Prestige Consumer Healthcare Inc (PBH) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Prestige Brands Holdings Fourth-Quarter and Year-End Earnings Conference Call.

My name Onica and I'll be your operator for today.

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

We will have a question and answer session towards the end of this conference.

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

At this time, I would now like to turn the call over to Mr.

Dean Siegal, Director of Investor Relations and Communications, please proceed.

Good morning.

Thanks for joining us this morning.

As a reminder that the slide presentation that accompanies this call, which can be accessed on our website at prestigebrandsinc.com, click on investor relations on the left and then on webcast and presentations on the right.

And you should go there now.

I also want to remind you, for those who have the opportunity to watch Fox Business tomorrow at noon, you'll see our CEO, Matt Mannelly, featured there as one of the guests discussing the quarter that we're going to discuss this morning.

Hope you'll tune in.

And now I'm 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 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 would like to introduce Matt Mannelly, President and CEO, and he'll be joined by Ron Lombardi, CFO.

First, here's Matt.

Thank you, Dean, and thank you everyone, for joining us this morning for our fourth-quarter and our year-end call.

I'm going to spend a few minutes and talk a little bit up-front in terms of some comments on the business both for the fourth quarter, as well as for the fiscal year, and then Ron Lombardi, our CFO, will take you through some of the financial numbers with a little bit further explanation.

Just as we did in the third quarter, we have included a presentation that we'll follow along.

We thought it was helpful given the recent acquisitions and some of the things that go along with those acquisitions, we thought this would provide clarity in terms of the quarterly release, so we're going to operate off that presentation today and hopefully I will remember to tell you to turn the pages of the slides on that presentation.

So with that, if you could go to slide 3, which is our fourth-quarter highlights and I think I'd start out by saying we're very pleased with the quarter.

And, specifically, I think the thing I'm most pleased with is the fact that, exclusive of acquisitions, our net revenue growth for the Company in total, exclusive of acquisitions, was plus 4.1% for the quarter.

That's the third quarter of three of four quarters this year that we delivered growth in a very tough economic environment.

And for the year, excluding acquisitions as you're going to hear from Ron, we delivered 1.8% growth for the year in a very tough economic environment and we really believe this is a real turning point for the Company.

And I think the next thing I'd say in terms of highlights is, how we did it.

And that's the fact the change in strategy and the increase in A&P support in the brand building that we're doing at the Company that is really driving significant consumption growth and market share gains that we're going to talk more about this morning.

I think the third thing is, is in addition to the two transformative acquisitions that I'm going to talk about, the speed in which we integrated them into the Company, both from a supply side and a demand side, and specifically how quickly we've been able to get effective and innovative marketing into the marketplace during the heart of the season, has really allowed those brands to grow and contribute to our success.

However, it's not all rosy because, as you'll see in the numbers in household, it continues to be a very challenging environment for us and is not meeting our expectations and we have some plans in place to help improve those numbers.

But I think the bottom line is, in terms of the fourth quarter, not only a solid, what we believe is a solid financial performance, but it's a performance and it's a strategy that is really oriented towards setting us up for future value creation.

So with that I would ask you to turn to slide 4.

And on slide 4 I think the numbers really speak for themselves.

In total, for the fourth-quarter revenue growth of 37.8%, for the total Company excluding the two acquisitions, Blacksmith Brands and Dramamine, growth of 4.1%, and then the third number, which is equally important which we've talked about quite a bit for all of fiscal year '11 beginning at the start of the year, we really have focused on our core OTC brands and for the year, those core OTC brands grew 8.4%, which again in this environment we're quite pleased with.

If you'll move to slide 5, we'll talk a little bit about how we gotten that growth and we've gotten that through significant increase in terms of A&P investment, but also an improvement in terms of how we spend that A&P.

So again, a couple examples would be, we purchased or we closed on PediaCare November 1.

On November 15, we began running national advertising that we ran through the fourth quarter that helped really drive PediaCare numbers.

We've also increased support for Clear Eyes, really one of our bell weather brands, quite a bit and it paid dividends for the quarter once, again.

And we've continued from a new product standpoint, whether it's Little Fevers that we introduced this year in response to a need in the marketplace or we just started shipping Clear Eyes Cooling Comfort and have put quite a bit of support behind that as well.

If you turn to slide 6, I think this is an important slide for us that we've talked about in the past and that is the spending and what the spending is resulting in, in terms of market share gains.

So again, if I rewind to this call a year ago, we said for the year our A&P spending would be up very modest single-digit.

We said our core OTC spending last year would be up 22% and we've done that.

And excluding the acquisitions, we've done that, but you'll see what's interesting is, the first couple of quarters we actually spent at a lower rate, which meant we had planned all along to spend during the heart of the season at a higher rate.

In quarters three and four we did that and look at the results.

You can see our consumption growth, and this is IRI consumption, which is primarily grocery, drugstore, et cetera, and you can see our consumption consumer take away was down in the first quarter it grew by 3.4%, this is for the total Company in the second quarter, by 14.2% in the third quarter, and this last quarter I'm pleased to announce that the consumption was plus 20.6% according to IRI for the 12 weeks of that quarter.

