Prestige Consumer Healthcare Inc (PBH) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 Prestige Brands Holdings Inc.

earnings conference call.

My name is Tarita and I will be you operator for today.

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

We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Dean Siegal, the Director of Investor Relations.

Please proceed, sir.

Good morning and thanks for joining us this morning.

As a reminder, there is a slide presentation which accompanies this call.

It can be accessed by visiting PrestigeBrands.com, clicking on Investor Relations on the left, then on Webcasts and Presentations on the right.

Today's presentation will be right at the top, number one.

I am required to remind you what this time 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.

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

A complete Safe Harbor disclosure appears on page two of the presentation accompanying this call.

Additional information concerning the factors that might cause actual results to differ materially from management's expectations is contained in the Company's annual and quarterly reports which it files with the US Securities and Exchange Commission.

Before I introduce Matt Mannelly, our CEO, and Ron Lombardi, our CFO, I'd like to remind you that today at about 5.15, between 5.15 and 5.45, if you watch CNBC, the program called Fast Money, you will see our CEO, Matt Mannelly, interviewed on our quarter.

Now I'd like to turn the call over to Matt and Ron Lombardi.

Good morning.

Thank you, Dean, and thank you, everyone, for joining us this morning.

We appreciate your time.

Ron Lombardi, our CFO is with me, and the agenda is on page three of the presentation that Dean referenced earlier.

I will start out and give some comments in terms of overall performance highlights.

Ron will then take you through the financials.

And then I will close it with some more closing comments, and we'll open it up for some Q&A from there.

With that, if you would turn to slide four, I believe you seen this before, but just really to start out every presentation, we talk a little bit about our strategy and the key drivers for the Company and how we create and deliver value today and moving forward for our shareholders.

For us, the strategies remain the same.

The initiatives under the strategies may change, but the strategies remain the same over a long period of time.

And our strategies have been and will continue to be to drive our core OTC growth, to leverage our financial profile, which Ron is going to talk a little bit about today, which really we had an exceptional quarter as it relates to that, and to continue our aggressive and disciplined approach to M&A, with that focus being exclusive in the OTC market.

With that, if you will turn to slide five, talk a little bit about the highlights of the quarter, and I'd say for starters, we are quite pleased, and we feel we had an excellent financial performance for the quarter.

Among the key measures include the fact that our third-quarter revenue of $160 million is up over 50% from prior year.

I think also our adjusted earnings per share, which Ron will talk about, of $0.37, which is up 48% over last year.

And then I think the numbers that are really outstanding are record cash flow from operations of over $40 million for the quarter.

You combine that with cash that we had on hand, as well as the sale of Phazyme, we paid down $83 million in debt this quarter, which is really quite a record for Prestige.

As a result, our leverage ratio, our debt-to-EBITDA, which was 5.25 11 months ago when we repurchased the GSK North America brands, is already down to 4.35, which is really exceptional.

Other key highlights from a brand building standpoint, we continue to focus on our core OTC brands.

And you can see our consumption growth continues to be very strong.

And for our core OTC brands, our consumption growth for the latest quarter, the latest 12 weeks, is up 6.9%, and the categories in which those brands compete is up 3.2%.

So we are almost 2X-ing category growth.

Our core OTC organic revenue growth, when you combine the second and third quarters, it is up 4.8%.

You are going to see Cough/Cold in terms of a shift in shipments to second quarter, and we will go through that on the next couple of pages.

The GSK Brands, what I would say there is we have been very successful in terms of integrating the brands in this year.

And at this point, we are really focusing our efforts around consumer efforts and some of the learning and preparing to set up for FY 14 investments on those brands, which we are very excited about.

And then finally, as a result of the excellent performance for the quarter, we are going to take our full-year adjusted EPS guidance up from $1.37 to $1.42, which we had raised last quarter, and we are going to take it up to $1.45 to $1.48 for the year.

So we are quite pleased with that.

With that, if you would move to page six, I think you've seen this page before.

I'm going to talk first about shipments, and then I'm going to talk about consumption.

You can see on a quarterly basis -- and if you recall, last quarter, questions were asked of -- your core OTC is up 11.3% for the quarter, and we said, well, it is never neat; it is always a timing type of thing.

And you can see for the third quarter, our core OTC, the legacy brands -- not the GSK Brands year-over-year, but the legacy brands -- were down 1.2%.

And that really is a result of if you split it out into Cough/Cold and non-Cough/Cold.

So I'll take you through that.

