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Operator
Good day, ladies and gentlemen, and welcome to the third quarter 2011 Prestige Brands Holdings earnings conference call.
My name is Derek and I will be your operator for today.
At this time all participants are in a listen-only mode.
Towards the end of the conference we will facilitate a question-and-answer session.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to Mr Dean Siegal, Director of Investor Relations.
You may proceed.
- Director, IR
Good morning.
Welcome.
As a reminder there's a slide presentation that accompanies this conference call, which you should access right now if you haven't already.
It's at www.prestigebrands.com.
Click on investor relations on the left side of the screen, and then on webcasts and presentations on the right.
We are the top presentation listed under title.
I want 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 is known as forward-looking statements.
All forward-looking statements involve risks and uncertainties, which in many cases are beyond the control of the Company and may cause actual results to differ materially from management's expectations.
Additional information concerning the factors that might cause actual results to differ from management's expectations is contained in the Company's annual and quarterly reports that it files with the US Securities and Exchange Commission.
Now I'd like to introduce Matt Mannelly, President and CEO.
Matt?
- President, CEO
Thank you, Dean.
Welcome to everyone joining us on the call this morning.
And a special welcome to Ron Lombardi, our CFO, who is joining us on his first call today.
As Dean said, with our recent acquisitions, in order to give you better insight into our results, we provided a presentation today for you to follow along that we will speak to.
So, with that let's start with slide three and the highlights for this quarter include that overall revenue growth was driven by both our core OTC strategy as well as the Blacksmith acquisition.
We've said on previous calls that we're going to increase our A&P investments in our core OTC portfolio and it is clearly paying dividends.
Consumption for the quarter, which is consumer take-away at retail according to IRI, is up over 26% in those core OTC brands, which significantly exceeds category growth of negative 1% in the categories in which those brands compete.
The M&A strategy we've embarked upon over the last year has yielded tangible results as evidenced by our two acquisitions completed in the last 90 days.
We are now in the process of integrating Blacksmith and Dramamine into our organization.
Again, as previously communicated, we are investing in the brands in these acquisitions in order to build a foundation for a strong future.
In addition, as Ron will discuss in a few minutes, there were one-time charges associated with these acquisitions.
Overall, I'm pleased with the portfolio's performance for the quarter.
Our investments are yielding results and setting the foundation for FY '12 and beyond.
So, now if you would please turn to page four.
The next slide, which some of you have seen, shows you how we're improving our portfolio mix and have increased our core OTC brands from five to eight in the third quarter.
If you look on slide five, this slide really demonstrates to you that our OTC portfolio is really changing before our eyes.
Our core OTC brands, which we have really focused on so much for the last nine months, now represent two thirds of the Company and over 90% of our OTC portfolio.
If you turn to slide six, I'm really pleased to talk to you about what we're doing to build our brands and how it's working in the marketplace.
Let's start with Clear Eyes.
Clear Eyes has been a real star for us.
It has shown steady growth.
We've done this through impactful line extensions like Clear Eyes Complete, as well as effective marketing support.
Recently we brought back Ben Stein who has been a very effective and recognizable spokesperson for Clear Eyes and the results really speak for themselves.
For the quarter, Clear Eyes grew at five times the category growth rate.
Next, Chloraseptic has also really been a winner for us.
We have a new TV campaign focusing on our lozenge business with a soothing liquid center.
In addition, we recently introduced an ergonomic bottle that does a much better job of providing brand recognition at retail.
For the quarter we gained market share since our performance was significantly better than the category, which was down 7% for the quarter.
The cough cold season started off slowly, but has picked up significantly as of late, which I'm sure you have heard from other manufacturers and retailers.
Finally, Little Remedies has made great progress this year.
The brand really resonates with Moms who want all the good things in products and none of the artificial things they don't want.
This is why our new safety zone campaign has been such a hit with Moms.
In addition, new products and distribution gains have really contributed to Little Remedies' success.
Leading the way has been Little Remedies Honey Elixir which has charged off the charts and is one of the top selling pediatric SKUs at retail.
As the numbers indicate, in a time where the category was down as a result of everything going on with some other key brands, Little Remedies grew consumption for over 40% for the quarter, which is really amazing.
Now if you turn to slide seven.
As we said when we purchased Blacksmith Brands, we are committed to increasing marketing support out of the gate in order to build a foundation for these brands' long-term success.
This is one of the reasons why I was quite proud that our marketing team was on air with a new national TV advertising only two weeks after we purchased the business.
We beefed up our support for all of these brands and are excited about what the future holds for them.
