Perrigo Company PLC (PRGO) 2005 Q2 法說會逐字稿

Good morning and welcome to the Perrigo second quarter fiscal 2005 earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host for today's teleconference, Mr. Doug Schrank, Executive Vice President and Chief Financial Officer. Sir, please go ahead.

I would like to welcome all of you on the conference call. We are delighted to have you join us and thank each one of you for your interest in wanting to learn more about Perrigo. First, let me dispense with the SEC Safe Harbor language.

These conferences include our view of where the business is going. We will make forward-looking statements we believe to be reasonable but can give no assurance that those statements will prove to be correct. We have prepared a detailed discussion of the many factors we believe may have a material effect on our business on an ongoing basis and have included this discussion on pages 27 to 33 on our form 10-K for the year ended June 26, 2004.

Additionally, at certain times, we will use non-GAAP financial measures as we believe -- which we believe better describe the ongoing financial results and trends of the business. The required reconciliation of these measures to GAAP measures is included in our 8-K and press release filed therewith and may be accessed from our website at www.perrigo.com. Please note that Perrigo has filed with the SEC a registration statement on form S-4 which includes a proxy statement and prospectus of Perrigo and other relevant materials in connection with the proposed transaction. The proxy statement/prospectus will be mailed to the stockholders of Perrigo. Investors and security holders of Perrigo are urged to read the proxy statement prospectus and the other relevant materials when they become available because they will contain important information about Agis, Perrigo and the proposed transaction. The proxy statement prospectus and other relevant materials when they become available and any other documents filed by Perrigo with the SEC may be obtained free of charge at the SEC website, www.SEC.gov. Investors and security holders may obtain free copies of the documents filed with the SEC by Perrigo at www.perrigo.com.

Investors and security holders are urged to read the proxy statement prospectus and the other relevant materials when they become available before making any voting or investment decision with respect to the proposed transaction. Perrigo and its respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of Agis and Perrigo in favor of the proposed transaction. Information about the directors and the executive officers of Perrigo and their respective interests in the proposed transaction will be available in the proxy. Agis and its respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Perrigo and Agis in favor of the proposed transaction. Information about the directors and executive officers of Agis and their respective interests in the proposed transaction will be available in the proxy statement prospectus. With these formalities completed, I will now turn the call over to Dave Gibbons, Perrigo's Chairman, President and CEO.

Thanks, Doug, and good morning everybody. It has certainly been a busy, exciting and also challenging period since our last conference call. To start, Doug and I will provide a review of the second quarter where sales were up 2 percent or $4 million to $252 million and reported net income was $15.8 million or 22 cents a share. On an operating basis, it was 29 cents per share.

In addition to the loratadine syrup recall, which cost us 7 cents a share, we had expected the flu season to kick in in December, particularly considering the flu vaccine shortage this year. The season unfortunately just never hit. Tracking service data suggests that this is one of the weakest December quarters on record and is more than 30 percent below a year ago. This sure made for tough comparisons and it undercut our operating plan where we had built inventories to support customer service through the season and then had to cut back on production pretty dramatically in the latter half of December.

It does remind us that, even though we are less of a seasonal business than we used to be and we're becoming less of a seasonal business each year, we can still be impacted by the seasonal pattern of the cough, cold and flu season. It was another strong quarter for us in the vitamin category with sales up better than 30 percent. Some new products, good sales at existing accounts all contributed. UK sales were up with the Peter Black business adding $8 million and operating income was improved in both the UK and in Mexico. I will now turn it back to Doug for a more detailed financial review of the quarter and six months to date.

Before reviewing the key financial components of our second quarter and first six months, I have a couple of overview comments. As a result of the previously reported November 2004 recall of loratadine syrup, sales in the quarter were reduced by 6.3 million, pre-tax earnings were reduced 8.3 million and net income was reduced by $5.3 million, or 7 cents per share. In addition, the impact of not having the product available is estimated to reduce earnings by 2 cents over the second half of the year.