So if you'd please turn to page 7 you'll see how each of the brands contributed to that.

So I've talked in the past and if you look I'll give just a couple examples.

Clear Eyes for the quarter IRI consumption grew 10.7%, while the category was flat.

So you can see, again, Chloraseptic, which we had a good cough cold season and the cough cold season resulted in the category growing 3.2% and we grew at over four times the category rate at 14.2% and you can see some of the other brands, I won't read them here, but what's going on in the category in pediatrics and what's happening with Little Remedies and PediaCare is absolutely fantastic.

I think if you go to the far right and you look at our nine core brands, which we started the year with five and with the acquisitions we've made we've added four additional core brands, our nine core brands, I'm particularly pleased, grew at almost 33% from a consumption standpoint for the quarter in IRI, while the category grew 8%.

I think two things very interesting to note.

Number one, we're four X-ing the category growth, and number two, the absolute growth of those core brands to grow 33% in consumption for the quarter, we're quite pleased with.

With that if you'll move to slide 8 I'll talk a little bit about Comet.

And I think the point I would make here, first of all, in terms of performance, if you look at the abrasive business for the fourth quarter we're declining and we declined at approximately the category rate.

In terms of non-abrasives we declined more than the category, but you can see our decline decelerated by half in terms of versus the third quarter, so we believe we're making progress in terms of non-abrasives.

I think more important is what are we doing about it?

And I think we're doing some tangible things, including we've just introduced a Comet powder twin pack at one of our major customers that will be coming in shortly.

We also have introduced a Comet classic line in the dollar store channel, which we have had some good success on so far.

We've also expanded distribution.

We gained distribution for Comet powder in Home Depot and it's off to a very strong start and we also just received word what we gained distribution in terms of a Hispanic marketing opportunity for Comet Lavender powder in over 1,500 doors in one of our key retailers.

With that I'd ask you to turn to slide 9.

So that's a little bit in terms of my thoughts for the quarter.

Now let me step back and talk a little bit about the year, since it's year-end.

And I think it's safe to say for us that we believe this really was a transformational year for Prestige.

At the beginning of the year we outlined clear goals of what we wanted to accomplish and, again, we reiterated a number of times we wanted to grow in the short to medium term.

Let's focus on growing our five core OTC brands.

And let's do that by really committing to brand building through increased and more effective A&P support, because one of the things that's been discussed for a long time is we haven't been supporting the brands at the right level.

We also said at the beginning of year we're going to be very aggressive in terms of pursuing M&A activity exclusively in the OTC category.

We also set out to strengthen the management team.

I've been here about a year and a half and we wanted to do some things from an organizational standpoint.

And then, finally, we have a history of delivering terrific free cash flow and while we build the brands we want to continue to deliver that strong free cash flow.

So let's talk very briefly about each of those in terms of, for the fiscal year '11.

If you turn to slide 10.

Again, I think the numbers speak for themselves here.

For the year, our five core OTC brands, our shipment growth, our shipments to our customers, the retailers, for those five brands in aggregate up almost 10% for the year and our consumption up almost 12% in those five brands for the year.

So again, we're quite pleased with the performance of those five core OTC brands and that was clearly our number one priority for the year.

If you go to page 11, you'll see a little bit more granular detail on how those brands did and you'll see here the top bar is green or red in terms of whether they grew from a shipment standpoint.

Again, we don't give out specific brand numbers for competitive reasons.

The middle part you'll see again these numbers I've referenced in terms of consumption, blue bar is brand consumption, green is the category, I'm sorry, red is the category.

And again if you go to the far right, you'll see from a consumption standpoint for the year, those brands in aggregate grew 15.3% versus 1.9% for the categories in which they competed, so for the year from a consumption standpoint, we were more than eight times greater than category growth in our core brands.

And you'll see at the bottom, what that resulted in, in terms of market share gains for those brands for the year, which we're quite pleased in aggregate with the market share gains.

With that I'd ask you to turn to page 12.

Page 12 talks briefly about the acquisitions, which we've talked quite a bit about in the past.

As I said, these really were transformational for us, particularly the Blacksmith acquisition that, not only added three scale brands to our portfolio, but helped us strengthen our platforms in cough cold, pediatric and the oral care categories.

Dramamine has also been a terrific acquisition for us, given that it's a strong number one brand in a category that's somewhat under the radar and we have every intention of investing in this brand and seeing how much that we can grow the brand.

With that, please turn to page 13.

And again, I think you can see on slide 13 what a difference 18 months makes.

I came at the end of the third quarter of 2009.

At that time our portfolio, 57.5% of our portfolio was OTC.

Today it's almost 75% is OTC.

And in that period of time we believe that's quite a dramatic shift and very consistent with the vision and the strategies of what we've laid out in terms of what we want to accomplish as a Company.

Slide 14 shows how the new brands contributed to that in terms of over the course of the year and you can see that again the new brands in terms of the Blacksmith Brands and Dramamine, the categories in which they competed for the quarter in aggregate were down 2%, while our brands were up almost 25%.

So again, the new brands are contributing as well as the core brands that we started the year with.

If you'll move to slide 15.

I talked about the fact that we wanted to strengthen our management team and our organization in general.

