Prestige Consumer Healthcare Inc (PBH) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter fiscal year 2012 Prestige Brands Holdings earnings conference call.

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

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

We will be facilitating a question-and-answer session towards the end of today's conference.

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

I will now turn the presentation over to your host for today's conference, Mr.

Dean Siegal, Director of Investor Relations.

Please proceed.

Good morning.

As a reminder there is a presentation that accompanies this call.

It can be found on our website prestigebrands.com, click on investor relations on the left and then webcasts and presentations on the right.

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

Statements of management 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 expectation.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only of the date of this conference call.

A complete Safe Harbor disclosure appears on page 2 of the presentation that accompanies this call.

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, CEO, and Ron Lombardi, CFO.

Matt?

Thank you, Dean.

Good morning, everybody, and welcome.

Thank you for joining us this morning for the second-quarter FY 2012 earnings release results.

As usual with me this morning is Ron Lombardi, our CFO.

And consistent with past calls, I will make some comments for openers.

I will then turn it over to Ron who will take you through some of the financials, and then I will come back and briefly close it with a summary, and then we will open it up to Q&A.

And in addition, as we have done the last several quarters, we will operate off a presentation that was sent out last night, I believe.

So with that, if you would turn to page 3 on the PowerPoint presentation.

The headline second quarter highlights.

And with that I would like to say that we are pleased with the second quarter results.

Very solid financial performance.

Our sales of $105.5 million is up almost 35% from prior year second quarter.

And that is on the heels of a $95 million first quarter, which I believe there was a typo in the presentation, that was up 33.8% versus prior year's first quarter.

It was up 10.08% the $105 million versus the first quarter.

So, on a quarter-on-quarter basis Q2 was up 34.8% over previous year's quarter and Q1 is up 33.8% over previous quarter.

Again, consistent with where our focus has been, we are quite pleased in this economic environment that our growth was over 4% for our five core OTC brands compared to last year's Q2.

That is the fifth consecutive quarter that we have gotten organic growth from our core OTC.

Now again, as a reminder, we now have nine core OTC brands, but to compare apples to apples, we quoted just the legacy core brands here since they were here this year as well as last year.

Our earnings per share of $0.26 is up 18.2% or $0.04 over last year's $0.22 and as important our free cash flow continues to be strong at $17.8 million, allowing us for continued pay down of debt, which Ron will talk about a little bit more this morning.

I think you can see the strategy that we embarked on quite a while ago is working and the increase in A&P support is making a difference.

And as I said, now on our nine core OTC brands our consumption, which is IRI consumer movement at retail, is up 12.1% for the quarter for those nine brands.

So we are quite pleased in terms of the innovation, both in terms of product and marketing, of what we are bringing to the table continues to work and draw consumers to our franchises.

The next point is progress, it's improvement.

And that is our household business is showing improvement versus the previous six quarters.

And I'll talk a little bit more about that later.

And then I think the last thing I'd say for openers is Prestige's -- our consumer staple portfolio really continues to prosper in a very turbulent economy.

And our portfolio, as well as our balance sheet, with our very strong free cash flow, makes us very well-positioned for the current economic environment.

So with that, if you would turn to slide number 4.

And again, I talked briefly about this, but you can see the numbers.

And again this is -- we continue to deliver consistent organic growth in our core franchise.

And we have said all along that that's how we will measure ourselves in the short and medium term, as we evolve our franchise over time.

So you can see the numbers here against the five core brands, Clear Eyes, Chloraseptic, Compound W, and Little Remedies and they continue to be very strong since we began our investment in these brands a little over a year ago.

With that, if you would turn to slide 5, you can see how that breaks out in terms of, as I said at the beginning, 34.8% growth overall for Prestige for the quarter.

You can see our core legacy OTC brands, if you take out the acquisitions, were up 4.8% and as we said, our household business was down 3.9%, which again was a significant improvement versus previous quarters.

If you go to slide 6, you'll see that slide 5 is from a factory shipment standpoint.

Slide 6 is from a consumer poll standpoint.

Again IRI data for the quarter, for the second quarter shows you can see the category overall in the categories in which we compete, consumption in those categories was down 2% for the quarter across all categories in aggregate in which we compete, while our consumption in IRI was up 5%.