In the second quarter last year, as a result of a routine IRS federal tax examination, we recorded a onetime income tax benefit of $13.1 million, or 18 cents per share. The fiscal '05 loratadine recall expense and the fiscal '04 tax benefit could cause some confusion as we discuss our results. I will make every effort to identify net income and earnings per share before and after these items.

Starting with the second quarter, consolidated results, second quarter consolidated sales of 215 -- $2 million increased $4 million or 2 percent from a year ago and included $8 million from Peter Black acquisition, approximately $2 million from currency translation, and were reduced by $6 million for the loratadine syrup recall. On a comparable basis, consolidated sales were up slightly.

Looking at gross profit, it was $67 million, a decrease of $9 million compared with last year's $76 million. The gross margin percent of net sales was 26.6 percent compared with 30.8 percent last year. Excluding the effect of the loratadine recall, gross margin would have been $75.4 million versus 76.2 million last year, or 29.2 percent of sales.

The effective tax rate for the quarter was 36 percent, and last year with the $13 million tax benefit, our effective rate was 3 percent. Consolidated net income was 15.8 million this year, compared to 38.2 million in fiscal '05 and earnings per share were 22 cents versus 53 cents a year ago. Excluding the loratadine recall of 5.3 million and last year's tax benefit of $13.1 million, earnings per share was 29 cents this year versus 35 cents last year and net income was $21.1 million compared to 25.1 million last year.

Now let's move onto a more detailed review of our four business segments. Understanding the progress in each segment will give you a better picture of the consolidated results. But first, let me review the IRI point-of-sale data for key product categories for the 12 weeks ending December 26, 2004. And remember, because Wal-Mart does not submit information to this organization, these statistics do not include Wal-Mart.

The cough/cold market was down 10 percent, store brand was down 7 percent and Perrigo was down 5 percent. And remember, Perrigo was up 21 percent in the first quarter when the total market was down 2 percent. Perrigo's sales in this category were weak due to the lower seasonal demand in December compared to last year. The analgesics market was down 7 percent, store brand was down 10 percent and again, Perrigo was down 7 percent. Analgesics closely follow flu symptoms, and the incidence of flu and high fever reported so far this year are extremely low compared to the past 10 years.

In addition, we have not seen any impact of the discontinuation of Vioxx sales or recent media stories about concerns from Celebrex -- about -- concerns over Celebrex and Naproxen. The gastrointestinal market was down 1 percent, store brand was down 6 percent, and Perrigo was down 3 percent. The lower sales for Perrigo reflect lower laxative sales and very competitive antacid pricing due to Prilosec OTC.

The vitamin market was down 4 percent, store brand was down 8 percent, and Perrigo was up more than 30 percent. This quarter like last, we experienced strong gains in the core vitamin product categories. We also saw additional volume from new products at existing accounts, including canned fish oil and Mega Soul (ph).

Now moving to Consumer Healthcare. Sales in the Consumer Healthcare segment decreased $6 million or 3 percent from 225 million to 219 million. Without the loratadine recall, sales would've been even with a year ago despite the lowest December incidence of cold and flu symptoms in the past 11 years. Consumer Healthcare incurred lower sales of cough/cold and analgesics products, partially offset by vitamin sales. Excluding the product recall, the Consumer Healthcare gross profit decreased from 71 million to 68 million, and as a percent of sales, gross margin declined from 31.7 percent to 30.2 percent. A 150 basis point decline -- or this 150 basis point decline was cause by -- resulted because we anticipated higher production volumes and staffed accordingly. Because of the low December cold and flu product sales, we reduced production, which is fairly easy to do in the latter half of the month, but it's more difficult to reduce costs and these costs acted like fixed costs and hurt profitability in December and in the quarter. We were not expecting the season to kick in -- we were expecting the season to kick in in December, and it did not.