As you can see on slide eight, we stated at the beginning of the fiscal year we have stepped up our spending against our core OTC brands, and specifically in the second half during the heart of the season.
As I mentioned earlier, consumption trends clearly indicate that this strategy is working.
We also said, when we purchased the Blacksmith Brands, we were prepared to invest significantly in these brands in the near term to establish them for long-term success and we follow through on that commitment.
If you turn to slide nine, this page is a real testament to all 100 employees and their hard work over the last year.
It shows that their hard and smart work is really paying off.
I already talked about Clear Eyes, Chloraseptic, and Little Remedies.
You can see how their consumer take-away for the quarter is far out stripping the category trends.
You can see Compound W also had a fantastic quarter from a consumption standpoint at plus 25%.
The Doctor's was down for the quarter and, as you know, this is related to the distribution we lost in the fourth quarter last year at a key account.
After a successful test this year, we have been told that we will be regaining that distribution at that account.
And as you can see here, Ludens, Efferdent, and PediaCare all significantly outperformed their categories.
We are quite pleased with the consumer take-away of these new brands during our first quarter of ownership.
The end result for the core OTC group was really outstanding for the quarter at plus 26.5% in consumption.
If you turn to slide 10, I think the really good news is that these trends are accelerating and have been improving over time, again, a testament to our new strategy.
I'm not one to put too much stock into four-week trends, but I sure do like plus 35.9%.
And if you turn to slide 11, our Household business is the one area that continues to provide real challenges.
We've talked on previous calls about the price wars going on in this category.
Price reductions continue to roll the category during the current time and are actually driving down overall consumption dollars as a result of this lower pricing.
In the abrasive segment, we continue to gain market share.
In the non-abrasive segment, our trends were weak for the quarter as a result of competitive introductions as well as continued heavy promotional activity.
We are in the midst of our FY '12 business planning and we are taking a fresh look at line extensions and new packs that we will offer in FY '12 across various channels of distribution.
We will continue to work hard to successfully defend in this difficult marketplace and improve our trends.
You turn to slide 12 please.
I'm pleased to let you know that we are working hard with regards to successfully integrating the Blacksmith Brands into the organization.
I already spoke about our marketing success.
Our sales force is currently getting up to speed and from a supply chain standpoint, purchasing is 100% integrated and our warehousing consolidation will be complete by the end of the quarter.
We've had excellent on time delivery rates since the close and no disruption in any areas.
As I said, we are pleased with the results to date of our marketing investment and are really focusing on investing for long-term, sustainable growth and success.
Now if you go to slide 13.
Finally, before I turn it over to Ron, I know you're all aware that after the close of the quarter we completed the Dramamine brand acquisition in the US.
This great brand is the number one brand in the motion sickness category.
It's a great fit with our portfolio and we believe we can continue to grow the brand and build on its success in its latest 52 week plus 7% consumption trends.
We are currently working through the transition of this acquisition and expect it to be smooth and completed by the end of this quarter.
If you'll turn to page 14.
So, as you can see on page 14, with this acquisition we will now have nine core brands that represent 75% of our portfolio.
As importantly, in addition to them being a high percent of our portfolio, I'm quite pleased with the quality of these brands and their future potential.
So, now I would like to turn it over to Ron who will give you some additional commentary regarding our financials for the quarter, starting with slide 15.
- CFO
Thanks, Matt.
Starting on slide 15, we will highlight the financial results for the quarter.
Prestige realized strong results in the third quarter, largely driven by the growth strategy that Matt has described.
Specific results include strong revenue growth from Prestige's core OTC brands, and the acquisition of Blacksmith Brands.
Brand building A&P investments for the core OTC brands and to support the Blacksmith Brands.
And finally, excluding the costs associated with the Blacksmith acquisition an increase in both net income and EPS in the quarter over the prior year, even after significant A&P investments.
Turning to slide 16, we will continue with the financial summary for the quarter.
Please note that unless otherwise noted, the financial information discussed today will exclude the costs associated with the Blacksmith acquisition.
Revenues for the third quarter were $90.6 million, an increase of $16.8 million, or 22.7% versus the prior year.
Revenues excluding the addition of the Blacksmith Brands grew $1.6 million or approximately 2%, while Blacksmith added $15.2 million during the quarter.
Gross profit for the third quarter increased $8.5 million, or 21.6% when compared with the prior year.
As a percent of total revenues, gross profit decreased slightly from 53% in fiscal 2010 to 52.5% this year.
The decrease in gross profit as a percent of revenues was primarily due to the expected mix impact of the Blacksmith Brands.
A&P spending increased $7 million over the prior year.