So we're quite pleased with that and you can see in our nine core OTC brands, where it was down 1.3% where I mentioned previously we were up 12.1%.

Now in household, the category continues to be soft in household at down 2.4% and within IRI our consumption for household was down 10.4% for the quarter.

Slide 7, you can see -- as a result of what is going on there, you can see what our market share is across our portfolio.

So again, total Prestige, most importantly, across all the brands and all the categories in which we compete from an IRI standpoint, which represents food, drug, et cetera, we have a 9.1 share which is up 6/10 of a point for the quarter, which we're quite pleased with.

And our nine core OTC brands are up 1.4 points in the categories in which they compete.

And our household business was down 4/10 of a point for the quarter.

Slide 8, just to give you some perspective on a few of the brands in terms of how they're performing.

I will start with Clear Eyes and I think just a little bit of information.

We continue to bring innovation to the category and the new product we offered this year in terms of Clear Eyes cooling comfort that provides consumers with a new cooling sensation has performed quite well.

Our Ben Stein advertising to introduce it has been very effective.

And you can see here Clear Eyes, for the quarter, consumption of 8.6% growth while the category is down 3.4%.

So we're very pleased with that.

Slide 9, PediaCare.

You'll see here I think something we are quite proud of from an innovation standpoint.

We were first to market with the new safer dosing syringe system in terms of to hit the shelves, and we think that is quite important from a safety standpoint to parents and it is performing quite well at retail.

And again you can see here, and we will talk a little bit more about this later, our PediaCare business up considerably over prior year, while that category is down slightly.

Slide 10 talks about household.

And as I said here and I will talk a little bit more at the end, we're making progress, we still have work to do.

Overall, the household cleaning products category continues to decline slightly, the overall category.

You can see here in the first quarter and last -- for the last three to four quarters, I believe we've been down approximately 10%.

This quarter we're down 3.9%.

So we're seeing market improvement.

We also believe we're moving towards stabilization with some of the programs we've put in place.

And I would call out for the second half two things.

One, bonus packs that we have that have started shipping already to Wal-Mart and the dollar channel.

And second of all, we have additional end aisle displays in those channels in the second half.

We have more promotions in the second half than we had in the first half of the year.

So we expect that to aid the business as well.

Slide 11 talks a little bit about, in terms of how we are positioned for the future, and specifically, how we are positioned vis-a -vis the competitive environment and any competitors coming back.

Our portfolio, as we have said in the past, our OTC portfolio has grown from 57% to 75% of our revenue over the last two years.

We now have nine core brands.

Those brands really compete primarily in niche categories where we are number one or number two in most of those categories.

The other thing I think that is important to note is, we are building a very diversified portfolio.

So we are not dependent upon one brand.

So that said, that means specifically PediaCare and Little Remedies, which make up approximately 13% of our revenues, and they make up in the categories in terms of analgesics and cough/cold, that is about 7% of our revenues for the entire Company.

All right?

So we have obviously significantly increased our A&P support there over the last two years.

We're running at 20% to 30% A&P to sales ratios on those brands in order to build the equity.

We now also, as I've said in the past, we have multiple brands that are creating opportunities for us there.

I think the other thing that should be noted, in terms of that category, in which they compete and the competition that is there and is not there.

I think it is important to note that private label has by far been the biggest benefactor over the last year in terms of any competitive withdrawals.

We believe we're well positioned in terms of innovative marketing that we are bringing strong A&P levels.

And the fact that this is just a small part of our portfolio gives us confidence that moving forward we believe we're going to be successful with these brands and we believe the overall portfolio will continue to be successful.

With that, slide 12 gives you a little flavor of some of our new products that we're introducing right now during cough/cold.

You can see Chloraseptic warming lozenges that have been quite a success in the marketplace so far and gotten off to a very strong start.

We also introduced Luden's orange flavor with real orange juice and vitamin C that is shipping into the marketplace as we speak, and doing quite well as well.

Slide 13, something I don't talk about as much, but I think is very relevant as it relates to this economic environment and that is, we have a very strong balance sheet for this environment.

We have a strong balance sheet for starters, because our portfolio has consistently, over the last five years or so, had excellent free cash flow, where we generate $60 million plus annually in free cash flow in various economic environments.