Operating expenses increased $3 million due primarily to an increase in R&D spending of $2 million and an increase in marketing spending to drive store brand share gains. All in all, the Consumer Healthcare segment was 6 million below last year's record results, excluding the loratadine recall. The lack of the start to the cold and flu season took its toll on this business unit.

In the Pharmaceutical Segments, we recorded our first shipments, not material, but a start. Operating expenses were 2.3 million compared to 1.1 million last year as we continue to fund the startup of our generic prescription drug business. In UK, sales increased 9.5 million to 24.5 million from 14.9 million last year. The Peter Black acquisition accounted for approximately 8 million of the gain and currency translation approximately $2 million.

Operating income was 1.7 million, up from 900,000 last year. We continue to implement the raft and Peter Black merger integration plan which is targeted to reduce ongoing operating costs and overall breakeven of the combined businesses. This will result in a continued year-over-year improvement in operating income in the second half of the fiscal year.

In Mexico, sales increased 900,000 to 8.2 million due to increased volume in the store brand market. Operating income increased 600,000 to 1.7 million, as we continue to change the Mexico business model to become more dependent on store brand sales. Store brand sales actually grew 57 percent in the quarter and in the quarter, represented 51 percent of total sales in Mexico.

On a consolidated operated income basis, in summary, the operating income in the quarter was 32.4 million before the loratadine recall versus 38.8 million last year. All of the operating income declined in Consumer Healthcare in December. The continued investment spending in pharmaceuticals was offset by increases in income in both UK and Mexico.

Quickly looking at the consolidated six-months results, consolidated sales were 479 million, an increase of 4 percent from last year. These sales included 16 million from the Peter Black acquisition, approximately 4 million from currency translation and were reduced 6.3 million by loratadine recall. On a comparable basis, consolidated sales were up 2 percent. Consolidated gross profit for the 6 months of 131.8 million was a decrease of 4.4 million compared with a year ago and the gross margin percentage was 27.5 percent compared with 27.9 percent last year -- I'm sorry -- was 27.5 percent compared with 29.7 percent last year. Excluding the effect of the loratadine recall, gross margin would have been 140.1 million versus 136.2 million last year, or 28.8 percent, a 90-basis point decline from fiscal 2004. The effective tax rate was 36 percent. Last year, the effective rate was 16 percent, including the $13 million tax benefit.

Reported consolidated net income was 33.4 million this year versus 54.7 million in 2004 and earnings per share were 46 cents versus 76 cents a year ago. Excluding the loratadine recall and the tax benefit, net income was 38.7 this year versus 41.6 last year and earnings per share was 53 cents this year versus 58 cents a year ago.

Moving to Consumer Healthcare, sales were unchanged from last year at 418 million and were up 6 million or 2 percent excluding the loratadine recall. Strong vitamin and feminine hygiene product sales were offset by declines in antacids, cough/cold and analgesic products. Excluding the product recall effect of 8.3 million, gross profit increased 600,000. As a percent of sales, gross margin declined from 30.6 percent to 30.2 percent. Operating expenses increased 6 percent or $4 million due primarily to an increase in R&D spending of 2 million and an increase in marketing spending to drive store brand market share. Excluding the loratadine recall, Consumer Healthcare operating income increased $4 million compared to last year as a result of weak seasonal -- I'm sorry -- decreased $4 million compared to last year as a result of weak seasonal related sales and higher operating expenses. As in the quarter, the lack of the start to the cold and flu season took its toll.

In Pharmaceuticals, operating expenses were 3.6 million compared to 1.4 million last year. We expect operating losses for this business to be in the range of 9 to 11 million in 2005. Year-to-date sales increased 20 million to 40.7 million in the UK, the Peter Black business accounted for approximately 16 million and currency translation approximately 5 million of the increase. Operating income in the UK was up -- was 1.9 million, up from 1.3 million last year. In Mexico, sales decreased from 13.8 to 13.2 million as increased store brand sales were offset by decreased government sales and currency translation. Operating income is up 15 percent or 200,000 as we continue to develop the retail store brand business.

