pressures in the form of markdowns or rollbacks or things like that have impacted and continue to impact.

  • And then as I mentioned in my section, on the OTC side the move in manufacturing for Clear Eyes last year has resulted in margins for Clear Eyes that are going to be a little bit softer than they have been for the last couple of years because the new manufacturer is further away from our St.

  • Louis facility so there's a transportation increase as well as the cost of goods is slightly higher.

  • Jon Andersen - Analyst

  • That's helpful.

  • One quick follow-up.

  • I know it's a pretty small part of the business now but what's left in the personal care segment and what's the approach to managing that business or thoughts on that business going forward?

  • Thank you and congratulations on a good quarter.

  • Pete Anderson - CFO

  • Really, Cutex is the biggest brand by far and as we've said, the decline in the segment was largely due to the Cutex distribution losses that we reported last fall.

  • That said, Cutex actually beat our first quarter budget, so where Cutex is in, Cutex is actually doing better than we expected.

  • The remainder of the category is a series of very small brands that quite frankly since we bought the business have been on a decline but certainly not a precipitous decline and that pretty much continues.

  • Those are brands, with the exception of Cutex, that have pretty loyal followings, they're small brands and the only support that they enjoy is co-op programs with those retailers that want to support the brands with us.

  • So the go-forward strategy is exactly what we've been saying for the last couple of years, that if we wind up getting an offer that we believe is a fair offer, we would certainly contemplate it.

  • If not, we will happily run the brands for the cash flow that they provide that goes back in to support the other brands in the business.

  • Operator

  • Your next question is from Stephen Christel representing The Clark Estates.

  • Stephen Christel - Analyst

  • I was interested in your thoughts on the Comet brand and I realize you identify that as one of your core brands, but it does seem to have quite different challenges as well as very large competitors that seem to be competing heavily on price.

  • I was wondering if there was a price that would make sense to possibly sell that brand or that division and then use the proceeds to pursue your OTC acquisitions and perhaps a stock buyback?

  • Matt Mannelly - President and CEO

  • Well, I think Comet historically has been a significant brand for Prestige, it's got a great brand equity and that's what you want in any brand.

  • I think right now in the short-term, I think the household segment is facing some strong headwinds.

  • It's not the first time that's happened in a segment; it won't be the last.

  • I think we're committed to the brand; we're committed to weathering that storm.

  • And would we, for the right valuation, an OTC or any brand, I'm sure we'd consider it if it was the right valuation but again, Comet is a core brand for us right now that we're not looking to do anything with it in the near-term.

  • Operator

  • At this time I would like to turn the call over to management for closing remarks.

  • Matt Mannelly - President and CEO

  • Again, I just would like to thank everyone.

  • We appreciate your time and your coverage and we look forward to next quarter's call with you.

  • Thank you.

  • Operator

  • Thank you for your participation in today's conference.

  • This concludes the presentation.

  • You may now disconnect and have a great day.