You can see in the second quarter, our Cough/Cold brands were up 16.7%, and our non-Cough/Colds were up 7.8%, to get to a blended 11.3%.

What that says is the trade was taking in inventory in preparation for the cough/cold season, so they did it in the second quarter.

So you can see our non-Cough/Cold brands in the third quarter continued to be up 4.4%, while our Cough/Cold, after coming off a 16.7% quarter, was down 6.2%.

So again, over a long enough time period you can see second and third quarter combined when you look at cough/cold season, you will see cough/cold brands up 3.2% and non-Cough/Cold up 6.3% for a 4.8% aggregate.

So from a shipment standpoint, that shows you in terms of Cough/Cold and non-Cough/Cold what happens with the trade.

If you turn to page seven, you will see the numbers that I just quoted on the left-hand side in terms of Cough/Cold for second quarter, Cough/Cold for third quarter.

And then combined, as importantly -- probably more importantly -- are the numbers on the right-hand side.

So these are consumption numbers.

This is what pulled off the shelf in each quarter.

So in the second quarter, Cough/Cold brands, you will see listed there, from a consumption standpoint were up 14.9%; in the third quarter consumption was up 8.5%.

So when you look at those two quarters combined from a consumption standpoint, it is up 10.9%.

And that is ultimately how we measure ourselves in terms of our consumers pulling our brands off the shelf.

With that, if you turn to page eight, you will see again the chart that we've shown in the past that shows the total Company, it shows our total over-the-counter business and it shows our core OTC business.

Total Company revenue -- and again, this is consumption, this is consumption of all of our products -- up 3% for the latest quarter while the category is up 1.1%.

Our over-the-counter brands up 3.8%, and the categories in which they compete up only 1.3%.

And as I said previously, our core OTC, up 6.9%, while the category is only growing 3.2%.

So we are quite pleased in terms of the brand-building efforts and the marketing efforts continue to impact in terms of how the brands are being pulled off the shelf at retail.

And page nine shows that as well, in a different format.

You can see what it means, how far we are outgrowing the categories, the latest quarter, plus 3.7 points.

And you can see that we are gaining market share in each quarter, and the latest quarter, 3/10 of a point in terms of market share gain.

We are doing that among a number of brands, and on slide 10, we show you Efferdent.

I think the key things I would point out our it starts with bringing innovative product to the marketplace.

And the new Efferdent Crystals product that had a very strong claim of kills 10 times more odor-causing bacteria was a very powerful claim, so we decided to take that claim and put it on TV.

And there had not been advertising in this category for a number of years, so we put significant television dollars behind the brand.

We've also done things like displays, in terms of a trial-sized unit display that is now at retail.

And you can see the results for the category and for our brand.

The category over the last quarter is down 2.4%, while the Efferdent brand is up 3%.

So we are clearly outdistancing the category again by over 2X.

And you can see on the next slide, 11, how much of that Efferdent Crystals business has been incremental.

So the red line is the base business, which is basically steady over the last year, and -- over the last nine months since we introduced Efferdent Crystals.

And you can see the Efferdent Crystals product has really been almost completely incremental to the brand.

So that is what innovation does for you, is bring incremental revenue to the brand.

So we are quite pleased with the performance of Efferdent Crystals.

Page 12 talks about -- 13 talks about our Gaviscon product, which we have our brand -- a powerful brand for us in Canada.

And as we said at the time of the acquisition, our Canadian business has doubled in size and Gaviscon is our biggest brand in Canada.

The brand has quite a bit of momentum.

It's number one in the category.

You can see its consumption growth over the latest 52-week period -- we don't get data as often in Canada as we do in the United States -- but the latest data that we do have shows that consumption is up 8% and it has gained 8/10 of a share of market -- 8/10 of a point of market share over that time period.

The next slide shows why, and the reasons are we continue to put strong marketing support behind our lead brands.

And in Canada, Gaviscon is one of our lead brands.

So a very compelling TV campaign in terms of for heartburn.

Professional sampling.

We are doing digital marketing, and we have very strong performance in terms of merchandising at retail for the Gaviscon brand, as well.

With that, I will turn it over to Ron, who will take you through the financial highlights, and then we will come back and wrap it up with a few comments and go to Q&A.

Ron.

Thanks, Matt, and good morning, everyone.

A financial overview of the third-quarter results appears on slide 15.

As a reminder, unless otherwise noted, the financial information we are discussing today excludes certain TSA, integration and other costs.