Consolidated operating income excluding the 8.3 million charge for the loratadine recall was 59.1 million compared with 64.1 million last year. Like the second quarter results, the decrease is primarily from the Consumer Healthcare and Pharmaceutical segments, offset by gains in the UK and the Mexican business units.

Now some comments on the balance sheet. Working capital excluding cash at quarter end was 147 million versus 132 million. Our cash balance increased 68 million from 111 million last year, to 179 million. Accounts receivable were 111 million compared with 124 million a year ago, reflecting lower sales in the month of December compared to December last year. DSO improved to 41 days compared to 46 days last year. Inventories were 167 million, a decline of 7 million from year end and an increase of 24 million from the low inventories a year ago when we shipped everything possible during the high December 2003 peak. All in all, we have the appropriate level of inventories and our promotional programs are in place. We need the usual seasonal sales bubble.

In late January, we finally saw a pickup at point-of-sale movement, and as we approach the second half of the year, it would really help us if that would continue.

Cash flow from operations for the second quarter was 44 million, compared to 50 million last year. We expect cash flows will be positive for the next two quarters as inventory falls and receivables are collected. Capital expenditures for the 6 months were $8 million. We now anticipate spending 20 to 25 million for the year.

The quarter can be summed up in a number of positives and negatives. First of all, the loratadine syrup recall reduced operating income 8.3 million. We were well positioned to handle the cold and flu seasonal demand which usually makes a significant uptick in December. This year, despite all the publicity about the shortage of the flu vaccine, the cold and flu season incidence of illness set a record low in December and Consumer Health Care operating income for the quarter was off 6.4 million before the loratadine recall as a result of this.

On the positive side, vitamin sales remained strong. UK and Mexico performed very well with operating income up $1.3 million. We sold our first generic products and have 9 generic Rx ANDA's pending at the FDA. Second quarter cash flow was strong and the cash balance was $179 million. At retail, store brands increased approximately -- more than 1 percentage point in market share as product availability, promotional products and share level merchandising were successful. Overall, the balance sheet remains strong and our long-term future looks as bright as ever. Now let me turn it back to Dave.

Thanks, Doug. On our last call, we had announced the approvals for prescription ibuprofen suspension and for the over-the-counter nicotine gum. We began shipping ibuprofen suspension in December. It's a small product, where Alpharma is already in the market, but we are already picking up some pretty good market share. In November, we also began shipping citalopram tablets with an approval through our development partner, Kelly Labs. This is the equivalent to Celexa indicated for treatment of depression, will be a very small contributor to us because of the number of competitors in the market.

Also in November, we announced a partnership agreement with Bentley Pharmaceuticals to codevelop and market selected products. It's just another step forward in building a generic product pipeline. We also filed 7 ANDA's for new generic Rx products in the quarter, and we expect 3 more to be filed in the second half of the year.

Finally on the OTC side, we began shipping nicotine gum in January. This is a large market, early indications are very good for us, with more of an opportunity than we had anticipated. We can't meet the demand in the short-term.

A couple of comments on outside U.S. operations. We are very pleased with the improved results this quarter in both the UK and Mexico. Operating earnings are up both from quarter one and from the same quarter last year. The integration and turnaround in the UK is on track and we see favorable comparisons ahead for the balance of the year and Mexico has just been making great progress in moving to a retail store brand model, and that's moving along very well.

Terms of the outlook -- our assumption now is a continued mild cold and flu season. We're only now starting to see some uptick in the tracking data and in point-of-sale movement. In response, we're going to continue now to closely manage our production levels and our costs in the second half of this year. Nicotine gum will be a positive for the second half, but we have far more demand than supply in the short-term. It should, though, be a very good growth driver for fiscal year '06 and beyond with good sales opportunity and higher than average margins for us. In fact, the smoking cessation category has the potential to contribute even more to Perrigo than loratadine has.