And that very robust free cash flow allows us comfort from a leverage standpoint because of our quick repayment of that debt and our debt pay down.

And our leverage ratio of approximately 3.5 right now, Ron will talk a little bit more about later.

We do not have much of a CapEx (inaudible) in terms of less than $1 million a year.

So we think that our financial profile is very attractive and also allows us for significant flexibility in terms of our capital structure.

Slide 14, just to talk very briefly about Blacksmith and Dramamine.

So it has been almost a year.

Where are we?

Well, as I said, we have transformed the portfolio to 75%, which was one of our stated objectives over a year ago.

So we have accomplished that.

We have diversified and built more core OTC brands, which we said is the key to our long-term growth.

So we have accomplished that.

We have strengthened our expertise and built platform in key categories such as cough/cold, pediatrics and oral care.

And that strength in those platforms has not only helped us with consumers, but it has increased our importance in those categories to retailers and given us more clout.

And I think as importantly for this group is, both Blacksmith and Dramamine the brands, are meeting our initial expectations in terms of our projections.

What we projected before we purchased them, we're spot on with what we thought we were going to be.

So with that, I will now turn it over to Ron who will take you through the financials.

I will come back, make a few closing comments and then we would be happy to open it up for any Q&A.

Ron?

Thanks, Matt, and good morning, everyone.

A financial overview of the second quarter appears on slide 15, so please turn to that page now.

We were very pleased with our financial results for the second quarter, which are highlighted by the continuation of three good trends from the first quarter.

These are solid growth, solid sales growth driven by our effective A&P investments behind the core OTC brands and the Blacksmith brands; continued growth in EBITDA and EPS; and consistent free cash flow from operations.

I'll give you more details on each of these in the next few slides.

As a reminder, unless otherwise noted, the financial information we are discussing today excludes several one-time items that occurred in Q1, which are reviewed on slide 18.

If you turn to slide 16, you will see our Q2 results.

Starting with net revenues, which grew almost 35% versus last year.

Core OTC growth and acquisitions were the driver of our net revenue growth of $27 million.

Our legacy core OTC brands, excluding acquisitions, grew just over 4% over the prior-year, while acquisitions added approximately $27 million during the quarter.

Without acquisitions, revenues were about even as OTC success was offset by lower household revenue during the quarter.

As expected, our gross margin decreased by 3.3 percentage points from last year due to the impact of the Blacksmith acquisition and household.

We increased our A&P spending by nearly $5 million or 57.7% over the prior year and it is driving our growth.

Acquisitions added approximately $4 million of the increase, while the legacy businesses increased $800,000.

G&A costs increased $700,000 over the prior-year to $8.9 million due to the impact of the acquisitions, additional personnel to support growth, and the timing of incentive compensation accruals.

Our adjusted net income increased $1.5 million to $12.9 million, which is 13.5% higher than the prior-year.

And finally, we are especially pleased with earnings per share, which increased $0.03 to $0.26 during the quarter, an increase of over 12%.

Moving to slide 17, which reviews the six-month results.

You can see that the first half of the year reflects similar trends between the first and second quarter.

For the six months, revenues totaled just over $200 million, which is about 34% higher than the prior-year, and net income increased $4 million to $24.8 million, an increase of approximately 19%.

On slide 18, we reconcile the second quarter and six months net income and EPS for you.

This slide shows the breakdown of the one-time items recorded in the first quarter that now affect net income and EPS for the six-month period only.

Now let's move to slide 19 for an overview of our second quarter segment results.

As you know, we operate in two business segments, OTC healthcare and household cleaning.

First, our largest segment OTC.

Our OTC segment realized solid revenue growth during the quarter driven by acquisitions combined with higher A&P investments behind core OTC products.

Revenues for this segment increased $28.3 million or almost 56% higher than last year.

The increase in revenue was due to $27.6 million from the acquired brands, as well as $1.6 million or approximately 4% growth from our legacy core OTC brands.

We continue to see strong consumption data across nearly all of our staple core brands, despite the challenging retail and economic environment.

As expected, our OTC gross margin decreased 6.8 percentage points to 58.2% due to the impact of the Blacksmith acquisition.

OTC A&P increased $5.3 million over the prior year, as the acquisitions added just over $4 million and we increased the investment in our core OTC by approximately $1 million.