A reconciliation between reported results and the adjusted results can be found in schedules included in today's earnings release.

We are extremely pleased with our excellent financial performance in the quarter that includes strong gains in sales, earnings and cash flow.

Our solid revenue and earnings growth continue to be driven by strong growth and share gains in our core OTC brands, solid performance from the GSK Brands and strong growth in EBITDA and EPS that is consistent with revenue gains.

We also realized record cash flow from operations during the quarter, which allowed us to significantly delever and reduce debt by over $80 million during the quarter.

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

Turning to slide 16, we have our Q3 results.

Our excellent Q3 results continue to reflect our transformed financial profile.

Our year-to-date sales are at a run rate in excess of $600 million annually, our gross margin has increased approximately five points over the prior year, and our A&P investment level is almost 15% of sales.

For the third quarter, our net revenues increased approximately 51% over the prior year to just over $160 million during the quarter.

We continue to realize stronger growth and share gains in our legacy core OTC brands, with sales growth of almost 5% during the combined Q2/Q3 period.

Cough/Cold shipments season to date are off to a strong start, up 3% over the prior year for the combined Q2/Q3 period.

As Matt discussed on slide six, we saw a shift in Cough/Cold timing into Q2 of this year as compared to Q3 last year.

Our non-Cough/Cold legacy brands grew fairly consistently each quarter, with a gain of approximately 8% in Q2 and approximately 5% in Q3.

The acquired GSK Brands performed very well in the quarter and were generally in line with our expectations, adding approximately $57 million of revenue during the quarter over the prior year.

Our Q3 gross margins increased significantly over the prior year to 55.4% due to our increase in OTC sales to approximately 85% of total sales.

Q3's results include seasonal Cough/Cold promotional and merchandising support which was in line with expectations.

Consistent with our strategy to grow core OTC, we increased A&P spending almost 55% over the prior year's level during the quarter.

The increase was due to the addition of the acquired brands, as well as increased support behind our legacy core OTC brands.

These investments are effectively driving increased sales, consumption gains and drive value creation through increased earnings and cash flow.

G&A as a percent of sales declined over one full point to 7.1% of sales from last year's levels, reflecting the leverage of higher sales.

Our adjusted EBITDA, net income and EPS all increased significantly during the quarter over the prior year's levels.

Revenue increases in EBITDA margin gains resulted in an increase of approximately $7 million in adjusted net income to $19.3 million during the quarter, an increase of 54.2% over the prior year.

And adjusted EPS grew to $0.37 during the quarter, an increase of 50% and $0.12 over the prior year's level of $0.25.

Turning to slide 17, we have our year-to-date results.

Our year-to-date results reflect the same trends and financial profile that we realized in Q3.

Our year-to-date net revenues have increased approximately 53% over the prior year to $470 million.

Our non-core legacy OTC brands have increased 4.5% over the prior year, which is well ahead of category growth.

Our total legacy business has realized organic growth of almost 1% on a year-to-date basis, and the acquired GSK Brands have added $160 million of revenue year-to-date.

Gross margins at 56.5% are well ahead of prior year's level, but consistent with expectations.

A&P investment continues to fuel sales growth and has increased 1.7 points and approximately 75% over last year's levels to 14.3% of sales, as we continue to invest behind our 14 core OTC brands to drive long-term top- and bottom-line growth.

Our adjusted EBITDA, net income and EPS have all increased significantly due to the increase in sales and gross margin.

EBITDA outpaced sales growth and has increased approximately 75% to $164 million year-to-date.

Adjusted net income has increased 57% to $58.5 million, and EPS increased $0.40 to $1.14, which is 54% above last year's level of $0.74.

Moving to slide 18, we have a reconciliation of reported net income and EPS to adjusted results.

As a reminder, our earnings release contains a full set of disclosures about our non-GAAP financials.

Reported results for Q3 and year to date include GSK transition and integration costs and increased amortization of deferred financing costs related to our accelerated loan payments.

Adjusted EPS excludes these items, which impacted Q3 by $0.13 and year-to-date by $0.24.

We incurred approximately $4 million of GSK integration costs in Q3, as expected.

We recognized approximately $8 million of incremental non-cash deferred financing amortization during the quarter as a result of the accelerated paydown of our term loan.

We have repaid in excess of $190 million in the 11 months since the GSK acquisition.

We expect the quarterly amortization for these costs to be approximately $2 million per quarter in Q4 and in fiscal 2014.