$5 million of the increase was due to the acquisition of Blacksmith, while the remaining $2 million was in support of our key priorities during the heart of the cough and cold season.
As Matt has discussed on previous calls, A&P spending for the full year, excluding Blacksmith, is expected to be up modestly over the prior year and varies quarter to quarter.
General and administrative expenses were $8.5 million for the quarter, compared to $7.3 million for the prior year.
$500,000 of the increase was due to the acquisition of Blacksmith, while the remaining $700,000 was due to quarterly timing distances versus the prior year, with December year-to-date still below the prior year's totals.
For the quarter, net income increased $300,000 or 3% when compared to the prior year.
We achieved this increase even with our significant increase in A&P support.
Earnings per share, excluding the costs associated with the Blacksmith acquisition, increased $0.01 to $0.21 during the quarter over the prior year.
In a quarter with heavy A&P investment activity, we are pleased with this increase in EPS.
Earnings per share as reported declined $0.16 to $0.04 during the quarter from the prior year's level, primarily due to $8.1 million of costs net of taxes related to the Blacksmith acquisition.
We will detail these costs on a later slide.
If you will turn to slide 17, we'll continue with year-to-date results.
Revenues for the first three fiscal quarters of 2011 were $240.1 million, an increase of $17.4 million or 7.8% versus the prior year.
Revenues excluding the addition of Blacksmith Brands grew $2.2 million, or 1%, while Blacksmith added $15.2 million to year-to-date results.
Growth in Prestige's core OTC segments grew approximately $9 million over fiscal 2010.
This increase was largely offset by reduced revenues in the Household segment, largely attributable to continued heavy competitive promotional activity.
Again, we are pleased to deliver overall organic growth year-to-date.
Gross profit for the nine months of fiscal 2011 increased $9.6 million, or approximately 8% when compared with the same period in fiscal 2010.
As a percent of total revenues, gross profit increased slightly from 53.2% to 53.3% in fiscal 2011 as a result of strong OTC growth.
A&P spending increased $4.5 million, or 18.4% for the nine month period.
The increase is due to $5 million added from the Blacksmith acquisition, while the remainder of Prestige's spending was $500,000 lower than the prior year's level.
General and administrative expenses were $24 million for the nine months of fiscal 2011, compared to $26.1 million for the comparable nine month period of fiscal 2010.
An increase of $500,000 was due to the acquisition of Blacksmith, while the remaining costs were reduced $2.6 million, or 10% below fiscal 2010 levels.
This reduction is largely attributable to the reduction of force put in place in fiscal 2010.
Moving on to net income, year-to-date our net income has increased $4.6 million, or 17.6% when compared to fiscal 2010.
This was driven by revenue growth and lower G&A costs that were somewhat offset by increased A&P investments and higher interest costs.
Earnings per share, again excluding the costs associated with the Blacksmith acquisition, has increased $0.09 to $0.62 from the prior year's $0.53 level.
Earnings per share as reported declined $0.12 to $0.46 from fiscal 2010's $0.58 level, again primarily due to the $8.1 million of cost net of taxes related to Blacksmith.
If you turn to slide 18, we have an overview of the Blacksmith acquisition costs.
Both the third fiscal quarter and nine months ended December 31, 2010, include $11.3 million of cost before taxes and $8.1 million after taxes related to the Blacksmith acquisition.
These costs include $800,000 of incremental interest costs with cash balances carried and ultimately used for the Dramamine acquisition.
Inventory valuation costs of $3.5 million with a similar cost expected in Q4.
$3.4 million of transaction fees and expenses, and $3.6 million of severance and lease costs.
These costs were reduced by a tax benefit of $3.1 million.
Turning to slide 19, we will continue with business segment information.
Revenues for the over-the-counter healthcare segment increased $20.9 million, or 45% during the quarter versus fiscal 2010.
The increase in revenue was primarily due to $15.2 million from the acquired Blacksmith Brands.
Additionally, our strong A&P support resulted in revenue gains for our OTC brands.
Revenue increases for Chloraseptic, Little Remedies, Compound W, and Clear Eyes were somewhat offset by revenue decreases for the Doctor's line due to changes at our largest customer.
Chloraseptic revenues increased primarily due to new products and expanded distribution.
Little Remedies revenues benefited from the launch of the new Little Cold Honey Elixir product that Matt mentioned earlier.
Compound W revenues rose as a result of an increased consumption for both cryogenic and non-cryogenic products, as well as the continued strong sell through of the new Compound W skin tag remover in Canada.
Clear Eyes revenues increased primarily due to continued strong consumption trends, as well as distribution gains for its new multi-symptom relief eye drop products.