And now contribution margin.

For the OTC segment, it increased $7.8 million or almost 30% versus last year.

Moving on to the household segment.

In the very competitive and price-sensitive household product segment, revenues decreased $1.1 million or 3.9% in the second quarter from the prior-year.

As Matt mentioned, although we still have much to do over time to stabilize this segment and its leading brand Comet, the slowing of the rate of decline this quarter as compared to past quarters is encouraging.

Gross margins for the household segment decreased approximately 5 percentage points to 29.7% due to the impact of continued pricing and promotional activity along with the impact of lower volume.

Household products' A&P spending was $400,000 lower than the prior year, largely due to the timing of promotional activity compared to last year.

Contribution margin for the household segment decreased to $6.9 million from last year's $8.3 million level, as the impact of lower sales and gross margins were somewhat offset by lower A&P spending.

The six-month segment results are on slide 20.

Again, these results reflect, for the most part, a continuation of the trends in the first quarter.

The highlights are a 57.3% increase in OTC revenues supported by a 70% increase in A&P spending year-over-year.

Finally, moving on to cash flow from operations on slide 21.

The business generated cash flow from operations of $18 million in the quarter.

Cash flow from operations was $4.1 million lower than last year, largely due to an increase in working capital related to higher sales volumes and a shift in sales to later in the quarter versus the prior year.

This cash flow allowed for a $17 million pay down of debt for the quarter and $40 million for the six-month period, leaving the quarter end balance at $452 million.

At this point, I'd like to turn the discussion back over to Matt for a wrap-up.

Thanks, Ron.

So, slide 22.

Just a couple of comments before we open it up for Q&A in terms of as we kick off the second half, where we see ourselves going.

I think most importantly, very consistent with what we've talked about in the past is, we're going to continue our strategic focus on the core OTC brands, because really ultimately in the long-term that is what is going to create the most value for our shareholders.

And we have shown that that strategy is working for us and we're going to continue to do that.

So, we are going to continue to build those brand investments and we believe it will continue to yield successful financial results as it has over the last several quarters.

Again, as a reminder, our A&P investment always increases in the second half as a result of the cough/cold season.

And I would like to say we still have work to do.

A few quarters ago I said our goal was to try and stabilize, by the end of the year, the household business.

You can see this quarter that we made significant progress where we were versus the last few quarters and we continue to work at it with that goal of stabilization.

But we are quite pleased with the progress we made in the last quarter.

And again as I stated, where our balance sheet is really our ally and one of our strengths and has been over the last five years and continues to be in this environment.

I would say as we move into the second half, and I've said this in the past, I'm cautiously optimistic on the second half and I'm cautiously optimistic because the economy is showing some good signs, some not so good signs.

Retailer and consumer confidence is okay.

I think everyone -- I think performance is probably better than people think.

I think confidence is not as high.

And the last thing is, is cough/cold, I think, many of you who have followed this business and these categories for a number of years, after several years of disappointing cough/cold seasons and incidents rates, last year was really a record year for incidents.

So, we think we'll have a good year, but we're coming off a record year last year, so the comparisons within cough/cold are going to be very challenging.

So with that I will open it up to any questions.

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

I'm surprised shipment growth continues to track so far below consumption.

I think that is four straight quarters that the delta has been quite large.

Can you just share your view on current inventory levels at your customers.

Then, whether you would expect shipment growth to start catching up with consumption growth once we get through flu season?

Yes John.

We know there is a gap.

As I've said in the past, we just look at it relative as opposed to absolute, because you remember as we've said and it is noted on the slides, the consumption growth here is IRI, which is food and drug only.

It doesn't capture Wal-Mart.

It doesn't capture the dollar channel.

So, we can see it plays games at times both sides.

So, in the case of household, you will see that our shipments actually picked up, but our consumption for the quarter for household was actually down greater than the category.

Well, that is in food and drug.

In the alternative channels, like dollar, we actually had, obviously, better performance than that.

So, I think it is never going to reconcile completely.

As far as answering directly your questions about inventory at retail, I would say I think inventory at retail is okay.

I don't think we believe across the portfolio that we have got excess inventory against any of our key retailers, because we track it quite closely.