With the recall expense of 9 cents, the mild cold and flu season and acquisition expenses of approximately $3 million or 3 cents a share, we now anticipate earnings for the full fiscal year 2005 in the range of 80 to 84 cents per share, or 92 to 96 cents per share on an operating basis. There's no question about it -- this is a difficult and disappointing flu season for us, but our issues we feel are short-term. With good management, we will work through them. We still have the same positive outlook as we look forward to next year and beyond and hopefully a more normal cold and flu season.

Perrigo remains financially strong with a strong balance sheet and good cash flow. We've been gaining market share, have some very good new products coming and have a lot of confidence in the direction of our business. Doug and I will now take your questions. I would ask you to please limit your questions to no more than two in the first round so that everyone has a chance to participate.

(OPERATOR INSTRUCTIONS). Derek Leckow, Barrington Research.

Dave, I've got a question here on the prescription drug pipeline. I wondered if perhaps you could provide some additional details on that pipeline and maybe talk about the combination of Agis, when that's completed, what's the total number of ANDA filings that you'll have in place by the end of this year?

I'd have to think on the Agis number. We gave you the Perrigo number, and I don't have off the top of my head the Agis number, Derek. We will have to get back to you on that.

Thanks. One follow-up. The $3 million of additional acquisition expenses -- what was that related to?

That's related to the integration activities. Doug, do you want to comment on that?

As you can imagine, there are a number of activities that happen with an acquisition of this size. Many of them are capitalized from the due diligence costs to integration costs, etc. But a number of the costs have to be expensed, things -- certain legal costs and many of the extra accounting things that happen as we start to audit the beginning balance sheet, etc. So that 3 million reflects those items that are not capitalized on the balance sheet.

So if I take the second quarter results and I take the 3 cents there, it seems to me that you're not really changing your outlook for the second half of the year. Is that a fair statement?

That's a fair statement. If you look at the second half of the year, year-over-year, it’s pretty flat after you take out the 2 cents. Remember, we probably have a 2-cent hurt for loratadine in the second half, plus the 3 cents for the acquisition costs. We're pretty flat.

And your outlook at this time assumes a pretty mild season, and so that's probably -- there could be some upside in terms of the season if we do in fact see a rebound here -- .

We've been burned. We're going to be careful saying that we see an upside to it. Certainly, there will be an impact one way or the other, if it goes up or down. We're glad to see the latest two-week uptick and we hope it means that the season is finally coming, because boy, we really felt we were geared up for it. But we're going to be more cautious in making any prediction as to what will happen. But I was with my son and daughter-in-law and grandkids this weekend, and I hate to say it, but I was happy to see that they all had the flu.

Good luck, guys. Thanks.

William Teller, Key McDonald.

Do you have a feel at all for retail inventories, in light of the weaker cold and flu season thus far and taking into account the first quarter sell-in, and how might that impact sales going forward in the second half?

Yes. Retailers do not appear to be over-inventoried, so we feel pretty comfortable there. We feel comfortable with our own inventory situation. But obviously, if the season would never hit or just suddenly it started to hit now, if it just suddenly decelerates rather than accelerates, it could have some impact. But from what we see, there is not any kind of concern out there. We do not see any kind of over-inventory situation.

As far as the lower production rate potentially going forward, will it have to be lowered more than second half of December, or sort of a constant from what you saw at the very end of the second quarter?

I'm going to let Doug give you some details on that, but what I will tell you is they won't be lowered below the end of December because we basically shut down production for the last latter part of December, the last couple of weeks because we wanted to get inventories in line. But let me have Doug give you some further information on that.

