Prestige Consumer Healthcare Inc (PBH) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to our Q3 fiscal 2015 Prestige Brands Holdings, Inc.

earnings conference call.

My name is Grant, and I will be your Operator for today.

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

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

(Operator Instructions).

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

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

Please proceed.

Good morning, and welcome.

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

It can be accessed by visiting prestigebrands.com, clicking on the investor link and then on today's webcast and presentation.

I am required to remind you that during this call management may make forward-looking statements regarding their beliefs and expectations as to the Company's future business prospects and results.

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 as of the date of this conference call.

A complete Safe Harbor disclosure appears on page 2 of the presentation accompanying 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 which it files with the US Securities and Exchange Commission.

Now, I would like to introduce Matt Mannelly, our CEO, and Ron Lombardi, our CFO.

Thank you, Dean.

Good morning, everyone, and thank you for joining us this morning.

As Dean said, we have a presentation that we typically go through and I will be consistent today will I will take you through the performance highlights and then run will go through the details of the financial review and I will come back and wrap it up.

So with that being the case, I would ask that you turn to page 5 of the presentation.

I will talk a little about Q3 performance highlights and some of the things that happened this quarter.

First of all, from a numbers standpoint as we said in the press release we're very pleased with the numbers.

Q3 consolidated revenue of $197.6 million, which is up 36.4% over year-ago.

Our organic growth on a constant currency basis is plus 2.9%, which we're extremely pleased with plus 2.1% when you take the headwinds on a current dollar basis.

Core OTC consumption growth very strong also, excluding PediaCare which we talked about over the last several quarters, plus 5.5% with core OTC consumption growth including PediaCare total core OTC up 1.6%.

So very strong performance in terms of the core.

Our adjusted gross margin of 57.2, up significantly versus prior year third quarter at 55.5 and up slightly from Q2 so we continue to improve on the gross margin front.

Adjusted EPS of $0.48 is up 60% versus Q3 of year-ago and for us the all-important adjusted free cash flow $45.5 million is up nearly 10% versus third quarter of year-ago.

I think the reason we believe for these strong results is we continue to invest in the business and have consistent and innovative marketing support that is helping build the long-term brand equity of our core OTC and international brands.

From an acquisition standpoint; inside pharmaceuticals I'd say the integration is now complete and we're well underway in terms of both our supply and demand initiatives.

And finally, from the standpoint for the full fiscal year and fourth quarter we're on track to deliver what we believe is very strong financial performance and we have updated our revenue growth to the high end of the range of 18%, adjusted EPS we have moved to $1.82 to $1.85 and we have also increased our adjusted free cash flow to $155 million.

If you turn to Page 6, this is an important slide and I think this is an interesting slide that we introduced last quarter.

In terms of how we're managing the portfolio and I would say the results for the quarter say we're delivering the results that we hoped to achieve.

If you look at the businesses that we're investing in versus our manage for cash businesses, if you recall from a few years ago we used to talk about core OTC making up two-thirds of the portfolio.

Given the acquisition of international and our success in international as well, we now have core OTC in international that makes up 78% of the portfolio and by the way that's up a percentage point from last quarter of 77%.

And you can see that 78% of the portfolio is performing very strong on a constant-currency basis plus 4% versus year-ago.

And the manage for cash right now is performing very strong as well at 22% of the portfolio is nearly flat and you can see that's how we achieve our overall 2.9% organic growth on icon separate currency basis.

So we're quite pleased with both parts of the portfolio in terms of how they're performing and well within the bandwidth of what we would expect.

Turning to page 7, I think this is also an important slide that we talked to the last several quarters and you can see there our core OTC consumption growth has accelerated and this is contributing to our revenue, our sales momentum.

On the left side is consumer poll consumption and again you can see the numbers with and without PediaCare of plus 5.5% and plus 1.6%.

I think you would note that on the right hand side our organic sales growth of 2.9% that's supposed to be and 8.3% and I think the point to note there as we've said the last couple of quarters that our consumption growth has been exceeding our sales growth and you can see that it's starting to catch up at this point and that's what we have been saying for the last few quarters.

Turning to Slide 8, I think the other good news for us is our Q3 core OTC growth was very broad-based and we're quite pleased with that and you can see from a consumption standpoint the percent of the core OTC portfolio with consumption growth in the third quarter was 78% of the portfolio.

So we're quite pleased with that.

We're also pleased with the fact that the growth is coming from our large brands.