I think we've done that and what we've tried to do is complement the great leaders that we've got in the Company already and bring in some additional people to make us stronger and strengthen the team in aggregate.

Tim Connors, who came in over a year ago as our Chief Marketing Officer, is now the Executive Vice President of Sales and Marketing.

As you know, Ron Lombardi joined the Company almost six months ago as our CFO and we also recently brought in a new VP of Operations, Paul Hennessey, who had 18 years experience in the OTC business, so we believe that that's really going to help strengthen our knowledge and expertise to go with our existing team in operations as well.

And from a process standpoint, with sales and marketing now being housed under one leader, we believe we're more integrated then ever.

And, in fact, we also brought in a new gentlemen named Bill Mar to head up our sales, a new function sales planning to help bridge that gap between sales and marketing and make us even more effective in terms of how we go to market to our retailers.

With that I'd ask you to go to slide 16.

And we said the last thing we wanted to do was continue to deliver strong free cash flow and solid financial performance.

We think we've done that along a number of measures for the year, so as you can see for the year in aggregate our revenue is up 15%.

Our adjusted EBITDA, which Ron will walk you through in a couple minutes, is up almost 15% as well.

And our adjusted EPS is up about 18% for the year.

And our free cash flow from operations for the year is up 46%.

So again, we've balanced and we've changed strategies.

We're now investing in the businesses, but we're continuing to deliver what we believe is solid financial performance.

So with that I'll turn it over to Ron who will take you through some of the financial specifics.

I'll come back and close it and then we will open it up to Q&A.

Ron.

Thanks, Matt, and good morning.

So starting on slide 17, as Matt stated at the beginning of the call, we are very pleased with our financial results for the quarter, highlighted by our strong performance in both our core OTC brands and the recently acquired brands and our net income and EPS growth over the prior year, even with our A&P investments.

If you turn to page 18 we'll discuss the specifics of the fourth quarter.

Please note that, unless otherwise noted, the financial information discussed will exclude the cost associated with our recent acquisitions of the Blacksmith Brands and Dramamine.

Highlights of the fourth-quarter results include net revenue growth of $26.4 million, which is an increase of 37.8% over last year, driven by both acquisitions and our core OTC growth.

Our core OTC brands, excluding acquisitions, grew 9% over the prior year.

Excluding acquisitions, total sales increased 4.1% during the quarter, over the prior year, and acquisitions added $23.6 million during the quarter.

Our gross margins grew by almost two percentage points over last year to 51.9% due to increased OTC mix.

Our A&P investment continues to drive growth with A&P spending increasing $7.6 million over the prior year.

Of this increase, acquisitions added $6.1 million and the legacy business increased $1.5 million.

G&A costs increased $2.1 million to $10.2 million during the quarter due to the impact of acquisitions and higher incentive compensation costs than in the prior year.

Adjusted net income increased $1.6 million or 23.7% over the prior year to $8.8 million, even after our increase in A&P investments.

Finally, we are very pleased with our earnings per share, which, excluding the costs associated with acquisitions, increased $0.04 to $0.18 during the quarter.

So with that, if you turn to slide 19 we'll move onto the full year results.

Full year results showed many of the trends highlighted in Q4.

Our net revenue grew by $43.9 million or 15% over last year, again driven by acquisitions and core OTC growth.

Our core OTC brands, excluding acquisitions, grew 9.3% over last year.

Excluding acquisitions, total revenue increased 1.7 percentage points for the year.

And acquisitions contributed $39 million of revenue for the year.

Gross margin grew by 0.5 percentage point over last year to 52.9%, again due to the increase in OTC revenue.

A&P increased by $12 million over the prior year to $42.9 million, with acquisitions adding $11 million of the increase and the legacy business increasing a modest $1 million over the prior year.

G&A costs remain flat at $34.2 million for the year, as costs reductions were offset by costs associated with the acquired brands.

Adjusted net income and adjusted EPS both grew above the 15% revenue growth, with adjusted net income increasing $6.5 million, an increase of 19.3%, to $39.9 million and adjusted EPS increasing $0.12 or 18% over the prior year to $0.79.

With that, if we move onto slide 20 we'll look at our reconciliation of net income, EPS and EBITDA.

The table at the top of slide 20 contains the fourth-quarter and full year one-time costs related to the acquisition of Blacksmith Brands and Dramamine.

Reported results in the fourth quarter include $2.4 million of cost, net of taxes, which reduced reported EPS by $0.05 in the quarter.

The full year included $10.7 million of costs, net of taxes, which reduced reported EPS by $0.21 in the year.

The table at the bottom of page 20, which we have included for disclosure purposes, has the reconciliation between reported net income, EBITDA and adjusted EBITDA.

With that, if we move to slide 21 we'll talk about segment results for the fourth quarter.

Revenues for the OTC segment increased $28.7 million or 66% during the quarter versus last year.

The increase in revenue was due to $23.6 million from the acquired brands, as well as $5.1 million or approximately 9% growth from our other OTC brands during the quarter.

As Matt described earlier, we have seen strong consumption growth across nearly all of our core brands, largely driven by A&P investment and an improved cough/cold season versus a year ago.

Revenues for the household segment decreased $2.2 million or 8.1% during the fourth quarter.