Revenues for the Household segment decreased $4.2 million, or 15.1% during the quarter versus the prior year, revenue decreases for Comet, Spic and Span, and Chore Boy.
Comet revenues decreased primarily due to the lower consumption demand for bathroom spray, while Spic and Span revenues were lower due to promotional timing versus the prior year.
Gross profit for the Over-The-Counter Healthcare segment increased almost $11 million, or approximately 37% during the quarter versus the prior year.
As a percent of OTC Healthcare revenues, gross profit decreased from 63.1% to 59.6% versus 2010.
The decrease in gross profit percentage was primarily the result as expected from Blacksmith Brands mix.
Gross profit for the Household segment decreased by $2.4 million, or 24.6% during fiscal 2011.
As a percent of Household Cleaning revenue, gross profit decreased from 35.8% in fiscal 2010 to 32%.
The decrease in gross profit percentage was associated with both higher distribution costs and increased cost of sales from promotional bonus packages for Comet and Spic and Span.
The contribution margin for OTC Healthcare segment increased $4.2 million, or 17.4% versus the prior year.
The contribution margin increase was the result of approximately $11 million in increased gross margin, which was partially offset by increased A&P spending due to the acquisition of Blacksmith and differences in timing as compared to the prior year.
Contribution margin for the Household segment decreased $2.7 million, or 31% versus the prior year.
The contribution margin decrease was the result of the lower gross profit previously discussed and a $300,000 increase in A&P spending.
The increase in A&P spending was primarily related to increases in consumer promotion for Comet bathroom spray.
And finally moving on to slide 20, we will cover cash flow.
The business continued to generate strong cash flow from operations during the third quarter.
Our reported net income of $2.2 million was impacted by $8.1 million of cost associated with the Blacksmith acquisition.
This was offset by nearly $11 million of cash flow generated by a reduction in working capital during the quarter.
Cash flow from operations was $18.8 million during the quarter, which was close to the year-to-date quarterly average.
The Company has a long track record of generating strong cash flow and this trend continued during the quarter.
At this point I would like to turn the discussion back over to Matt.
- President, CEO
Thanks, Ron.
Now, if everyone would please move to slide 21.
Just a few comments on the next two slides before I open it up to some Q&A.
As I stated previously, I think we're doing the right things and positioning ourselves well for FY 2012, and as I said all along, the purpose of our acquisitions is really about reshaping our portfolio for the future, not maximizing the present.
I think retail is beginning to show some signs of improvement as I'm sure you've seen on some of the recent releases from retailers and other manufactures.
And as such, we will continue to invest in our core OTC brands, particularly right now in the heart of the cough and cold season.
That increased support is clearly paying dividends based on our consumption numbers this last quarter.
We're working hard on the Comet business.
We are developing some exciting line extensions that I think are more in line with today's consumers' needs and some insights on those businesses.
And we will continue to prioritize winning at retail in this very competitive environment.
We have a lot of exciting things happening with our recent acquisitions.
The entire organization is really working hard to integrate these businesses into our Company and, candidly, today things have gone quite smoothly.
And finally, I really view Q4 as a stepping stone for FY 2012.
We hope to continue the revenue momentum on our core OTC brands.
We expect to do this through the appropriate level of A&P investment to fuel near and long-term growth and build the equity of these great brands.
And finally, as Ron pointed out to you today, there are one-time charges associated with these acquisitions and will have some more of these charges in the fourth quarter, whether it's banking or lawyers fees associated with the acquisition of Dramamine or stepped-up inventory charges associated with the acquisitions.
So, if you'd please turn to the last slide, slide 22.
So, I would just like to bring it back to where we started and where I began today.
And say that I think we're pleased with the overall revenue growth in Q3.
We grew as a Company exclusive of the Blacksmith Brands acquisition.
We had excellent growth in our core OTC brands as a result of our marketing investments, which we intend to continue and the goal is to continue to fuel those consumption trends at retail.
From an M&A standpoint, we're now in the integration phase and methodically working through that.
We are excited about our latest acquisition, Dramamine, and its potential as a market leader.
We're going to continue to set ourselves up for future growth through appropriate investments in the brands.
We also recognize that there are one-time charges associated with those acquisitions.
Finally, I would say in general I am pleased with the new strategic direction, most importantly how it's being received by consumers and how our investments are setting us up for 2012 and beyond.
And with that I we'll open it up to any questions.
Operator
(Operator Instructions) Our first question is coming from the line of Joe Altobello from Oppenheimer.
You may proceed.
- Analyst
Thanks, good morning, guys.