And you can see the BC and Goody's numbers here in terms of our consumption growth quarter accelerating quarter-over-quarter from Q1 to Q3 and Clear Eyes continues to really outperform the category and outperform the market and we believe the results for all of these brands is as a result of the investment and the type of marketing programs that we're employing are really paying off for our brands.

Turning to Slide 9, I will talk about some of the brands and what we're doing, some of the exciting things.

BC for us really targeted campaigns are helping drive our revenue growth and right now we're running a testimonial campaign that's really resonating with consumers on BC that we have been running significant waste in the southeast.

And we are also testing an Hispanic marketing program in a couple of key markets in the South and it has is shown very favorable results year-to-date.

And as a result you can see that we continue to significantly out grow the category latest 12 weeks 1.4 times category growth and for a 52 week, 1.9 times category growth.

So we're quite pleased with these results.

Turning to the next page Clear Eyes which I referenced earlier very strong results.

We think this is a result of a couple of things.

First of all, we signed Vanessa Williams I think a couple of years ago now.

She's been very effective for us.

We also modified our target audience to go more against older women and we think that's been quite successful and Vanessa has been quite successful at reaching that target audience.

So you can see Clear Eyes roles at 15.7% and in a very significant and important segment for us which is the Redness segment, you can see how significantly we are outperforming the key competition both at 12 and 52 week basis.

The final thing I would note on Clear Eyes is we have had exceptional growth in our C store initiative and you can see over the last 12 weeks our consumption growth is up 36%.

So, again, we're quite pleased with the terrific success that we're having in the C store channel.

Turning to Slide 11, I want to spend a little bit of time and talk about our latest acquisition in our women's health platform in Monistat and tell you about some of the things that we're in the process of doing right now and getting ready to roll out in the first quarter of FY 2016.

Let me start with and talk a little about bit about the brand and, most importantly, about the consumer.

For women who have yeast infections often times it's important and most women visit the doctor the first time they have a yeast infection.

Their options are very simple.

They can either get a prescription, or the doctor can tell them they can take an OTC over-the-counter product and that would be either Monistat or primarily private label.

70% of consumers, patients, use what their doctor recommends.

I have referenced this in the past when we did the diligence on the Insight business we looked back ten years and you can see here in units and you can see the blue line is Monistat units, and the red line is prescription units and you can see how they have changed over time and prescription has grown and Monistat units had declined and you can see that in 2008 where the lines crossed.

Well, it just so happens at that time that's when the previous or the two time previous owner had stopped the elimination, or had eliminated, their healthcare professional marketing programs and calling on doctors and it was not done since 2008 and you can see the results.

Well, we're pleased to announce that we're going to take steps to restore our leadership position with healthcare professionals and we have six initiatives that we are embarking upon to do that and the first one is we're going it employ a direct professional sales force to call on OB GYN offices.

Second of all we're going to facilitate peer-to-peer information we have relationships with a number of key healthcare professional influences who reach out through webinars and other means to OB GYNs and we are working with them to do that.

We are commissioned specific medical studies in this area that we expect to work with doctors on.

We are also in the process and have been since our acquisition of attending and sponsoring a number of professional Congress for these healthcare professionals.

I reference one on the left-hand side that's in May the biggest one of the year.

The American Congress of obstetricians and gynecologists that we'll be attending with a number of people in May and making a major presentation at.

In addition, we will be conducting e-mails and direct mail campaigns to these health care professionals.

We want to begin a dialogue with them, we want to engage them and we want to enroll them in some of the programs that we are doing.

And finally, we will be sampling products in medical offices and this has not been done for Monistat in the past and we expect this to yield favorable results over the long-term.

I think we're very excited about this and most important reason is this.

Monistat is as effective as a prescription in terms of fluconazole yet it works four times faster in terms of symptom relief.

That is a major consumer benefit that we want to make sure that healthcare professionals are touting to consumers.

In addition, Monistat cures a broader spectrum of yeast infection strains than does the RX prescription.

In addition, from a consumer standpoint from a time, a convenience and a cost standpoint they are much better served in terms of going to a retail outlet and purchasing an OTC item and actually from a healthcare professional standpoint they are better served and it's more profitable for them, they are reimbursed more those OBGYNs dealing with women with pregnancy issues and other issue and they're reimbursed more than they are for yeast infections.

So, it's in their best interests it recommend OTC to them as well.

And finally, when the additional benefits in terms of OTC is fluconazole does have the oral fluconazole does have side effects in terms of headaches as well as making women nauseous.