Revenue declined in Comet, Spic and Span and Chore Boy brands due to continued strong competitive pricing and a challenging retail environment.

Overall gross margin increased 1.9 percentage points to 51.9% in total due again to increased OTC mix.

OTC's margins declined 2.4 percentage points due to the expected impact of the Blacksmith acquisition.

Our A&P increased in the quarter over the prior year due to the acquisitions and an higher investment behind the core OTC brands, as Matt described earlier.

Contribution margin for the OTC segment increased $7.8 million or 26.4% versus last year.

The contribution margin increase was driven by higher revenue, but was somewhat offset by increased A&P investments due to the acquisition and timing differences as compared to the prior year.

Contribution margin for the household segment decreased slightly during the quarter to $6.7 million from last year's $7 million level.

A slightly higher gross margins and lower A&P spending offset most of the impact of the revenue decline.

With that we can move to slide 22 and we'll look at full year results by segment.

Revenues for the OTC segment increased $52.7 million or 29% for the full year versus last year.

The increase in revenue was due to $38.8 million from the acquired brands, as well as $13.9 million or approximately 8% growth from our other OTC brands.

Revenues from the household segment decreased $8.8 million or 8% during the year, with again declines in all three brands.

The decrease was due to lower consumption trends during the year, along with a challenging retail environment.

Gross margin increased 0.5 percentage point to 52.9% in total due to increase OTC mix.

OTC margins declined 1.7 percentage points, again due to the expected impact of the Blacksmith acquisition.

Household gross margins declined 1.4 percentage points, largely due to pricing and other promotional activity during the year.

A&P increased $12 million to $42.9 million due to acquisitions and higher investments behind the core OTC brands.

Acquisitions added $11 million, while the balance of the business was up a modest $1 million during the year.

Contribution margin for the OTC segment increased $16.8 million or 18.5% versus last year.

The contribution margin increase was largely driven by the impact of the acquisitions.

Contribution margin for the household segment decreased $4 million from last year's $31.9 million level due to the lower revenue volumes and a decline in gross margins.

With that, if we move to slide 23, we'll finish with cash flow.

The business continued to generate strong cash flow from operations during the fourth quarter and for the full year.

Cash flow was also positively impact by the mid-year timing of the acquisitions and the resulting seasonal drop in working capital that increased cash flow for the quarter and the year.

Fourth quarter cash flow from operations was $25 million in the quarter, including a benefit of approximately $10 million from the acquisitions.

Full year cash flow from operations was $86.7 million for the year, including a benefit of approximately $23 million from the acquisitions.

A strong cash flow during the quarter allowed for a $17.5 million pay down of debt, leaving the year-end balance at $492 million.

With that I'd like to turn the discussion back over to Matt.

Thanks, Ron, appreciate your comments.

I'd like to make just a couple of more comments and then we'll open it up for questions.

If you turn to slide 24, just take a moment, -- I'd like to take a moment and talk a little bit about as we just head into FY '12, which we've just started, talk a little bit about where we're going.

I think the first thing I'd say is, I believe from a financial standpoint we are much healthier today than we were a year ago.

And I think some of the numbers that Ron talked to you about and the financial measures, whether it's free cash flow, earnings per share, et cetera, that we're in a very healthy state as a Company.

I think the second thing is, is just like as we started FY '11 we had clear goals.

I think we have clear goals for FY '12 and, in addition to that, I think we're building on some real momentum that we've built in FY '11.

So our goals, simply put, are we want to continue to drive core OTC growth and we're going to do that through proven increase and innovative A&P investment even over FY 2011 year levels.

So in FY '11 we said we were going to invest in the business, we did it and we've shown the tangible results.

So now, based on those results, we expect to continue that investment in order to create that value for the brands long-term.

I think the second goal is, we really want to tap into the long-term potential of the Blacksmith Brands and Dramamine following the successful integration that we've had of them into the Company.

I think our third goal clearly is, we want to stabilize the household segment and we're going to do that by actually increasing our support and doing some different things throughout the year and, as well as, increasing distribution in household in some of the alternative channels that I talked about.

We're going to continue to participate in OTC M&A activity.

I said last year that we were going to aggressively participate in it, we did.

I'd say this year that we're going to continue to participate in it because we believe, long-term, that will play a role in terms of creating shareholder value and success over the long-term.

And we're going to continue to maintain our strong financial performance, particularly in free cash flow, but we're going to do that while appropriately investing for future value creation, so we're going to balance that.

And again, now that we have a year under our belt of proving what that investment does for the business, I think it gives us the license and, more importantly, the confidence that that investment will create future value for our shareholders.

So in summary, we're going to continue the strategic course in terms that we're on right now that we set really at the start of this year.

And we believe that strategic course is going to continue us down the path in terms of the transformation of the Company.

And I'd say that's a journey and we're not there, but I'm quite pleased with the steps that we've taken in FY '11 to get there and I think it's getting us down the road.

So the last page, page 25, and then I'll open up for questions, is something we've shown in the past, but in simple terms these are the three stools in terms of the three pillars of our strategy.

Our day job focus really on driving core organic growth is particular in the OTC area.