My first question is on the consumption growth in the core OTC brands, I think you mentioned it was 26.5% with Blacksmith.
Do you know what that number was if you exclude the Blacksmith Brands?
- President, CEO
Joe, I don't have that exact number off the top of my head, but I can get that to you.
But you can see what our consumption numbers were on the charts that I showed because I showed by individual core brands.
You can see without the Blacksmith Brands our consumption number was fantastic.
- Analyst
Was there anything unusual there or was it, for example, was there a promotion run by a large retailer or was that really a true organic consumption number?
- President, CEO
If you look again -- if you go to slide nine, you can see our consumption on Clear Eyes of 10.5% for the quarter is fantastic.
Chloraseptic is basically flat, down 1%, but that's because cough and cold started out slow but it's now picking up momentum.
Little Remedies, Joe, at plus 43%, that's the one that's a little bit of an anomaly because with everything going on in that category, brands missing et cetera, there was some explosive growth for Little Remedies there.
The Compound W, 26% growth for the quarter because we grew in both the cryogenic and non-cryogenic.
So you can really see, and I explained Doctor's, what's going on there.
That's a distribution loss.You can see exclusive of Blacksmith, we had really terrific growth for normal reasons for the most part, with the exception of pediatrics.
Does that answer your question?
- Analyst
Yes it does.
Thanks.
In terms of the portfolio, obviously, as you mentioned Matt, you changed it pretty dramatically in the last 18 months or so.
Would you expect to see additional acquisitions in the next year or are you guys kind of going to focus on integrating the two you've done already?
- President, CEO
I think, Joe, it's a really good question.
I think it's a tough one to answer, but I will give you my perspective.
I think right now we're focused on integration and execution and that's got to be our number one priority.
Two acquisitions for a company our size, that's a lot to bite off.
That said, we are committed to transforming the Company, as I've said over the last year.
We've taken steps to do that.
If the right acquisitions were available, would we consider them?
Yes, we would.
- Analyst
Okay.
Just one last one if I could.
The non-core brands look like they had another -- a bit of a steep decline this quarter, obviously overshadowed by the core brands.
What's your plan there?
Are you guys going to reinvest behind those brands?
Would you look to divest some of them?
- President, CEO
Again, another good question, Joe.
I think there's a lot of brands in there and even our non-core OTC brands grew.
We've got some terrific brands in non-core like New-Skin and Dermoplast, but the Household business with Comet and Spic and Span and Chore Boy had a tough quarter.
As I said to everyone internally, and I would say externally, our goal is to shrink Household as a percentage of our portfolio, not to shrink our Household business.
So, with that said, Household given the brand equity and the size of business, we will defend and we will invest in that business to turn those trends around.
That's the plan as of right now.
- Analyst
Great, thank you.
Operator
Your next question comes from the line of John San Marco from Janney Capital Markets.
Please proceed.
- Analyst
Thank you, all, and good morning.
Was the $13 million ad spend for the quarter, was that consistent with your plan when you closed Blacksmith?
And is the $5 million you spent against Blacksmith a decent run rate for us to model?
- President, CEO
I think the answer to the first question is yes, John, because as Ron pointed out, exclusive of Blacksmith, our A&P is up Q3 over Q3 last year, but our A&P year to date is tracking right on with last year, even a little under.
And again, I think we pointed out in the call that we said at the start of the year, for the full fiscal year for our business, we expect to be up modestly in A&P, and we told people that's going to be over the course of the year and we were down in the first half, so we expected our spending to be up in the second half on our existing businesses.
And with Blacksmith to answer your question, the amount we spent is what we expected, it's what we modeled in when we did the diligence and bought the businesses.
And I think you can see on one of the slides, I think it showed 33% spending rate.
I don't think necessarily long term we are going to be that high, but, again, as I've said in previous calls, John, I do expect to invest heavily in the Blacksmith Brands and in particular PediaCare in the next couple of years.
So, I think we're going to be up at pretty significant spend levels for those businesses.
I think it's the right thing to do for the business.
- Analyst
Got it.
When you sort of envisioned that relative ad spend you just described coming down over time, is that because you grow the denominator?
You grow the revenue?
Or in absolute terms, do you think that number comes down a touch over the next couple of years?
- President, CEO
I think it's because one you grow the denominator but two, this PediaCare business has a lot of potential.
There is a lot going on in that category.
When we went into this, we went in eyes wide open saying we have to solidify that foundation and have a reason for being for the consumers to come to PediaCare.
So, that's why we're going to invest significantly in the short to medium term.