So if you look at all of these things, the initiatives that we're undertaking and the long term healthcare program that we're going to install beginning in the first quarter we believe is going to have significant impact on the business over time.

Turning to Slide 12, we haven't talked a lot about international to-date, but as you can see with the acquisitions that we have done, international the scale of international is now beginning to contribute to our growth profile.

We have said in the past the last couple of quarters that is going to be a beach head for us.

We continue to introduce new products in Australia.

We also are in the process of expanding and introducing those products into New Zealand in terms of Care Pharma introduction.

From a Hydralyte standpoint, which we acquired in May of this year, we have a number of new products under development and are in the process of introducing those to the marketplace and the UK which is also an important market for us, we are in the process right now with a major new product introduction of preservative free Murine eye drops.

So we continue to have strong performance from Care.

We are significant growth potential in Hydralyte, and our UK business continues to excel.

Turning to Slide 13, from an integration standpoint of inside pharmaceuticals, I referenced that in the past, this is really one of our core competencies in terms of integrating businesses into the Company and I would say that integration is largely complete at this point.

As you can see from a systems and a back-office standpoint, from a regulatory and QA standpoint, all the functions have been fully integrated in this industry and for us that is a very important point and we take it very seriously.

And finally, from a sales standpoint go-to-market we are fully integrated with our sales force at this time.

In terms of the ongoing initiative from a supply chain standpoint, we're optimizing the supplier network and we're doing so in a way that's consistent with our supply standards and our expertise.

And in addition we have identified and we're going to be capturing the cost savings potential over the next 12 to 24 month associated with these brands.

From a brand-building standpoint as I said and as I just referenced with Monistat our marketing strategy, as well as our programs, are well underway and we are also beginning to embark in terms upon new product and an innovation pipeline.

For us Monistat is the number one priority in the Company and we feel we're doing the right things right now to set ourselves up for FY 2016 and beyond.

So, with that, I will turn it over to Ron who will take you through the details of financials in the third quarter.

Ron?

Thanks, Matt and good morning everyone.

Turning to Slide 15, we start the finance overview this morning.

As Matt has described we're very excited about our third quarter results including our record revenues and organic growth of 2.9% during the quarter.

Strengthening consumption trends and strong organic growth across our core OTC and international portfolios has resulted in extremely strong third quarter and fiscal year-to-date results.

Our results for the quarter exceeded expectations and included solid revenue and EPS growth, strong free cash flow generation and strengthening of our overall financial profile.

Highlights for the quarter include organic revenue growth of 2.9% excluding the impact of foreign currency, net revenue growth of approximately 36% to $197.6 million, adjusted EPS growth of 60% to $0.48 per share, and adjusted free cash flow growth of nearly 10% generating $45.5 million of adjusted free cash flow during the quarter.

The strength of our third quarter results has enabled us to update our full-year outlook.

We now expect full year adjusted EPS in the range of $1.82 to $1.85 per share, full year revenue growth in the 18% range along with anticipated organic growth in Q4.

In addition, we project adjusted free cash flow of approximately $155 million for the year.

Turn to go Slide 16, we have our consolidated Q3 and year-to-date results.

As a reminder the information in today's presentation includes adjusted results.

These results exclude acquisition-related and other items.

A reconciliation between adjusted results and reported results are included in today's earnings release.

Our net revenue increased approximately 37% on a constant-currency basis in Q3 and approximately 16% during the nine months ended December 31st.

These results were driven by strengthening consumption across our core OTC and international portfolios which drove strong organic growth, as Matt discussed earlier.

Our revenue growth was impacted by foreign currency rates during the quarter which reduced revenue growth by $1.1 million and .8 points during the quarter, and $2 million and half a point on a year-to-date basis.

Currency fluctuations impact our Canadian and Australian businesses and we expect our full-year-results to be impacted by approximately $3.5 million.

We also anticipate that our organic growth for fiscal 2016 may be impacted by $5 million or more based on current values.

Our Q3 gross margin of 57.2% was the highest level in the past five quarters and was largely in line with expectations.

Our long-term objective is to grow gross margins to 60% over time as we realize Insight and other supply chain savings over the next 12 to 24 months and expect to reinvest these gains in higher levels of A&P.

A&P was 15.3% of revenue for Q3, which was above the year-to-date level, the 14.2%, and approximately 25% ahead of last year's spending.

It was also in line with expectations.