Turning to slide 19, we have a summary of cash flow for the quarter and year-to-date.

Prestige's enhanced financial profile of high EBITDA margins and significant tax attributes allowed us to generate record cash flow from operations during the quarter.

The business generated $40.5 million of cash flow from operations during the quarter, which was an increase of approximately $27 million above the prior year's level.

On a year-to-date basis, we have generated over $100 million in cash flow from operations, which is an increase of well over 100% and $53 million over the prior year's level.

Cash flow has been driven by both strong EBITDA margins and reduced working capital.

December's net debt balance was approximately $997 million, and our debt to covenant-defined EBITDA ratio was less than 4.35 times.

Our strong cash flow has allowed us to quickly delever and has reduced our leverage ratio by almost one full point in less than 12 months.

We expect cash flow from operations to be in excess of $120 million for the full year, and continue to expect capital additions of approximately $10 million related to our new headquarters and ERP upgrade, with most of the spending completed through the end of the third quarter.

Finally, we anticipate refinancing our term loan beginning today and completing the transaction by mid-February.

Credit markets have been very robust, and we anticipate the opportunity to meaningfully lower our interest rate.

At this point, I'd like to turn the discussion back over to Matt.

Thank you, Ron.

I'll just -- a couple of comments that I'll make and then we'll open it up for some Q&A.

If you turn to slide 21, again, I think you've seen this slide before.

I would highlight a couple things today that I think are particularly relevant.

On the financial profile, hopefully in the results, what Ron had to say, you can see that the financial profile of the Company is exceptional and has never been stronger.

And when we look at our cash flow generation and what it allows us to do in terms of paying down debt, it is really exceptional, and this was a tremendous quarter for us.

You also heard from Ron at the very end the fact that we're going out today and will be refinancing and will be strengthening that financial profile even more.

The second thing I would just reiterate, as I have in the past, is I think we have the right strategies, but you can have great strategies, but you got to have great people.

And for us, we are a company of 125 employees, and it is the 125 people in this company that make it happen and the passion that they have for the business, is why we have continued success.

With that, page 22, slide 22, I think this has been a topic that has been discussed recently, so I thought we would include it, since everyone seems to be talking about it.

But recent seasonal flu incident levels.

As a result of the flu incident levels, I think we are cautiously optimistic for the remainder of our fiscal year.

I would point out a couple of things.

If you look at this chart, the blue line is this year, 2012 and 2013.

And if you look at this from FAN flu data, it shows that at the beginning of the season, September or October, we were running slightly ahead of previous year.

Then you get into November, and we're actually running a little behind last year and the year before.

Then it is really late December and January where it takes off.

So this is where the manufacturers and the retailers have a slightly different timeline.

So the retailers are starting to get the benefit of that in December, and you've seen that in the results that came out recently.

As you saw from us, from a shipment standpoint in the second quarter, our Cough/Cold business was very strong, as the retailers anticipated a solid season.

And with the strong consumption and incidence level that has gone on in December and January, as I said, we are cautiously optimistic for the remainder of the fiscal year.

With that, if you will turn to slide 23, please.

Just a couple of comments about the outlook for the remainder of the year.

First, we are very pleased to be raising guidance and taking it from $1.37 to $1.42 and raising it to $1.45 to $1.48.

That guidance also includes the fact that we sold Phazyme, which was dilutive to the tune of $0.01 a share and the revenue that has gone with that.

It also includes a $0.01 per share benefit associated with the refinancing that Ron is talking about, and does not include any of the financing -- one-time financing charges associated with that.

In terms of the fourth-quarter highlights, from a revenue standpoint, as I've said, we believe we are well-positioned to benefit from the strong cough/cold sell into merchandising and the current incident levels, and we are set up to do that.

From a marketing standpoint, we continue to emphasize that the second half of the year is when we increase our support behind the brands, and we've done that this year, which is why we believe we are well-positioned and cautiously optimistic about the fourth quarter.

And finally, in terms of the refinancing, it helps us take advantage of a favorable financial market and it's going to strengthen our profile even more.

And I think the last language we've used in the past is really particularly relevant today, and that is for us, this is -- the strategic course that we are on is a marathon, not a sprint.

And that is why we look at it in terms of building the brands over the long-term.

And you can see in the beginning, in terms of Cough/Cold shipments, how they may vary from quarter to quarter, but over the course of the season, they are going in the right direction, both from a shipment standpoint, and in particular from a consumption standpoint.