We're going to continue, as I said, to participate in M&A activity exclusively in OTC.

And then finally, it's about how do we best manage our portfolio for the long-term and we've proven that we can do that and we'll continue to do that.

So with that, again, I'm pleased with FY '11, we're looking forward to FY '12 in terms as we set ourselves up for the future and I'd be happy, we'd be happy to take any questions that you have at this time.

(Operator Instructions) John San Marco with Janney Capital Markets.

When you did the Blacksmith deal, you said it would add $0.16 to $0.20 of EPS, I believe, by fiscal '12 and then Dramamine, if I'm not mistaken, would be modestly accretive.

I guess two questions.

One, do you stand by those initial guidance ranges and then secondly, if possible, can you quantify what EPS impact the M&A had on your comparable EPS number for fiscal 2011?

Well, John, good question.

I'd say a couple things.

We did say at the time of the acquisition of the Blacksmith acquisition that it would be accretive by $0.16 to $0.20.

If you recall we also said when we did the Dramamine acquisition that on the Blacksmith acquisition we had intended to finance that through our bank debt and the accordian and it was accretive to the tune of $0.16 to $0.20 based on that.

Once we decided to pursue Dramamine, we went to a combination of bank debt, as well as bonds, and that financing was at a higher rate, so that altered the accretive nature, both acquisitions till accretive, but altered the accretive nature due to the financing.

I think the other thing I would say is you asked about in terms of FY '11, I think they were -- they really -- our intent all along with Blacksmith that we weren't looking for accretion in FY '11, in fact, we were looking really to invest in the business.

And if I recall I believe we said we were going to, which we did, we increased PediaCare marketing spend 400% from what was in the plan, because we're trying to build the PediaCare brand for the long-term.

So we did not receive much accretion from the Blacksmith Brands in FY '11 and, in fact, we're going to continue to invest in those brands for long-term growth and we expect accretion in '12, significant accretion, but as I just said, the $0.16 to $0.20 was based on that acquisition alone and with the combination of acquisitions our financing costs have gone up slightly.

That's helpful.

Thank you.

So with the inclusion of Blacksmith and Dramamine, what should that do to the shape of relative A&P spend throughout the year.

Historically the first half has been significantly higher for you guys.

And I know the business mix is dramatically different today than historicals, so just wondering if you could give us any sense of how relative A&P spend will shape throughout the year?

John, I don't have those numbers right from front of me.

But what I can tell you is this, actually our spend in the second half with given the seasonality of cough cold and everything and the amount of products that we have in there, typically our spend in the second half is higher than the first half.

And then in addition to the Blacksmith and Dramamine investments, I think what we've also tried to communicate is, we've also had quite a bit of success with the modest increase in investments on our legacy brands, as Ron called them, so we're going to continue to invest in those.

So I think while we don't give guidance, John, what I would say is, I would expect us, our A&P level, to be north in 2012 of what it was in 2011 and I feel good about that based on the results it delivered in '11 and the tangible consumption growth, does that help you?

Very helpful.

And just last one before I pass it on.

Can you talk about the new product innovation in Clear Eyes, were those launches shipped during 4FQ and then strategically what gives you confidences that the eye drop category can support some of the skew proliferation that it's experienced the last few years.

That's my own personal observation, so if you disagree with that, that there are quite a few more choices for the consumer, I'd appreciate that opinion as well?

Yes, I'd say two parts to your question.

Number one, we just started shipping Cooling Comfort in, literately in March, the last month of the fourth quarter, so we've just started in.

And second of all, I don't have a crystal ball, so I can't guarantee the growth in the future, but boy, the Clear Eyes brands based on the last three to four years, not just the last year, has consistently grown for us and one of the reasons it's grown is through brand extensions and product extensions that we've delivered on a consistent basis.

So we have some additional new products in our bag of tricks for '12 that we're working on right now that we expect to continue that trend and we do believe the category can support it, because it's shown historically that it can support it.

Great.

Well thanks for taking my questions and congratulations on a long list of achievements in the fiscal year.

Thank you very much, John.

Olivia Tong with Bank of America Merrill Lynch.

Please proceed.

First I want to talk about [ad spend], obviously it was up dramatically, but it looks like your legacy brands were only up 3% on 4% organic sales growth.

So first, what is the optimal level of a spend in the legacy business?

And then second, on the acquired business it looks like it is about a 25%-ish ad margin this quarter, is that indicative of what you need to spend long-term or is there something more that I should be thinking of?

Thanks.

Olivia, I think a couple things.

Again, we don't give specific guidance, but I would say on the legacy brands, first of all, I'll try to answer your question as best I can.

We're up -- we said at the beginning of the year we were going to be up modest single digit and we were up modest single digit.

I think we've now seen the results of that and it gives us further confidence that we can invest in the business and if you look at our A&P to sales ratio of those legacy businesses, some people on this phone have pointed this out to me over the last 1.5 on a number of occasions in terms of how we spend versus the competition and I think we now have greater confidence that as we increase our spending and percentage rate on the legacy brands that we're getting the return on investment for that.

So we would expect that we would increase it, but we would increase it along the lines that we have done this year, a little bit pay as you go.

We're going to keep increasing and growing that top line and see how far we can push it.