We anticipate increased levels of A&P investments going forward as we move from planning to executing brand building initiatives Monistat and other Insight brands.

G&A at 7% of revenue was lower than our expected level of approximately 8% of sales due to the higher sales levels and lower than expected spending.

We expect Q4 to increase closer to the 8% level.

Our adjusted EBITDA margin for both the third quarter and nine months was 35% as gains in gross margin and G&A leverage increased EBITDA margin over the prior year levels.

Finally, our adjusted EPS continues to grow faster than revenue as a result of our operating leverage.

Third quarter EPS growth was 60% and EPS grew at approximately 20% for the nine months ended December 31st, which were both well above our revenue gains.

Included in the year-to-date adjusted results were approximately $20 million of items related to our acquisitions.

We anticipate additional costs in Q4 but expect to be below our original estimate of $25 million during the year.

Slide 17 contains a reconciliation of reported net income to adjusted free cash flow.

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

We experienced strong adjusted free cash flow growth of approximately 10% above last year in the third quarter which continued to strengthen our financial profile.

We generated $45.5 million of adjusted free cash flow during the quarter and approximately $114 million for the nine months ended December.

Our cash flow generation comes from strong and consistent EBITDA levels, low fixed asset additions and a meaningful benefit from our deferred tax assets.

As a result of our strong and consistent free cash flow generation we were able it reduce our net debt by approximately $55 million during the quarter to $1.6 billion and reduced our leverage ratio to approximately 5.4 times.

As mentioned before, we expect to generate approximately $155 million of adjusted free cash flow for fiscal 2015.

Turning to page 18, we see the progress we have made to-date in delevering since the Insight acquisition back in September along with our projections going forward.

Prestige has a long history of rapidly delevering after major acquisitions and we expect this trend to continue.

We expect to reduce leverage by approximately a half a turn to 5.1 times by fiscal year-end and forecast further reductions in leverage to approximately 4.4 times by the end of fiscal 2016.

This leverage reduction will create over $11.5 billion of M&A capacity an will continue to support our M&A objectives.

At this point I would like to turn the discussion back over to Matt.

Thank you, Ron.

And so I just have a few comments before we open it up for some questions but we typically talk about in terms of the outlook and kind of the road ahead.

So if you turn it page 20.

I think for us what's important is we want to stay the strategic course to continue to create the shareholder value and that means quite simply our strategies remain the same.

It's our initiatives that change over time to deliver on those strategies.

And the first strategy and the most important is brand-building, which we have talked quite a bit about in this call and what's happened in the last quarter.

We want to continue to invest and focus on core OTC and international to drive that consumption growth and those key categories and brands.

We want to continue to deliver new product innovations on a consistent basis and in fact we have five planned in the fourth quarter for both domestic and international.

We also have said that we're going to assess the appropriate pediatric strategies moving forward post cough/cold as it relates to the rest of our portfolio and I think.

As we talked about over the last 12 to 24 months, we said with the turn the competition it would take probably two years for it to shakeout so we will see at the end of this cough/cold season, how the dust settles and what our appropriate strategies will be moving forward.

And, in addition, we want to make sure that we continue to innovate and evolve our marketing vehicles across the brands recognizing the current retail environment and that means whether it's our sports marketing vehicles, celebrity spokespersons, digital marketing or our merchandising programs, we want to continue, as I said, to innovate and evolve those marketing programs.

From an Insight standpoint, as I said, the integration is largely completed at this point and, again, when we announced the acquisition we said given the health of the business, our goal was really over the first 12 months to stabilize that business given the lack of support it had in recent years and we want to stabilize it over the first 12 months.

As you can see, we talked about today that we really are commencing our investment in Monistat and we're doing things to set ourselves up for those initiatives in the first quarter that will roll those initiatives out for FY 2016.

And then the last thing is, as I hit upon, we're going to optimize the supply chain and capture the cost savings over the next 12 to 24 months we have more than work it to here and want that supply chain to run in a way that's consistent with the way we run our supply chain here at the Company.

From an M&A standpoint we have talked about this in the past.

I think the most important thing that we have demonstrated over the last five years is we will remain aggressive and we will remain disciplined in our M&A activity.

We're going to make sure that we appropriately capitalize and participate in the industry consolidation and the announcements that have been made over the last six month.

We also, I think, one of the things the opportunities for us is given our size of what we are today versus two to three years ago it offers us the opportunity to explore creative deal structures and partnerships.