So we are quite pleased with that, and we are pleased with the strategic course that we are on.

Slide 24, again, this is the slide that we typically close with that talks about how we are delivering against those strategies.

You can see our consumption in terms of driving that core OTC growth, up 6.9% in the latest quarter versus the category is up 3.2%.

And you can see our support for the business, our support in terms of A&P for the third quarter, almost 20% A&P to sales ratio.

So we really are focused on building brands and we are quite pleased and quite proud of that.

The second bucket is really where we really had an All-Star quarter, and with over $40 million in cash flow from operations, it was an exceptional quarter.

Ron talked about we are now taking that up to over $120 million target for the full year.

And as a result, already to date, we've paid down a significant amount of debt that Ron talked about, almost $200 million for the year, and we are down to a 4.35 debt-to-EBITDA coverage.

And we continue to be focused and disciplined in terms of OTC M&A moving forward, and we are quite optimistic about it over the long term.

With that, thank you, and we will now turn it over to questions.

(Operator Instructions) Joe Altobello, Oppenheimer.

Good morning, guys.

Just a couple quick ones.

I guess first, let me start out with a housekeeping item.

You mentioned that the refi you expect to be about $0.01 accretive for the 45 days between mid-February and end of March.

So back of the envelope, you are looking at about $0.08 of annualized accretion from that.

Is that correct?

No, Joe.

I think the way to look at it is we have approximately $475 million out on our term loan.

And we've seen similar repricing in the marketplace with 1 to 1.25 point savings.

So we would expect, using 1%, to save between $2.5 million and $3 million of cash in higher net income next year.

Because we are paying down debt, we're going to have less debt that we will be capturing that against.

Correct?

Right, it's not on the full debt level.

It is just on the term loan.

Okay, understood.

Secondly, in terms of next year, the acquired GSK Brands, you mentioned, did very well in the quarter.

And starting with next year, they will be -- a lot of them will be in your sort of core OTC base, when you guys talk about organic growth.

So could you give us a sense for the type of organic growth you are seeing from those brands, and then maybe what you would expect from those acquired GSK Brands next year, given you will have a full year of the innovation and marketing programs you guys are talking about?

Joe, I think the numbers we are seeing from the GSK Brands on a pro forma basis year-over-year, even though we haven't owned them for a full year yet, are very similar to our other core OTC brands.

And as it relates to 2014, as I've said previously, we've done a love of the internal homework in 2013 for some of those brands.

Because remember, it is a marathon, not a sprint.

We are learning about the brands and the consumers.

We are doing a lot of quantitative and qualitative consumer research.

We have significant A&P dollars that we intend to put behind some of those key GSK Brands, including BC and Goody's, two in particular, that we'll talk more about in future quarters, and we would expect continued robust growth of those core brands, similar to what we are experiencing right now, which is similar to our other core OTC brands.

Okay, great.

Thank you.

John San Marco, Janney Capital Markets.

Thanks.

Good morning, guys.

My question is on gross margin, down 160 bps sequentially quarter over quarter.

That surprised me a little, and in the press release, I guess you attribute it to promotional and merchandising levels.

I guess, one, did it surprise you at all, and two, when do you expect those promotional levels to wane?

Good morning, John.

Ron Lombardi here.

John, we have some seasonality in our gross margins, both from Cough/Cold mix, which tends to have a slightly lower gross margin than our average, as well as timing of promotional and merchandising events.

So the third quarter was in line with what we anticipated and expected for the quarter.

I'll also add that, as we've talked about this, our gross margin has increased over 500 bps this year, or almost 500 bps.

First half, it was about 57%.

For the year, we are going to come in at a 56%-plus gross margin, which we are quite pleased with.

And we had said, and we still support the fact that long-term, we expect to get to a 57% gross margin on an ongoing basis.

And so we are tracking right on, if not slightly ahead of where we thought we would be from a gross margin standpoint nine to 12 months ago.

Okay, that's helpful.

Thanks.

And then focusing on Cough/Cold, I was a little surprised it was up 3% for the season, given the consumption growth.

And also, thank you for the incident data that you guys shared at the end of the presentation.

I guess do you foresee shipments catching up to consumption as the flu season ends?

Is there some catch-up shipping to do and do you think you will do that this cough/cold season or next cough/cold season?

John, having been in this type of business before, whether it is Cough/Cold or the Gatorade business, which I was in years ago, when you're dependent on something like this, it is interesting that -- the reason we put the incident level out there it is not like cough/cold has been -- and flu incident has been rampant the entire season.