It won't be dramatic swoops or increases in terms of A&P.

In terms of the acquisition brands.

Your comment about the level of A&P spending right now, I think we believe, and I'm going to use PediaCare specifically, our thesis when we brought these brands was, we were going to invest to grow them.

And PediaCare specifically with everything that's gone out in that category, we feel it's important and not just in FY '11, we feel this is true for FY '12 as well, that we need to support it at a high level to sustain the business and create the value that we're looking to create for the long-term.

So we expect to be investing at significant levels in FY '12.

Over time do we think that might shift?

Yes, but at the first couple of years we had built in significant investments.

Dramamine, to answer your question, is one that historically has not received much support in terms of marketing support and we purchased it with the intent of putting marketing support behind it to grow it, which is something, I'd say, a different strategy for us than a few years ago and we have every intention of doing that with that brand as well.

That's very helpful.

And then secondly, first, what was the growth rate organically of the acquired brands and then also there continues to be a pretty big Delta between your sell in and your sell through, your consumption trends.

So first, why -- this is sort of the second quarter in a row where there has been such a wide margin of organic trailing consumption, why does that continue to be the case and what are your inventory levels at retail look now like after two quarters of this trend?

Yes, I think, I can't give you the organic trends on the new brands because we don't have some of that historical data in terms of versus year ago, so we just are tracking it versus what we have now.

In terms of the Delta between consumption and organic, I think you'll see actually in most brands quarter to quarter it's fairly close.

There's a little bit, but it varies a little bit by brand in general, I'd say, over the course of our whole portfolio our inventory levels at retail are reasonable.

Because the trade is working very hard on working capital and keeping inventory to a minimum.

So in general, I am pleased.

I think there are a few brands that, I think, we're a little higher in inventory at retail than I would like and we're working those down, hence the Delta the last couple of quarters.

But I would say in general in total and aggregate for the portfolio, I don't view inventory, retail inventory, to be an issue at this point.

Matt, maybe if I can follow-up.

I'm a little bit confused because it looks like your core grew, at least looking at slide 7, your core grew 21%, but the category grew 9% and your blue versus red lines on the graph, there's clearly incredibly strong consumption growth versus the category and versus the organic sales, so maybe we can ask this offline, but I'm just a little bit confused.

Maybe you could help me understand that Delta a little bit because it doesn't seem like you're -- it seems like first you're out pacing the category, but also you're outpacing your organic sales in terms of consumption by quite a large margin.

I think on the consumption, if you look at a couple of the brands in particular on page 7, and I'll use Little Remedies and PediaCare, we've benefited there in terms of extremely strong consumption as a result of new distribution, as well as consumption based on some competition not being in the marketplace that has cause for dramatically improved consumption in a short period of time.

So I think those are some of the things that have contributed to the Delta on a couple of brands in particular.

But shouldn't that show up in your organic sales as well?

Your sell in, not just your sell through?

Well, we've also had, just so you know, we don't give individual numbers for competitive reasons, but what I would say is, on those individual brands, Little Remedies and PediaCare, we've had significant improvement in terms of sell in as well on those brands.

Okay.

Thanks very much.

I appreciate it.

Okay.

Jon Anderson with William Blair.

Just sticking with advertising for a minute.

I think you said you would kind of anticipate advertising spending being up in 2012 relative to '11.

Just to clarify, do you mean that on an absolute basis or on a rate basis as a percent of sales?

I'd say on both, Jon.

On an absolute I expect it to be up and on a percent of sales.

Given what we've demonstrated and the results of this year, I would expect it on a percent of sales to be up as well.

Terrific.

Thanks.

Just maybe talking about gross margin for a minute.

The gross margin performance was good in the quarter, obviously, up I think 150 bps year on year.

Do you anticipate gross margin expansion next year and, I guess, how are you thinking about kind of the commodity cost environment playing into that, is pricing something you're looking at to offset commodity costs, etc.

If you could just provide some more color on the dynamic on that line?

Jon, Ron Lombardi here.

We anticipate that we would expect our margins to be fairly consistent going into next year and really in terms of inflation, we continue to monitor it on a daily basis and we'll address it as it comes up next year in terms of pricing.

Jon, I'll add a couple points here.

Your question on commodities and on pricing.

On commodities I think you've seen in the food business what's going on in the last six to 12 months.

And I think a number of the majors are starting to say, listen, we are going to have to take price increases and we intend to do it.

I don't think we've seen as much pressure on that in terms of commodities in OTC as you've seen in food.

However, I think that's going to build a little bit over the year.

And the second thing I'd say is, in these categories in OTC there has not been a lot of pricing in the last 12 to 24 months.

We have not built pricing in very much in terms of FY '12, however, consistent with other manufacturers, if we do see supply costs increasing, we will determine from a value standpoint with the consumer what's the appropriate pricing and won't be afraid to deal with that.

But as of right now, I don't see it as an issue in terms of the magnitude that it is in the food business, does that help you?

Yes.

Very much.

Thanks.

Just a broader question.

When you look at the household business, it's been a difficult year, you've acknowledged that.

And then you kind of contrast that with your comments around the transformation that you're well on your way making with respect to the portfolio.