Bill, let me just summarize a bit. Despite the lack of the flu season and the lowest cough/cold flu season in 11 years, actually it was down 31 percent from fiscal '04. If you remember the last call, we were really positioned to take advantage of this year's cough/cold/flu season. Inventory was in place, we were actually -- and we've actually been gaining store brand share at retail up over 1 percentage point and Perrigo has actually been gaining share in the marketplace as a result of all this effort. As you go into December, we were staffed for the season. When the season started off very slowly and then really didn't happen in December, it was impossible to reduce our staffing fast enough to match the lower production volumes that were required. So we ended up, if you look at our business, if you looked at Consumer Healthcare, you would see that we were on target on sales, gross margin and operating income through the first two months of the quarter and really suffered greatly with costs that we couldn't cut fast enough in the last half of December.

As we look at the second half, we're adjusting as quickly as we can and as smartly as we can. We're reducing costs and delaying costs where possible; we're adjusting production strategies, staffing, and scheduling. Our finished goods is in great shape but I can tell you that we will be monitoring it much more closely as we go forward, given the uncertainty of the season. We are accelerating new product introductions to try to make up a little bit of the season shortfall. Obviously, nico gum will help. And we continue to invest in R&D. With OTC filings -- we've had 6 filings in 2005. Some of those are nico, and Rx filings at 8. So we're taking every action that we know how to really try to make up the shortfall in the first half of the year.

Thank you very much.

Doug Lane, Avondale Partners.

Good morning Dave and Doug. Question for you -- well, two topics. I will get my two questions in and then you can run with them. The first is on Agis. There's no -- the stock is down from when you announced the acquisition, but that shouldn't impact the terms of that transaction. And then if you could update any kind of progress that you may have on the integration and the timing of that deal. And then secondly, I've been reading in the New York Times over the weekend and here in Tennessee in the last couple of days about more state regulation of the pseudoephedrine products where you have a pretty decent exposure, taking them off the shelves and putting them behind the counter.

With Agis, the integration, it continues to go very well. We have teams from Perrigo over in Israel and teams from Israel coming over working with Perrigo here in the U.S. Very good commitment to getting this merger completed and closed as soon as possible. So we continue to move forward there.

In terms of the pseudoephedrine question, we have a number of states today that are putting pseudoephedrine products behind the counter. The State of Oklahoma was the first one to do it, Oregon has that law in place, and there may be one or two others. But certainly, there are restrictions on pseudoephedrine sales and we're doing numerous actions, including developing new products based on phenylephrine, which are going to closely follow new branded product introductions to replace some of those pseudoephedrine-based products. We also are trying to implement best practices in merchandising at the retail level to make sure that, even if product does go behind the counter, we can take advantage of the opportunity there. I think there may even be an opportunity for store brand when it goes behind the counter and you have to go and ask the pharmacist, because the pharmacist can tell consumer that the less-expensive store brand product is exactly the same as the national brand product.

Because pseudoephedrine is an important aspect of our portfolio, we track sales closely on that product category month-to-month, quarter-to-quarter and year-to-year. And as we've looked at the results through the first 6 months, we have seen no noticeable change at all, or really very little change in the sale of those products. So despite the media attention that it's getting, so far we've had very little effect on our business.

And Doug, that is -- I assume that with the states like Oklahoma and Oregon have enacted it, that it's the same for those states as well as nationwide?

I think you would say, when they first enact this, if you can imagine trying to get the consumer used to going to the pharmacy versus the store shelf, I think that as those initiatives get started, there's no question there's probably a falloff at retail. But as we've worked with different retailers to really turn that what appears to be a negative into a positive to help the consumer get to the pharmacist, to help the pharmacist understand that recommending store brand and the value to the consumer and the value to their company, we think we can mitigate that fairly well.

Just a follow up on Agis. The stock price of Perrigo here down a few points from when you announced the deal. That doesn't impact your ability to close the deal, does it?

The stock price does not impact the ability. We continue to review our performance with the folks from Agis. We've been very open with them, they've been very open with us and we continue to have discussions on a whole lot of topics, including performance and stock price and everything else. It's been a very good, open relationship with a good discussion back and forth about all topics.