However, what I will say is I think in this economic environment what we are hearing from retailers is their desire to tighten their working capital and to tighten their inventory.

So, while we don't have excess inventory out there at retail, for example in the cough/cold season we have had some key retailers tell us as opposed to taking all of the cough/cold products in at the start of the year, we are going to spread those shipments out in order to better manage our working capital.

I think there is a little bit of a trend right now at retail, given the economic environment and given consumer confidence that retailers are tightening their belts a little bit on working capital.

Then, can you tell us how much pricing contributed to OTC revenue growth on an organic basis?

Is really not contributing at all, John.

I mean, it's not like we are taking price -- we really have only taken price on one brand and a few SKUs in the last 12 months.

That was about 10 months ago.

So, it is really not coming from pricing.

So, that 700 basis points gross margin decline in that segment, you would still maintain that's all or primarily all due to the Blacksmith mix this year?

Again, yes, John, and again we have said that going into the acquisition.

The brands we acquired have lower gross margin, so it was going to be dilutive.

If you look at our gross margin since the acquisition, it has been fairly consistent.

Ron, what are the numbers?

We have been approximately 52.5% in total in the previous quarters.

So, again, I think the question comes up at times because of what happened in the food category.

Our gross margin reduction is not inflation or commodity related, it is strictly we said at the acquisition that we were buying brands with lower gross margins.

We are right on budget with where we expected to be.

That's helpful, thanks.

That's all I have.

Thank you very much.

Thanks John.

Joe Altobello of Oppenheimer.

Hello this is actually Christina standing in for Joe today.

I was just wondering if you could talk a little bit about the slowdown in the household category and whether you think this is sustainable?

Well, Christina, we have talked about this in past quarters and I think we have said household in aggregate for the category has slowed down over the last 12 to 24 months consistently.

We've obviously felt that.

I think what we are pleased with this quarter is after a few quarters of 10% decrease in shipments, to slow that by 60% to under 4% decrease in shipments we feel good about that.

I think the category in general is not a growth category.

The major manufacturers have been very clear that they're willing to protect share at the expense of price and gross margins and have acted accordingly really for 12 to 24 months.

Then, just one more.

On A&P spending, is that where you plan -- where do you plan to be going forward, 14%, 15% or just where, I guess?

Well, Christina, again as we've said, we don't give specific guidance on revenue or gross margin or spending.

What we have said in the past is we are going to continue to employ an increased A&P spending rate against our core OTC brands as long as we get growth.

Also, if you look before the last 18 months, I think we cut the spending, the A&P on those brands to fund some other things.

So, we're trying to build that back up, but we are trying to walk before we run and make sure that we get the performance.

So, we're going to continue to head north as long as it continues to bring increased revenue to our top line.

Okay, great.

Thank you so much.

Thank you.

Karru Martinson of Deutsche Bank.

When you look at the market share gains that you are getting across the board in your OTC categories.

Who are you taking that market share from?

You mentioned private label has been the biggest benefactor.

Is it coming from private label in other categories or is it branded?

I think it varies by category, but I think candidly, Karru, most of it is branded.

So, if you look again just -- I will point to a couple of categories where it is one -- couple where it is branded maybe and a couple where it is private label.

Clear Eyes.

We have consistently gained share on Clear Eyes.

I think if you look at the category data you will see that we have gained some of that share from Visine.

I think Compound W has consistently gained share over the last year or so.

If you look at that you would say that we have gained share from one of the key branded competitors, Dr.

Scholl's, versus if you look at PediaCare or Little Remedies you will see lately we're gaining share at the expense of private label.

So, it really varies by category.

Then, when we look at the new product introductions, seemed very much to be line extensions.

Do we have anything in the pipeline that you view as game-changers or is the philosophy still to kind of continue to dole out the singles and doubles, if you will?

I think we changed our strategy a couple years ago when I came here, because given the Company, I felt that we were better served to focus on stuff closer in.

We do have a game-changer in Canada right now called Skin Tags that has been a huge success for us.

If it were approved by the FDA in the US, it would, really would be a game-changer.

We are working hard on that, but do not have approval yet.

Our other introductions we're trying to be as innovative as possible, while staying close in.

We are also looking at some other things.