And my definition of short to medium term is a couple years because that's what it takes to build brand equity.
- Analyst
Makes sense.
Can you address the pretty sizable delta between your very strong consumer take-away growth and your shipment growth and how that compares to the prior quarter?
- President, CEO
Well you can see in terms of the consumption -- the good news is, is I'd rather have our consumption growth be higher than our factory shipments.
Because that means we're drawing down inventory, both here and at retail.
And I think you're seeing right now kind of the cough cold season is really drawing down some of that inventory that was there.
And I think you can also see with some of those consumption trends on the Blacksmith businesses, that would insinuate that our factory shipment didn't keep track with that because before we bought the business due to back orders, late shipments, et cetera, I think some more product went into the channel and we're now drawing that down.
- Analyst
And how would you characterize retailer inventories as of the end of the quarter?
- President, CEO
I think in general our retail inventories are in decent shape.
I think for a couple of our brands, I think our retail inventories for PediaCare are a little bit high.
I think our retail inventories for Ludens are a little bit high.
- Analyst
That's very helpful.
Thank you.
One quick house cleaning item.
I know there were some bonus-related noise you had to reverse and accrual last year in the fourth quarter.
Can you just -- so that expectations are in the right place into the next time you report, can you just comment on your level of bonus spend this year and how that will compare from a reporting perspective?
- President, CEO
Well, I think we are -- with the year we are having, if you look at the base business and how we are performing nine months to date, John, we're performing quite well.
And so we have -- we have true up in the third quarter and we would expect to true up any variances in the fourth quarter, but the business is performing quite well.
- Analyst
Thank you so much for taking my questions.
Operator
Your next question comes from the line of Chris Ferrara from Bank of America.
Please proceed.
- Analyst
Hi, good morning guys.
So, I guess just touching on something someone else asked.
The Blacksmith spend at a third of sales, I know you said you'd continue to plan to reinvest behind that business, but is that seasonally a high number?
I get maybe it's a little high for the quarter, but that's got to be some seasonality there, right?
That's not the annual run rate of that business is it?
- President, CEO
Correct, there is some seasonality there.
This is the heart of the season for Ludens and PediaCare.
- Analyst
That makes sense.
I guess bigger picture thinking about the sustainability of the growth, and this gets to the tail brands and everything like that.
You still only generated 2% organic growth for the Company and I know that the Blacksmith acquisition actually grew itself.
If you just look at the core brands -- not the core, but if you look at the traditional Prestige brands, they were only up 2% organic sales despite pretty massive consumption growth everywhere else.
To get that organic rate going, does it imply that you're going to need to reinvest at an even greater rate than what you've been seeing so far?
- President, CEO
No, I'm pretty happy.
Candidly, Chris, I'm happy with 2% organic growth for the Company.
We've had a lot of calls and I think one of the things that's been written is we haven't been able to deliver any organic growth.
Now through nine months of this year, we are delivering organic growth.
So, I think that is new and different for Prestige, so I am pleased with that in general.
I think if you look at that organic growth, it is coming from the areas that we're focusing on, and candidly, if Household wasn't having the speed bumps that it's having, we would be having terrific organic growth right now.
So, in general I'm quite pleased with the organic growth year-to-date on the base business exclusive of any acquisitions.
The other thing is that we've said for the whole year is from a spending standpoint, we will take our spending up if we believe that it can drive revenue, and now we are proving over nine months that we can drive revenue with that increased spending.
So, I think we are going to increase our spending.
But I think there's going to be some seasonality associated with it.
- Analyst
Just to make sure I'm understanding from a philosophical perspective, if you think about this Company on a five-year basis and you have a pie for the amount of revenue growth that you guys generate over the next five years.
I guess I imagine that acquisitions will be more than half of what you project to be the five-year growth trajectory of this Company?
Is that a fair way to look at it?
- President, CEO
I'm not sure I can answer that specifically for you, Chris, but I can tell you our goal is to develop a portfolio that can deliver overall organic growth on a consistent basis long-term, as well as growth through acquisitions.
And that's the strategy that we embarked upon nine months ago.
And the fact that we now have organic growth in the overall portfolio, even including some hiccups, through nine months I feel like were going down the right path and we're delivering on what we said we were going to nine months ago.
- Analyst
Great, thanks.
Quick housekeeping ones I guess.
The tax rate -- maybe I got the math wrong, but the normalized tax rate looks like it was only about 34%, 35%.
A, is that right?
And, B, does that mean anything going forward?
And then the D&A, would we expect that to move higher with any write up of assets as we look over the next couple of quarters?