It is really mid to late December through January that it has picked up.

So you are seeing that at retail mid to late December through January.

So if you -- you would have to be somewhat optimistic that with that pickup in terms of consumer pull in mid to late December into January, that you would be hopeful that reorders would be coming in the fourth quarter, yes.

Got it.

And do you have a view on what retailer inventories look like, call it relative to normal, as at the end of the quarter?

Yes, as you can see, in the beginning of the quarter, they were heavy because they all took [it] at the end of Q2 in advance of cough/cold, but since, they have been working those down.

So I think inventory late December was at normal levels and there was not any excess inventory out there at retail.

Does that answer your question?

That's helpful.

Thanks.

And just with respect to -- in this presentation you put 11% consumption growth for Cough/Cold for the combined two-quarter period.

How would that compare to what your categories did in Cough/Cold specifically?

It should be in there, John.

We were at 11 -- for Cough/Cold, it showed that combined -- well, that is on slide six, that is showing that shipments combined were up 3.2% in Cough/Cold.

On seven, it showed combined consumption.

Ours was 10.9%.

I'm sorry -- what you're asking is the category, I believe.

Yes.

The category I would expect to be up -- actually, I'll have to get you those numbers.

But the category is up less than 10.9%, significantly less.

I can tell you that.

Okay, great.

That's what I was hoping to get to.

Thanks for the time.

Congratulations.

Jon Andersen, William Blair.

Good morning, everybody.

I just wanted to start with a little follow-up I guess to Joe's question on the GSK Brands.

So those, it sounds like, are tracking in line with the other core OTC brand growth, which is quite strong.

With more A&P coming in 2014 behind those brands, would it be fair to assume perhaps we could see an acceleration in the organic growth rate of that part of the portfolio?

I think, as we've said in the past, our strategy is to build the core brands long-term.

So what we've done, whether it is with the Blacksmith brands that we bought a couple years ago or Dramamine that we bought a year ago, the first year or two, when we first buy the brands, we do all the research, understand the consumer, our positioning, what is relevant, what is compelling.

You take several months to do that.

Then we turn on the support.

And when you turn on the support, you expect some growth, but it's not like it is turning on a light switch and it all comes in right away.

So we expect solid growth on those brands with the increased investment in 2014, but we are really doing it to build the base for 2015 and 2016.

Does that answer your question?

Yes, it does.

That's helpful.

Had a question on advertising and promotion.

It looks like obviously on an absolute basis the change in advertising and promotion spending was significant.

When I kind of back out the brand contribution from GSK and the gross profit contribution from GSK, it looks like the advertising and promotion spending was maybe down year-over-year on the base business, on an absolute basis.

I was wondering if I was thinking about that right, and if that just reflects maybe some deemphasis of household -- the household portion of the business.

Our A&P on our legacy business was actually year-over-year up slightly.

All right?

So, I know it's hard with all the numbers, but on our base business, we continue to invest, and our A&P spending was actually up slightly over prior year.

Okay, that's helpful.

In terms of gross margins, Matt, did I hear you say you kind of have a -- your long-term target for gross margin is 57%?

Well, we had said that in the past, John -- if you remember, this did come up a few calls ago when we bought GSK, that we said our long-term goal was to get to 57%.

And then pre-cough/cold season, you know, we hit it right out of the gate with some brands.

But we're going to end the year, like I said, at 56%-plus, which is up from 51% a year ago.

So we are moving towards gross margin expansion, and we would expect over 2014 and 2015 that we would be heading towards 57%.

Okay, that's helpful.

How about operating margin?

Have you talked about an objective longer-term or within that same timeframe for operating margins in the business?

We haven't talked and given any guidance on that specifically.

I think what we have said is we are in the brand-building business.

We want to set the right foundation now and in 2014 with these acquired brands for the long-term.

So it's about doing the right thing for the long-term and not trying to squeeze the most operating margin into short-term.

Does that help you?

Yes, that makes sense.

Just the last question.

On the refi, maybe for Ron, how much will that refinancing help in 2014.

So as we think about our estimates, that would be helpful.

As I mentioned earlier, we would anticipate $2.5 million in cash and in improved net income next year.

Terrific.

Congratulations, guys.

Talk to you soon.

Carla Casella, JPMorgan.

I was wondering if you could give us any color on performance in mass versus drug versus supermarket.

And is there any particular channel where you are doing better or worse with new products or where you have more opportunities?