So whether that's in different geographies, whether that's different types of opportunities like joint ventures, et cetera, but we have more options available to us today at approximately $800 million on a pro forma basis than we did two to three years ago when we were much smaller.

In terms of FY 2015, the full year outlook, again given the third quarter results we're very pleased.

We expect strong revenue growth of about approximately at the high end of 18% in a very challenging retail environment.

We're quite pleased with the organic growth that we saw in Q3.

We have expectations of slight organic growth in Q4.

We have had a very solid cough/cold season to-date this year.

Certainly significantly better than last year and slightly ahead of the three year average and we are hopeful that will turn into repeat business in the fourth quarter.

As I said, we have much work to do on the Insight portfolio in terms of implementing those demand initiatives and as well as giving the supply side up to speed in terms of what we're looking for.

And I think the other thing I would say is, you know, given our strong consumption over the last three to four quarters, we're seeing that our revenue is catching up with that.

That doesn't mean that the inventory retailer inventory pressure is off.

We continue to see it on a slight basis an it's something that we are cognizant of and need to maintain in terms of our planning moving forward.

And then the find thing I would say which is really the first time we have talked about it and given the magnitude of it, Ron talked about the currency headwinds and what we have experienced to-date, what we inspect for the fourth quarter and the impact in terms of FY 2015.

So, again, given the significant of what's going on in terms of currencies outside of the US is beginning to have an impact on a number of people's businesses.

Like I said previously, the adjusted EPS growth for this year of 19% to 21% at $1.82 to $1.85 we feel very, very confident in, and we also feel very confident in our adjusted free cash flow in raising it to $155 million and that free cash flow is l really critical for our long-term strategy in terms of how we run the business.

So with that, if you turn to Slide 21, I think the point I would make here, this is a slide that, again, we modified and we rolled this out last quarter, but I think it's important to note that we're executing against all four of these areas consistently and all four of these pillars are critical to our success.

I think today we spent more time on number one given the environment and given the results, but you can rest assured that the other three we are spending significant amounts of time on as well.

So with that, we appreciate your time and I will open it up to questions.

(Operator Instructions).

Please stand by for your first question.

The first question is from the line of Joe Altobello from Raymond James.

Please go ahead.

Thanks.

Good morning guys.

How are you?

Good morning, Joe.

Just a couple of questions.

I guess first on Insight.

Now that it's fully integrated, how should we think about gross margin for fiscal 2016?

Would we expect some sort of step-up there now that you guys have that business fully integrated?

Yes.

I think, Joe, we would expect some.

I think as we have said in the past our goal over the next few years is to move toward the 60 gross margin.

As I said here, I think the cost savings for Insight will take 12 to 24 month so that we would expect slight improvement in FY 2016.

Does that answer your question?

It does.

Thank you.

And then secondly in terms of Monistat and marketing that brand to OBGYNs, when does that start, and what impact would that have on profitability?

Well, I think it's built into our numbers.

We have built that into the numbers and if you recall, all the acquisitions that we have done we have increased the spending on every acquisition versus what was done previously.

So we anticipated that with this acquisition.

That will start in Q1 of 2016 and I think a healthcare professional program is a long-term play, not a short-term play, so we don't expect an immediate bump in revenue as a result of that, but we expect the ground work we lay in 2016 will have significant benefits in 2017 and 2018.

And you can see on the chart put out there, what happened when they turned that off and it's been off for seven years now.

So that's why I think you have to think about it's going to take a little bit of time to get that thing rolled out and back in play and get the healthcare professionals back on our side.

Does that answer your question?

It did, yes, sort of.

But does it have a big impact on fiscal 2016 in terms of margin?

That's all I'm asking.

No.

I don't think that's going to have a big impact on margins.

No, Joe.

Okay.

That's helpful.

Thank you.

Thank you for your question.

Our next question comes from the line of Frank Camma, from Sidoti.

Please go ahead.

Good morning, guys.

Morning, Frank.

I had a couple questions here.

One on the cold and cough.

Could you give a little more details specifically on PediaCare and what you saw there?

Well, I think, Frank as we said, you know, this race has not been run in terms of competitors being out of the marketplace, and the competition coming back came back last cough/cold season and this cough/cold season and what we have said in previous calls is we have been impacted, I think PediaCare has been impacted by the returns to-date more than we anticipated and Little Remedies has been impacted less than we anticipated.

And what we said is let's see how cough/cold season plays out after two full seasons and we still have a quarter to go on that, and then based on that we'll determine how to best run both those brands.