How do you think about that household business?

Is that a strategic business for you?

Do you continue to reinvest in it, just looking for a little bit more of color there?

Yes, Jon, good question.

I'll say what I've said in the past internally and externally.

Our goal, candidly, is to shrink our household percent of our portfolio, not our household sales, because Comet is clearly a major band equity in the marketplace for us, as well -- it's just a big brand equity.

So we want to focus on OTC, but that Comet brand specifically we will invest in to secure its long-term brand equity.

And, in fact, I think I said earlier that we're going to need to take our spend up a little bit on Comet this next year.

And it's not just taking the spend up, we need to do some other things and we've done some research this year to help us from a consumer standpoint to better understand how to position the brand, what are the right products for the brand?

How do we expand the brands, etc.

So I think we're going to be taking -- we're going to be increasing some support to implement some of those initiatives in FY '12.

Does that answer your question?

Yes is it does.

Thanks.

If I could squeeze in one more.

Just more of a housekeeping maybe for Ron.

The G&A ticked up a little bit sequentially in the quarter, is that a good run rate, the fourth quarter number?

Is there something that maybe one-time in nature you need (technical difficulties)

I'll jump in.

I think our G&A run rate has been pretty constant and if it ticked up a little bit, I don't have the number exactly in front of me, but we -- with the acquisitions, one of the beauty of our model is we didn't have to increase G&A significantly and I think we gave the numbers of what we increased.

And we don't anticipate additional spikes in G&A, so I think our run rate is a pretty good one.

Great.

Thanks, and nice job.

Congratulations on the change this year.

Thank you, Jon.

Henry Capellan with Oppenheimer.

I guess the first question is just on, in terms of new product pipeline you talked about that, perhaps, contributing to the revenue growth in fiscal year '12.

You've already talked about marketing and so can you give us some insight into kind of what you expect from new products or next year?

Well, I think, Henry, again, across our core brands what we've talked about in the last year is developing, if you recall, maybe a three year product road map, because as I've said in the past, when we talk about marketing, our number one marketing tool is our product.

So we need to stay focused on that number one marketing tool and figure out how to continue to bring new products and innovative products to our consumers.

So as a result, and we've just embarked on this three year road map this last year, so it takes a while to build that pipeline, so I would expect that pipeline to build gradually in '12, because it takes time, as I've said, and by '13 and '14 I would expect our new product pipeline to be significant, but we expect on our core brands that line extensions, new products, et cetera, would continue to add at the current or greater pace as far as percentage of the portfolio that they are today.

Okay.

Great.

And then in terms of M&A, you talked about focusing on that as well in fiscal year '12.

Can you give us any idea of the type of size of acquisition you might be looking at or perhaps what you're seeing in terms of multiples for businesses that you might be interested in?

Well, I think the M&A market remains robust and I'd say actually it's probably picked up a little bit in the last six to 12 months.

I think, the people on this call have read comments from a number of people in the OTC industry, some of the bigger players in terms of some of their thoughts on strategy.

So I think that is fueling an even more robust environment and so I think as a result we're going to continue to look at things.

I think we're going to stay in the same zone in terms of the types of brands that we've outlined in the past that we're looking for.

And I think the multiples that we've talked about in the past, ideally we'd want to be in the fairways of a five plus to a seven plus multiple.

Great.

Thanks.

Thanks, Henry.

Mimi Noel with Sidoti & Company.

Most of my questions have been answered, but, Matt, maybe one that you could shed some more light on is can you update me on where we stand with the children's Tylenol recall?

I can't because I don't work for J&J, (laughter), so I think you're going to have to get that on another conference call, Mimi.

Okay.

Candidly, we don't know anything definitively.

Everything we hear is just second hand just like everyone else.

They're not back in the marketplace today, but that's all I could speak to.

And the buyers aren't necessarily positioning for an imminent re-entry?

No.

Okay.

Again, I can't speak to it.

That's not us, so I don't know.

I don't know.

We're running our business with the intent of going to the retailers and the consumers and having an impact and we're trying to stay focused on that.

I really can't comment on that.

That's not our business.

And the other one I have was for Ron.

I must be missing something in the press release, so if you don't mind helping me out.

G&A is listed as at about $11 million, but you've called out a couple times $10.2 million, I'm not seeing an adjustment.

I see an adjustment for the gross profit, but not an adjustment in the press release for G&A, can you help me out with that?

Yes, the reported number is $11 million for the quarter.

And included in that is $800,000 of costs associated with the acquisitions bringing us to $10.2 million adjusted G&A.

And all of my other questions were answered.

So that's all I have.

Thank you.

Thanks, Mimi.

Torin Eastburn with CJS Securities.

Just two quick ones.

The first, in one of your slides you show, I think, consumption growth of the nine core brands was 33%, up 33% year-over-year in the quarter.

Can you give a sense of what you think that number was when you adjust for what's going on with PediaCare and Little Remedies.

I appreciate it's subjective, but any guidance you could give would help.

Torin, that's a great question.

Candidly, I can't give you that number off the top of my head, but I know we've got some one-on-one set up or I'll ask someone to follow up on that and I'll come back to you, but I don't know.