As I said, if you remember, over the last 12 months we have changed our new product process and we are now developing new product road maps by brands that are a three year road maps.

And in fact, next Friday we have a full day meeting on new products and where we are on the road maps on each of those brands.

So, we're tracking it quite closely.

We're very bullish, in terms of over the next couple of years, what it is we plan to roll out, and some of those being close in and some of those moving a little farther out.

Given the pro forma leverage here, kind of 3.6 and strong cash flow.

Where are you guys comfortable operating the business?

What is the Outlook in terms of, talking acquisitions post the Blacksmith and Dramamine brands coming in?

I think the good news is with our -- we have a great track record of consistent free cash flow.

That great track record of consistent free cash flow gives us a lot of flexibility in terms of capital structure.

So, it allows us to take advantage of opportunities that are in the marketplace.

With regards to what is out there?

As we have said, over the last 1.5 years, we've been active in the M&A market and we will continue to be active in that market in terms of if we find things that we believe can create value for our shareholders.

Thank you very much, guys.

I appreciate it.

Thank you.

Torin Eastburn with CJS Securities.

Can you provide the growth for Blacksmith or for the non-legacy OTC brands in the quarter?

I don't think we broke that out, Torin.

I think we gave -- we tried to give -- be transparent in terms of giving what was in the legacy portfolio, but we do not have -- we don't break out the individual brands.

You can see, obviously, what the growth was with the acquisition, but we don't give it out by individual brand.

How about for Blacksmith as a whole?

I don't think we broke it out for Blacksmith.

We look at it, Blacksmith and Dramamine.

What are you seeing on the cost side?

Again, this question has come up the last few quarters.

I think we continue to see somewhat business as usual on the cost side.

We have seen some minor price increases.

But we are not seeing headwinds in that area at this point.

As I've also said that the last conference call or two, given that there have been no price increases by us or really it's been held by our suppliers, I think at some point over the next 12 months or so, that there is going to have to be some pricing taken.

I think I saw some things recently this week announced by some of the major manufacturers that they're going to take price increases.

So, we don't see the headwinds there right now, but we are certainly monitoring it closely.

And other question.

Johnson & Johnson, I think, resumed shipments of Tylenol cold and flu in September.

Have you seen any impact on your business from that?

I'm not aware that they resumed shipments in September, Torin.

Okay.

Thank you.

(Operator Instructions)

Okay, we have time for one more question if someone would like to ask.

Reza Vahabzadeh of Barclays Capital.

Please proceed.

So, just to recap some of the comments you made.

Revenue growth excluding acquisitions was how much?

Revenue growth of our core OTC legacy brands was up 4.1%.

Right, I guess I'm talking about the whole Company.

Basically flat, right?

Yes.

Then, as far as EBITDA performance excluding acquisitions, any comments on that?

We don't break out EBITDA by individual brands or segments.

We're, obviously, we're quite pleased with our EBITDA performance for the Company.

Then, the gross margin, you mentioned the 300 basis points decline was due to acquisition.

So, should we assume that ex acquisitions it was largely flat?

Our gross margin -- Go ahead, Ron.

For our OTC business, the Legacy OTC business gross margin was essentially flat year-over-year.

The household change in margin was laid out in the deck today.

The impact year-over-year on a total basis was because of the change in mix from the acquired Blacksmith brands.

Then, as far as the tuck-in acquisitions, is there a maximum leverage that you are willing to tolerate?

I understand you have strong free cash flow and you can bring it down, but is there a maximum leverage that you are willing to tolerate?

We look at that on a case by case basis in terms of acquisitions.

So, there's not even a range?

Again, we look at it on a case by case basis in terms of each acquisition, what we would be comfortable with.

Depending on the acquisition, the free cash flow, et cetera.

Right, thanks.

Okay.

Jon Andersen of William Blair.

Hi, guys, this is actually Ryan filling in for Jon.

Matt, just a quick question here.

As you focus towards your core brands, I was just wondering how you feel you non-core brands are holding up?

I guess, are you losing any distribution and do you feel the need to maybe reverse direction and increase support for any of these brands?

That's a good question, Ryan.

I think the answer is our non-core brands are performing in line with expectations.

Those non-core brands I think you have to look at them a couple of different ways.

We have some non-core brands that are growing quite nicely.