I would say that performance has -- it ebbs and flows across the channel.

So as we know, in this economy the last 24 to 36 months in particular, the dollar channel has been particularly strong.

And as you know, prior to the last few quarters, Wal-Mart probably was not performing at the rate it would like, but has since picked up consistently in the last three quarters and mass is now doing quite well.

And the drug channel, which had been doing exceptionally well, has maybe slowed a little bit.

So that is a little bit of what is going on in terms of each of the key channels.

I think our performance, what we like is we've got a diversified portfolio, and we've got a diversified channel mix that allows us to smooth out across a number of channels to see -- to manage the portfolio, and it works quite well for us.

So we are pursuing opportunities in all those channels, and the growth in general right now is steady, if not spectacular.

And then how much -- what is your exposure to dollar stores?

I'm sorry.

Say it again, please, Carla.

What is your exposure to dollar stores?

Is that a significant part of sales yet?

Dollar stores represents about 11% of our revenue, I believe.

10% to 11%.

Okay, great.

Thank you.

Karru Martinson, Deutsche Bank.

Good morning.

When you look at the kind of market share gains that you are getting here, who do you feel that this market share is coming from?

Is it more coming from the private label?

Is it coming from the remaining bigger players in the market, or is it really just expanding the category itself in terms of shelf?

I think it is primarily coming -- it is really primarily coming from the competition.

And that competition could be large pharma companies; it could be small independent companies.

I think it is coming from those people more than it is coming from private label, although as we've said in the past, private label is like a pendulum that will gain momentum and then it loses momentum.

And I think it had significant momentum 12 to 24 months ago, and that has not slowed.

But I think it is primarily coming from those other branded competitors, is where we are gaining share.

Okay.

And in terms of shelf space, there has been kind of an ebb and flow in the drug store channel to add and take away shelf.

What is kind of the current dynamic there?

I think the current dynamic is -- from a branded standpoint, I think if you step back, all the retailers, the number one priority is foot traffic, first, and basket size.

But if you don't get foot traffic, you can't grow retail.

And I think what the retailers appreciate is branded -- strong branded products like ours that brings significant consumer advertising and spending, marketing spend.

Which, as you know, our marketing spend three years ago was 10% of sales, and today, it is approaching 15%.

So in a rather lackluster economy, we've increased our market spend rate by 50%.

Retailers appreciate that because that drives foot traffic into their doors.

And so I think that is why they appreciate branded and our branded products.

Okay.

Given the strong growth that you've been experiencing, do you foresee a need to add G&A to kind of continue that or do you feel that the operation you have here continues to be scalable?

I think two things.

Number one, we've proven when you look at our G&A numbers with the acquisitions that we get significant synergies, and our acquisitions provide us great opportunities on that front.

I think the G&A that we need to add with future acquisitions is more about what do we need to be great in the future, not what do we need for today.

So we are constantly thinking in terms of what is it we need to do to be successful and to be a billion-dollar plus company, what do we need to be successful in three to five years and what are the resources we should start planning today to do that?

So that is where I think we need to add from a G&A standpoint; not to support the existing portfolio.

Okay, and I guess in that vein, you guys talked about an active pipeline of M&A.

What are you seeing in terms of kind of just the size of opportunities out there?

Are we talking about one-off bolt-ons, or larger, more transformative acquisitions?

I think you can see in the marketplace there has been significant M&A activity in the last quarter again.

So I think there continues to be opportunities out there, and we continue to be a player in that market.

Thank you very much, guys.

Appreciate it.

Frank Camma, Sidoti.

Good morning.

Most of my questions were answered, but I did have two quick ones, if I could.

The first is -- could you remind us -- I think you gave a little detail on this -- on your view on the A&P spend for the rest of the year.

I think historically, your two largest quarters are your second and third largest quarter, if I have that right, and then it kind of backs off in the fourth quarter.

Would that be consistent this year?

I think our A&P spend typically in the third and fourth quarter is up, and we would expect that again this year.

Right.

(multiple speakers) and this year, with a full quarter of GSK in the numbers in the fourth quarter, we will have a little bit of a different trend than prior years without the impact of the acquisitions.

Okay, great.

So I had that.

Okay, and the second question is -- I know you don't really focus on it much anymore, but the household cleaning revenues were flat, which is obviously a pretty marked improvement.

Could you just go into why that would be?

I think what we are seeing is some of the things we've done with household, we introduced Comet 2X a few quarters ago.