- CFO
First, Chris, for the tax question, our tax rate during the quarter was just about 60% versus our expected on going rate of 38.2%.
And that delta was driven by non-deductible acquisition-related expenses.
So, going forward, again excluding any future non-deductible acquisition-related costs, we would expect to be in that 38% range.
- Analyst
Right.
I guess I was referring to the ex-charges number.
The ex-one time cost tax rate, I thought it was lower than the 38%.
- CFO
The benefit was about 25% instead of the 38% because of the non-deductible acquisition related costs.
- Analyst
And D&A, I imagine the run rate picks up.
Is that right?
- CFO
Just slightly.
- Analyst
Just slightly.
Thanks, that helps.
Operator
Your next question comes from the line of Torin Eastburn from CJS Securities.
Please proceed.
- Analyst
Good morning.
My first question is about Dramamine, can you provide any info on revenue or margins?
- President, CEO
I think, Torin, consistent with what we did with Blacksmith, we just purchased it, we finished the acquisition about 30 days.
So, on the next conference call we will plan on doing that.
- Analyst
What are your expectations for A&P spending for Dramamine broadly and does that business have any real seasonality?
- President, CEO
I don't think there's as much seasonality with that business.
I think our A&P spending, we expect -- I don't think that business had a lot of A&P spending -- had much A&P spending behind it.
So, we bought it with the intent of doing something with it.
So, we expect to spend against it.
Candidly, I don't see the A&P spending for Dramamine at the same levels that I would for PediaCare, or Efferdent, or Ludens, but certainly we are going to spend at a higher rate than they were spending at in order to grow it.
- Analyst
Okay.
And I'm curious, what are you seeing on your material costs?
- President, CEO
That's a good question.
So far through fiscal '11 and through the third quarter, I think everything is holding okay.
We're hearing a lot of noise, whether it's copper price increases, oil, et cetera, we're in the midst of FY '12 planning right now, Torin.
So, I honestly haven't seen the numbers yet, but I will tell you, the organization is working hard and is focused on gross margin because it appears the cost winds are blowing for everybody a little bit and we are going to have to work hard to keep gross margin where it is at.
- Analyst
Okay.
My last question, obviously pricing in Household is difficult.
You haven't commented at all on pricing in OTC.
I'd be curious to hear about that and also, what are the fundamental factors that have helped pricing out better there?
- President, CEO
I think, in general, it's a tough pricing environment still.
But, I think there's more of an opportunity in OTC than there is in Household because of the value add, and we actually have done some things in pricing in OTC recently.
And we would look at it moving forward, but we wouldn't be aggressive on the pricing front until the environment shifts some more.
- Analyst
Okay, thank you, Matt.
Operator
Your next question comes from the line of Karru Martinson from Deutsche Bank.
Please proceed.
- Analyst
Hi, it's [Pat Dimiglio] stepping in for Karru.
Can you just provide us with an update regarding synergies related to the Blacksmith integration?
- President, CEO
I think they're very consistent with what we anticipated.
And I think at the time that we announced the deal and everything, I think the big thing was that acquisition, very similar to Dramamine, allows us to put minimal SG&A against it because we can really plug and play it into our both our back end and our front end operations.
So, there are significant synergies on that from an SG&A standpoint and it's living up to those expectations.
- Analyst
Can you quantify them at all?
Or not yet?
- President, CEO
I think we said, if I'm not mistaken, when we did the Blacksmith acquisition that we expected that our SG&A would be approximately at $2 million annual run rate for those businesses.
- Analyst
Thank you, that's helpful.
Also one more.
The CDC recently released pretty strong data around flu rates.
How do you think that will affect your OTC business in the coming weeks and months?
- President, CEO
This just sounds morbid to say, but I hope a lot more people get sick.
Right now, as I referenced early in the call, cough cold started out incidences started out fairly weak, but they have picked up significantly as of late and we're seeing it.
And, candidly, I think the retailers and the manufacturers are expecting a decent quarter this quarter in cough cold, which has not happened for the last few years.
So, I think people are expecting a decent quarter in cough cold this quarter.
- Analyst
Okay, thanks very much.
- President, CEO
Based on those incidences.
Operator
Your next question comes from the line of Reza Vahabzadeh from Barclays Capital.
Please proceed.
- Analyst
Good morning.
If you could comment some more on the comment and the household category.
I may have missed your comments on that, but the softness seems to be continuing and I don't know if there's a solution to address that softness.
And if there is a time frame within which you think that category or at least Comet and Spic and Span can turn for you?
- President, CEO
I think there's a few things going on, Reza.