Okay.

And the other question relates to kind of, so your overall organic growth was really strong with 3% almost.

But part of that was because one of your largest brands was up almost 16% with Clear Eyes.

In going forward you obviously have a pretty big opportunity with Monistat, but beyond that, what do you see as kind of your growth drivers?

Because some of your growth is kind of skewed by those big brand, right, in the next two years.

What do you see as the opportunities going forward in is it just kind of pushing the whole portfolio or are there specific brands that make you more confident in kind of achieving organic growth in that 2% to 3% range?

I think, like I said Frank, if you go back to one of the first slides 6 or 7 I think it was, if the core OTC portfolio and the international that we have confidence that we should, as we grow that part of the portfolio, we believe that we're going to get stronger.

And then the other slides that we showed was in the core OTC portfolio 78% of the core OTC portfolio grew from a consumption growth standpoint this quarter.

So it was fairly broad-based.

It wasn't just two or three brands.

And then the last thing I would say is candidly that's one of the beauties of our portfolio.

When we've got some brands that are really performing strong an others, candidly, that haven't performed as strong we still are able to net out at decent growth.

That's why our strategy is all about right now core OTC and international and investing in those brands to help drive our long-term growth.

And the final question is just on the A&P spend.

Are you still seeing more promotional activity which kind of shifts where that hits on your P&L or is that starting to mitigate?

No.

I would say it's still in a steady state of what it's been the last few quarters, Frank.

So I think Ron talked about this last quarter that some of our A&P dollars are being used to fund merchandising above the line and that has caused a little bit of a shift there.

I would say the last quarter it was in a similar state.

Okay.

Thanks, guys.

Thank you, Frank.

Thank you for your question.

Our next question comes from the line of Linda Bolton Weiser, from B. Riley.

Please go ahead.

Hi.

So I was just looking at the page 7 data on the consumption and the organic sales growth and I'm just wondering if they're apples-to-apples?

Like the consumption growth you're showing is for core OTC, but your organic growth includes core and non-core.

So, what I'm trying to get as is how did your shipments compare to consumption like relative to retail inventory in the quarter?

Like, did you actually build up a little bit of retail inventory because it got so low, or are you still working it down?

Should we be worried at all about the go forward that you built up inventory or can you kind of explain, give some numbers if you can to compare more apples-to-apples the consumption and the organic sales growth you posted in the quarter?

Okay.

Ron, clarify for me.

I believe the consumption growth, both these numbers sorry are for core OTC, correct?

Right.

Excluding Insight.

It doesn't include Insight.

This is our apples to apples number, Linda.

So this is both the consumption and the organic sales is for our core brands and the legacy brand that doesn't include Insight so that we're apples-to-apples so I believe it's apples-to-apples first of all, alright?

I believe.

Alright?

And second of all, I think what we're saying is, I don't think we, again, I said a couple things.

One, retailers remain cautious and at different retailers, it's not the same retailers every quarter or whatever, but retailers still remain cautious about inventory,

But what we have been saying the last few quarters is our consumption has been out stripping our sales by so much they can only take inventory down so much and I think we saw the impact of that this quarter where it was like okay, they have to refill the pipeline somewhat.

My personal belief is that we refill the pipeline it wasn't that we had a bloated inventory at this point if that's what you're asking.

Does that answer your question, Linda?

Yes.

It certainly does.

Thanks.

And just a question on the gross margin.

I guess it did improve sequentially if I've got my numbers right from 57.0 to 57.2, but you had Insight in for the full quarter and I thought Insight was really accretive to the gross margin like to the tune of a couple of points so I'm just wondering like what was the gross margin in the quarter excluding Insight?

Was it down year-over-year and down sequentially?

It looks like it might have been, but I don't know.

The gross margins for the legacy business is consistent during the quarter.

The Insight gross margin, as Matt mentioned earlier, we expect to see a benefit of that over time, Linda.

As we realize supply chain savings and make moves within the supplier base.

So that's going to be long-term.

Okay.

And then for the FX impact, thanks forgiving that for the full year.

I think you said $3.5 million for FY 2015.

What was it in the nine months year-to-date?

$2 million.

Okay and then for that impact you gave for FY 2016, can we think of it as roughly the impact on the top line is similar in terms of the impact on the bottom-line or do you have some unusual transaction thing going on where the bottom line impact is going to be way different on a percentage basis than the top line?

Yes.

The impact on the bottom-line, Linda, is actually much less.