We've seen success with that in the marketplace.

And as a result, that has helped from a revenue and profitability standpoint both us and the retailer.

So it has been successful on a couple of different fronts.

Do you think the category itself may actually be stabilizing, or do you think it is really kind of the innovation that you put out there that is helping it?

I think it is the innovation.

I think that continues to be a value-driven category, and in the current economic scenario, I don't see that changing.

Understand.

Okay.

That's really all I had.

Reza Vahabzadeh, Barclays.

Good morning.

On the consumption growth in OTC, as well as the Cough/Cold products, obviously pretty healthy trends.

Is it driven primarily by just higher cough/cold incidence, or are you getting better velocity from existing shelf space -- your shelf space?

Is there some contribution from additional shelf space and distribution doors?

I think it is from -- some of it is from cough/cold incidence.

But remember what I said.

In the consumption numbers, those consumption numbers are through 12-31.

All right.

So that includes the last few weeks of December, where you remember incidence levels really picked up.

But that is only in the last part of the quarter.

So some of it is coming from consumption.

I think the bulk of our gains are really coming from increased velocity in terms of better merchandising performance and also stronger consumer takeaway as a result of marketing spend that is effective in driving people to shelves.

Got it.

And as far as the additional velocity and shelf space, how does that impact your numbers in calendar 2013?

Is that going to be a carryover impact as you lap prior-year numbers?

I'm not sure I understand the question.

Can you repeat it or state it slightly differently so I can answer it for you?

Right.

Obviously, you are getting better velocity, and it sounds like you are getting some additional shelf space.

So does that present an easy year-over-year comparison for you as you lap prior-year numbers in 2013?

No, I think quite the opposite to your point.

If you look at slide nine in the presentation, that shows consumption over the last, I guess nine, or 10 quarters there, when you look at how we've outperformed the category, every quarter, it gets harder because we are lapping strong numbers.

So that is really what makes the performance -- in my mind, one of the things that makes it exceptional right now, because we are lapping very strong numbers.

So candidly, we are just setting the bar higher for ourselves for next year, and it's going to be a tough comp that we're going to have to work hard to beat.

Right.

I'm not sure if you've talked about this already or not, but your competitor in cough/cold, are they back?

Will they be back?

Any color on that?

We don't have any concrete information.

We just hear things, just like other people do.

And as a result, what we've tried to do is focus on our Cough/Cold brands, increasing our marketing support, improving our connection with the consumers and with the retailers, so when they do come back, we've got a very solid foundation.

Got it.

Thank you.

(Operator Instructions) Jon Andersen, William Blair.

Thanks for taking the follow-up.

I was just wondering, is there any reason that free cash flow in fiscal 2014 wouldn't be as strong as you're seeing in 2013?

We would expect fiscal 2014 cash flow to be as strong as what we saw in '13.

There isn't any one-time events in 2013, excluding the sale of Phazyme, that wouldn't reoccur in 2014.

Excellent.

Cash flow from operations.

Cash flow from operations.

Cash flow from operations we would expect to be as strong, right?

Absolutely.

And then just -- I know you probably don't want to talk specifically about 2014, but just in light of the new guidance for 2013, $1.45 to $1.48, if you look at the benefit of the refi, the debt paydown that you can do over the next 12 months, and if you get a little bit of growth out of the base business, it looked like a number next year will be closer to $1.65 on top of $1.48 this year.

Is that a reasonable way to think about 2014 at this point?

I think we're getting a little ahead of ourselves, but two comments.

You talk about the refi and what that can bring to it.

But the other things that you didn't mention was a couple of things.

Number one, a major competitor will be back in the marketplace.

So that has implications.

Right?

And the second thing that we said in the past is 2014 is going to be a year that we are really going to focus on investing in the businesses, especially those GSK businesses that we've bought, to set ourselves up for 2015 and 2016.

So we are trying to do the right things for the long-term, and 2014 will also be a year that we will deal with a major competitor coming back.

And so I think you've got to take both those into consideration as well.

Does that answer it?

Yes, fair enough.

That's helpful.

Thanks, guys.

Thank you for your questions.

I would now like to turn the call over to Mr. Mannelly for closing remarks.

Please go ahead.

Again, thank you very much to everyone for joining us this morning.

We appreciate it.

We look forward to seeing you future conferences and speaking with you on the next quarterly call.

Have a very good day.

Thank you.

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

This concludes your presentation.

You may now disconnect, and have a good day.

Thank you.