I think from a category stand point there's category softness and you're seeing that in the IRI numbers and that category softness, the category dollars are going down because there's so much price activity.
Then you've got to split it up into abrasive and non-abrasive, the way we look at it.
The abrasive category, we're the leader.
We are gaining share in that, but the non-abrasive, whether it's sprays, creams, et cetera, we're not fairing as well there and I think we're looking at doing some different things.
So, for example, we are looking at things, everything right now from offering some alternative packaging options and packings in some different channels of distribution i.e.
the dollar channel.
We're also working very closely with Wal-Mart right now on offering some new packs within Wal-Mart.
We've had some discussions with them.
We're working fast and furious trying to do some different things and offer some different packing sizes and different options in the various channels that we are hopeful will turn the trends in the next quarter or two.
- Analyst
Got it.
And as far as acquisitions, obviously you have a couple under your belt right now.
Are you comfortable pursuing more or do you need to digest these before you move on?
- President, CEO
I think, as I said a little bit earlier, I think job one for us is our day job is to drive our current business right now.
And execute against it and deliver.
I think on the acquisition front, to meet our long-term vision, I think we would be open to acquisitions because as people and I have said in the past, we don't control always -- sometimes we will get exclusives or we will go after things which we've done recently.
Sometimes things come on the market and we don't control that timing.
And so therefore we either play or we don't play.
So, I'm saying that we're going to focus on our existing business right now, but if the right opportunities came up, we would consider them.
- Analyst
Got it, thank you.
Operator
(Operator Instructions)Your next question comes from the line of William Reuter from Bank of America Merrill Lynch.
Please proceed.
- Analyst
Good morning, guys.
I'm not sure if I missed this or if this wasn't disclosed, but did you talk at all about what the operating income from the Blacksmith acquisition would've contributed to the quarter?
- President, CEO
No, we don't break it out at that level, Bill.
- Analyst
Okay.
And just to make sure I understand, the Dramamine acquisition, that closed in early January, is that right?
- President, CEO
Correct.
- Analyst
And it sounds like we should wait until the next quarterly call for us to get potentially some increased financial disclosure around that one?
- President, CEO
Correct.
Similar to what we did with Blacksmith.
We will do the same thing next quarter.
Something along those lines with Dramamine.
- Analyst
Okay.
And then in OTC you hinted that you're seeing a little bit of raw material inflation.
I'm wondering, back historically whether you guys have had price increases that you have pushed through to your retail customers and how those have been received when you've seen inflation historically?
- President, CEO
I don't think in the last couple years there's been a lot of pricing action taken by many people in OTC, not just us.
So, I don't think we've seen that and I think some of our retailers aren't fond of those price increases.
So, I think we are going to have to see how it plays out.
As I said earlier, I'm hearing noise on the supply front.
I don't have any specific data and we haven't -- we don't have the kinds, et cetera, for next year.
I don't know where they are netting out right now.
You've already seen it in the food consumer product companies that they've been hit quite a bit with cost increases, and I think it's going to be coming in '12 after a couple years of no increases.
- Analyst
Right.
I'm sure they're not fond of those price increases.
Did -- have you had any preliminary conversations with any of those guys yet to date or is this more just industry chatter?
- President, CEO
With any of those guys meaning retailers?
- Analyst
With any of your retail customers.
- President, CEO
No, because I don't even have final numbers in from our suppliers, so I wouldn't have discussions with the retailers until I know what our costs are.
- Analyst
Okay.
One last one.
Sounds like acquisitions at this point are a little on the back burner.
Your uses of free cash flow, what would those priorities be?
- President, CEO
I think they're similar to what we've said for the last year and that is our job is to create long-term shareholder value.
We think we can best do that by growing the Company, either through acquisitions, or paying down debt would be our second option.
And we would exhaust those options and if those were exhausted, we would look at additional options after that.
- Analyst
Okay.
I will leave it at that.
Thank you.
Operator
At this time I am showing no further questions in queue.
I would like to turn the call back over to Matt Mannelly for any closing remarks.
- President, CEO
Okay.
Again, thank you very much.
We appreciate everyone's time today.
I hope the presentation was helpful.
There was so much going on in this quarter that we felt it was necessary to provide you with some additional written charts so that you could see how everything broke out.
And I think at the end of the day, if you look at it, our base business is -- continues to perform very well.
We are really excited about the acquisitions and there were some one-time costs in this quarter that won't be there moving forward long-term.
Thanks to everybody.
We appreciate it and we will speak to you next quarter.
Take care.
Operator
Ladies and gentlemen, that concludes today's conference.
Thank you for your participation.
You may now disconnect.
Have a great day.