We have got two regions that are being impacted, Australia, which is translational so as we convert the Australian dollar financials to US dollars we end up with a very minimal impact on the bottom-line and Canada, which is transactional so as we do business into Canada that's more of a direct top and bottom-line correlation, but at the end of the day the impact of the currency on the bottom-line is much smaller than it is on the top line.

Great.

Thanks a lot.

That's good for me.

Thank you, Linda.

Thank you for your question.

Our next question comes from the line of John Anderson from William Blair.

Please go ahead.

Hi, guys.

Morning, John.

Where to start?

Matt, you mentioned after the you get through the current cough/cold season that you will evaluate what the appropriate strategy in pediatrics is going forward.

Could you just elaborate on that what those changes might be or if there are any significant strategic shifts that you anticipate?

Well, I am really saying the same things I said for 4 month, John, and that is we said it was going to take two cough/cold seasons for everything.

We thought two cough/cold seasons for the competitive landscape to kind of play out.

And I think once we get through the second cough/cold season we will have determined when the competition was away we had an investment thesis, when the competition returned we've had an investment thesis for 24 months and after the dust settles, we'll have an investment thesis moving forward by brand.

I'm saying the same thing I have said for the last 24 months.

Okay.

This quarter it looks like you shift a bit ahead of consumption and I know your shipments the past handful of quarters, or prior quarters, was trailing consumption.

Do you expect that you ship ahead of consumption going forward?

Is this just kind of a rebalancing of inventories at retail that's going on that maybe got too thin or, how do we think about that going forward, I guess?

Well, I think, John, we have to look at it over the long-term, right?

We can't call quarter to quarter and never, and I have said this for years, you can never match consumption and inventory in the short-term you can only match it in the long-term.

Right?

Because retail is reactive.

An example is cough/cold.

Sometimes we will get cough/cold shipments that will go into Q2, sometimes they go in Q3.

It changes year to year.

So, I think that's really a long-term play, but our point all along has been the last few quarters given that for a few quarters in a row our consumption was out stripping our shipments three quarters in a row you had to assume that the retailers were getting lean on inventory so some of that rebalancing occurred.

So I'm confident in that that's what happened.

As I also said, that doesn't mean that retailers are now back to the glory days of we're going to load up the warehouses because I think, given the environment and foot traffic, that they're going to remain pretty tight.

So we said that we expect organic growth again, slight organic growth in the fourth quarter than I expected, so I think that's how we're looking at it, but I try not to look at it over one quarter or two quarters.

We look at it over several quarters.

Is it possible that slight organic growth is stronger in the fourth quarter given this cough/cold dynamic you talked about where the reorders might be stronger given the flu incidents this year?

I think we don't flow that yet, right, and that's, candidly, the $64,000 question on cough/cold is, we've had a solid cough/cold season to-date, but you never know in terms of post January what the retailers are going to reorder so that's why you can't call that yet, you know, and so I don't think we know.

I think we expect slight organic growth and that's what we have said and we will see how cough sold season plays out.

Okay.

Fair enough.

A question on gross margin.

If I understand it, you know, you think gross margin or you see it migrating towards 60% for the Company overall over the next few years is that accurate?

I think that is our long term.

We have said that we are striving to get to a 60% gross margin and I think, Linda also pointed out that the acquisition was accretive from a gross margin standpoint and Ron pointed out that those cost savings are going to come over the next 12 to 24 months so, therefore, that gross margin goal of 60 is probably a medium term goal of 24 months would be my guess.

Okay.

Just kind of given that, by our estimate, and I may be off a little bit mere, but this fiscal year you're operating margin could be in the 33% range kind of a historic high.

Would that 250 basis points of gross margin flow through to operating margin during this period as well or what are your expectations for reinvesting that, or flowing through to higher operating margin?

Yes, John.

Good question.

I think we've been very consistent on that as well.

Our operating margin unlike other companies we have an exceptional operating margin, right?

We don't need to get improvements to increase our bottom-line operating margin.

Rather, we have stated explicitly internally and externally we're looking for gross margin improvement.

We're trying to get to 60 over the long-term to reinvest in the business to ensure that we can maintain the operating margin that we have today.

So we're not looking to expand that bottom-line we're looking to reinvest those dollars.

Okay.

That makes sense.

I guess the last question I had, guys, is why did the prior owner, you may not know the answer to this, in the context of Monistat the prior owner why would they turn offer the HCP support if that was something that's critical to the sales of that brand?