What I do know is this, if you look at year-over-year, that slide 7, look at Clear Eyes for the year, up almost 11%.

Chloraseptic up 14%, Compound W up 12%, Ludens up 27%, so it's not -- granted we've got great numbers on Little Remedies and PediaCare, but all the other brands I just quoted are strong double digit as well.

And the only other question.

Can you give an update on what your leverage targets are or what level of debt your comfortable with at a steady state?

Well, I think what we're comfortable with and what our covenants are may be two different things, but we, I think, today we finished the year probably around a 3.5, 3.6, in around there.

In that ballpark.

Yes.

So I think where we are today, when you look at our free cash flow, we're comfortable with that.

For this business, it can support that, I think, quite easily to be honest.

Sure.

Okay.

Thank you.

Karru Martinson with Deutsche Bank.

Just on the comment side with the initiatives to stabilize, I think last quarter you talked about working closely with Wal-Mart.

Have you actually had testing of these products out there and has there -- what have you seen in terms of a consumer response?

We are working closely with Wal-Mart and some of the initiatives that I mentioned in here.

We specifically have agreement with Wal-Mart to do some things and we're in the process of implementing those as we speak.

So they're not actually rolled out as of yet.

Correct, correct.

And then when we look at the cough and cold season that we just went through, it was very strong here for the fourth quarter, seasonally, is that going to create some difficulties just on a year-over-year comparisons when we look at the upcoming year?

Yes, I think that's a good point.

I mean, I think -- it's interesting if you look at us and I'll say the competition and you think about the last five years of cough cold, the last five years.

For until this year, I'll say for the four previous years, everyone said it was a disappointing incident season in terms cough cold and it was going down and this is the first year, and especially last year with H1N1, everyone really expected it to tick up and it did not.

But this year it was quite strong, all right, and what happened was, if you remember, our second quarter number on those businesses was not as strong because the previous year the trade had loaded up in anticipation of H1N1 and then in the third and, sorry, the fourth quarter of last year we were quite weak because they were drawing down that inventory.

So, we're going to have strong numbers in fourth quarter of next year for cough cold to comp against, so it is going to be a challenge, is the answer is yes, for that part of the business Q4 next year.

Very strong this year in Q4.

As you guys kind of flex your muscles in advertising and promotion, are you seeing a competitive response?

I think it's like any business, I think over time it's like a ping pong ball, you do see competitive responses on everything that you do.

So, yes, we try and stay focused on the consumer and we respect our competition in terms of what they've done and what they can do.

And just lastly, I mean, I hate to nit pick, but did notice Doctor's Night Guards seem to be kind of the laggard of the group and just wondering what your thoughts are for that brand.

Well, if you recall, we've talked about this on previous calls, so that's why I didn't bring it up, because we haven't brought it up before, that was a result of us losing distribution at one of our major retailers.

So we're going to get through that comp here in the next couple of quarters and then it will comp better, but we're working hard on that business to get that distribution back.

All right.

Thank you very much guys.

And I know Joe Gulliano is listening and some other people and they're working hard to make that happen.

Thank you very much guys.

Thank you

(Operator Instructions) Reza Vahabzadeh with Barclays Capital.

Did you outline when you expect the household business to stabilize, is that sometime in this year?

I would hope and anticipate and expect us to stabilize the business in FY '12.

That is our intent.

And what gives you confidence that that is a FY '12 event?

Because of the initiatives, the specific plans that we have in place that over the course of the year in aggregate those plans will take shape and I think it will build over the course of the year.

I think the first couple of quarters are going to continue to be tough, but as we've laid things out, we think by year-end that we'll have the business stabilized.

Obviously, you were active on the M&A front in FY '11, do you see 2012 being as active?

Well, as I said, I think we're going to continue to participate.

What the end results are of that I can't tell you, but it's a robust market and we want to continue to think about how we build our portfolio over time.

So we're going to continue to participate in that this year.

When you say robust market, you're talking about lots of properties in discussion and potentially available for sale?

Yes.

And for the larger potential transactions, what's your leverage tolerance at the high end?

Well, again, our covenants call for approximately four times, right, tolerance a covenant and we also -- you look at our free cash flow, had free cash flow over the course of the year we paid down quite a bit of debt as the year goes on.

So it gives us more flexibility with that cap as the year goes on.

So four times would be maximum allowed under the banks and so that would be your maximum leverage tolerance as well?

Correct.

Under our current bank covenants.

Thanks.

And then lastly on your [bottles], I assume that, that uses a lot of resin and oil based products, is there any input cost pressures on that from your co-packers and suppliers?

I think as I said, I think in the beginning maybe, we're not seeing -- we have some costs up, some costs we're holding.

In general our costs increases for FY '12 are in line and from oil, resin, et cetera, we're not seeing any unnecessary or undue spikes that are that much out of the norm.

Thank you.

Thank you.

(Operator Instructions)

I believe that's it for questions.

I don't think there are anymore questions, so again I'd like to thank everyone for taking time this morning to listen to our call.

We appreciate it.

And we look forward to speaking to you again in the upcoming conferences and at the next quarterly call.

Thank you very much.

Ladies and gentlemen, this concludes the presentation and you may now disconnect.

Thank you and have a great day.