New-Skin and Dermoplast both had terrific quarters.

We have other non-core small brands that are not growing that are declining, but we have made that choice and said we think that is right for the long term.

So, I think we are right on track with what we expect.

I would not reverse our decision.

I think it is one of the reasons we have been so successful.

I think part of having the strategy is you have to say no to some things.

So, I think we're quite pleased with the way the overall portfolio is performing, our core OTC brands, and thus, we are pleased with where we are in the non-core brands as well.

I don't see reversing decision.

Okay, thanks.

Olivia Tong of Bank of America Merrill Lynch.

Just wondering, if we could talk a little bit more about consumption versus shipment, because for quite a few quarters now, you've had shipment sell-in lag the sell-through the consumption number that you are quoting the IRI.

When does that start to normalize in terms of those numbers being more or less in sync?

If at some point that has to happen or is there something that -- in the data that we are not seeing, because my assumption is that at some point sell-in has to get closer to sell-through or sell-through had to come down to sell-in.

Thanks a bunch.

Yes.

I think, Olivia, again as we've said, first of all that consumption number does not include all accounts, all channels.

Really, and I think it is on one of the pages, it includes about 55% or 60% of the channels.

It does not include the dollar channel.

It does not include Wal-Mart.

We're not allowed to quote Wal-Mart numbers.

So, there is a discrepancy there, which leads to the potential gap.

The other thing is, is -- and whether it is this business or other businesses I've work on, we have never really seen it come completely in sync.

What we look for are relative trends, whether it is widening or narrowing.

Right now, while we continue to have a wide gap in terms of consumption growing more than shipments, even though it is not an all channels.

We think that points to good signs in terms of what our inventory is in the warehouse and retail, given the consumption's strong and we would expect that would translate to continued solid factory shipments moving forward.

Is it fair to assume then that, unlike other HPC manufactures, where the non tracked channels tend to grow faster than the tracked channels -- that for you it would be the opposite.

Where the non track channels tend to -- are pulling down -- if you include the non track channels, your consumption numbers would look lower not higher?

I think -- I don't think I could make that blatant statement about the whole portfolio.

Again, I think part of having this portfolio and the brands is it varies by brand.

So, some brands are particularly strong in alternative channels and others are not.

Some brands are stronger in Wal-Mart than they are in other accounts.

So, it really -- I can't make the statement across the portfolio.

It really varies by brand.

I'm still not understanding, I guess.

Maybe I should take this question off-line later.

Is the general consensus then, after including the non tracked channels in your consumption numbers, is that plus or minus net-net?

Maybe they all end up being about the track -- the all-in number is fairly similar to your tracked number?

I still am trying to bridge the gap between how flat organic sales overall ends up with the kind of consumption gains that you are seeing?

Well again, the numbers -- just so you know, the numbers we're quoting for consumption are public numbers.

So, those are coming directly from IRI and they're numbers that are available to us, our competition, to you, to anyone.

So, we are quoting public numbers that are coming from an independent third-party source.

Those are not ours.

And like I said, that is what we look at.

That is the data we get from a consumption standpoint of what we look at.

Obviously, we also look at Wal-Mart's POS, given how important Wal-Mart is, but that is just not reported publicly at Wal-Mart's request.

Okay thank you.

Karru Martinson of Deutsche Bank.

Just kind of a philosophical question.

As you guys have grown and have brought in a lot of brands, have you given thought to shifting away from the virtual manufacturing and starting to look at some -- of bringing stuff in-house?

Or are you comfortable with your next three year plan, if you will, of were you can grow on a virtual basis?

I think that is a good question that we have talked about, and I think we have talked about in the past as it relates to acquisitions.

What we have said, historically -- before I got here, we said any acquisition that included physical assets we would not pursue.

What we have said today is, we like our model, we would be happy with our model moving forward.

However, if we found the right acquisition that had physical assets that we felt could be of benefit to not just the brands we brought in, but maybe some other brands in our portfolio, we would consider it.

So, at this point we are open to that and we have looked at some different acquisition opportunities that have actually included that.

Thank you very much, guys.

All right.

Thank you very much.

We appreciate everyone's time this morning.

And we look forward to speaking with you again next quarter.

Take care and have a good day.

Thank you for your participation in today's conference.