I'm just trying to understand a little bit of context there.

And then, as you kind of turn that back on, does that have a short-term profit implication?

Because, as you said earlier, I think it's a long term play so there are probably some investments that are required upfront with the payoff down the road.

I can't answer for the previous owners, not the last owner but the last couple of owners.

I can't answer for them.

Everyone has got to prioritize for their businesses across their portfolio where they want to invest, right?

And so I can't answer for them.

I think for us as I said, it's a long-term play.

It is an investment in the short-term.

I don't think it's so significant that it has huge profit implications but make no mistake, we're going to be investing in the next 12 to 24 months in that business to get it back up on its feet and in the leadership position that we think it deserves.

Great.

Thanks for all the questions and congratulations on a nice quarter.

Thanks very much, John.

Thank you.

Our next Kevin Zeitz, from Citi.

Please go ahead.

Good morning.

Thanks for taking my questions.

My first question is on the Monistat investment.

I'm wondering how the new campaign that you're targeting is going to address the convenience factor of taking a pill.

Well, I think that through educational materials to doctors and not just a convenience factor.

There's other factors that go into it as well in terms of it may be convenient to take a pill but also locally is also a high priority for consumers and less side effects is a high priority for consumers.

So those are the kind of things that we get across in terms of the education materials that we'll be providing to the healthcare professionals.

Okay.

And then in terms of the supply chain move, I guess in the past when you have moved from sort of existing call it acquired suppliers to your own suppliers, how fast can you make that transition or how fast have you done it in the past?

I think in this industry, Kevin, that takes time.

You know, this as heavily regulated industry and that's not something that's done in three to six months.

That's something that takes 12 to 18 months.

That's why we're saying those cost savings will take 12 to 24 months.

That makes sense.

And then you mentioned Clear Eyes was having success in the C store channel.

I think in the past you have called out the same channel for the BC and Goody's business so I'm curious I guess two things.

One is how much of the organic sales growth this quarter was sort of pipeline fill in that channel, and then more broadly, do you see other opportunities to bring your portfolio into that channel?

I think we have got come distribution.

I don't think it is disproportionate but we had had some distribution gains in C-stores, but I think for us we have really tried to focus our efforts on the brands that make sense in C-stores.

So BC, Goody's, Dramamine, Clear Eyes and Luden's Cough Drops are the brand that we really are focusing in a C-store segment.

Okay.

And your placement of those is optimal you think?

I think we believe there's still upside there.

I think a turning point for us was with the acquisition of the GSK North America Brands and BC and Goody's being such a powerhouse in convenience stores in the south east, that has helped leverage those other brands in the portfolio.

So as we buy more brands that are C store relevant we get more leverage in that channel.

So that grows over time.

Now, the other thing I should tell you is the convenience store is a very slow build over time.

It doesn't happen overnight because I think there are 155,000 C stores that are supplied through mostly distributors and it takes quite some time to work through the system but we believe there is still upside, yes.

That's really helpful.

Thanks.

And if I can ask another, on the page where you talk about your acquisition capacity, I saw in the foot notes there's sort of a five and three quarters leverage assumption that's baked in there.

Is that as high as you would want to go with an acquisition or will you take it on a case by case basis, possibly higher?

Yes.

Kevin, we would address our peak leverage really on a case by case basis depending on the profile and the attributes of the opportunity.

So there really is no one answer to what would we take our leverage to.

It depends on the particular situation.

Okay.

And I don't know if you can answer this, but do you think you would want to build a certain amount of capacity before you start going after acquisitions or is it something that you feel like you could do more in the near-term?

The answer to that is no.

The most important thing for us in acquisitions is the financing part of it we can address.

It's the organization being ready to execute against it.

Right.

So we're integrated, we're ready to execute.

So at that point it's when the opportunities arise and the financing part we believe we can address.

So no, we don't need to build capacity for that.

That's helpful.

And then just one last question on the currency.

Is the majority or the vast majority of the currency exposure translation or are there transaction exposure as well?

It's almost equally split between translational and transactional.

Okay.

Thanks very much, guys.

Thank you.

Thank you for your question.

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

Okay.

Again, thank you very much.

We appreciate everyone's time.

As I said, we're quite pleased with the results this quarter, obviously, and we look forward to continue to execute against the four pillars that I talked about at the very end and we look forward to speaking to everyone at the next quarter.

Thank you very much and have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference.

This now concludes your presentation.

You may now disconnect.

Have a good day.