When is that vote? And is there any chance that those terms that you outlined in the S-4 will be changed between now and then?

The shareholder vote is probably sometime between the end of March and the end of -- it's probably sometime in March. And we're moving forward to completing that closing, to going the shareholder vote and completing the closing.

Are the terms up for negotiation, or is that pretty much a done deal? Then that's what's going to go to vote, is what you have in the S-4 from December?

We will continue to monitor the situation all the way to shareholder vote, but we're moving forward with -- on the basis that both sides recognize the long-term opportunities in bringing the two companies together. The integration activities are going very, very well and we're moving forward to get this thing closed and bring the two companies together and create additional shareholder value for shareholders on both sides, which I really think is what this merger will result in.

Thank you.

David Maris, Banc of America Securities.

Two questions, the first on the nicotine patch. Are you in all flavors, or what flavor did you launch? You mentioned that you have a little bit of a production constraint. Does that mean you met 80 percent of the demand or 20 percent of the demand? What sort of impact is that having on the store shelves? And what sort of price discount are you to the other generic brand?

First, David, it's not nico patch, it's nico gum.

I'm sorry, I meant nico gum.

It's nico gum, and we will have three different flavors -- .

Obviously with the flavor question, I guess. I was just joking to myself. Obviously, with the flavor question, if it were a patch, that would be a little difficult.

But you never know, because Perrigo is determined to bring innovation (multiple speakers)

And I've asked worse questions.

So -- and now I'm getting -- I'm losing the question. We have the three flavors, and what is the amount of demand that we can handle? I guess I want to be careful here, but it's certainly less than half of the demand that's out there for us. There's -- we could have quite a bit more sales if we had more product.

And what sort of price discount to the Watson (ph) product do you have, and when do think you'll have the production issue finished? Is it just a matter of running machines longer, or is it an actual production problem?

No, there is no production problem. It's the fact that we're more successful with C introduction than we had anticipated we would be, and we would expect that by the end of the first quarter and fiscal year '06, we will have all the new production up and running and able to supply the demand at a much higher level. And I can't tell you off the top of my head what the discount we are to the brand.

Thank you very much.

Linda Bolton Weiser, Oppenheimer.

Can you just explain in the operating cash flows. There was a line item of something other where there was a pretty positive swing in that item. What was that?

Oh, my gosh. I probably couldn't tell you that because there's about seven line items there, Linda. I can surely get back to you with it. I don't know that -- I just don't know.

Because it's a positive swing of --.

7.5 million.

Yes, okay.

I don't know all the details.

And secondly, just on your vitamin business, you talked about it a little bit and the strong growth. But it's been strong now for four quarters, and prior to that you had four weak quarters. It almost looks like there was a loss of a customer or something, that you're anniversarying now. Is that the case?

I'm trying to think. About a year ago, we did lose business at one customer, but the growth is well more -- far more. That is not the driver of the growth. The driver of the growth are products like the Cocucan (ph) and other new items that are out there, as well as some very good marketing and merchandising programs. But you are right, there was one customer that transitioned away from us, probably in the time period around that you're talking about, but that is absolutely not the driver of the growth that we're seeing today.

Linda, if you remember, a year and a half ago, we had one very large customer who was reducing the number of store count and that was affecting our vitamin sales because they were a significant customer to us and that customer has stopped that. So the negative side of that equation has stopped and I guess naturally helps us. But it's not the driver of the growth.

Okay, so we should expect halfway decent growth in the next couple quarters as well.

I would think we're going to continue on the growth track. I sure wouldn't -- I wouldn't say I'd bet my money on 30 percent growth, but we still feel that we have growth opportunities ahead of us in the category, yes.

Thanks very much.

(OPERATOR INSTRUCTIONS) Derek Leckow, Barrington Research.

I just had a follow-up. You've had a Board authorization for a significant share purchase program out there for some time and I don't think you've utilized any of that yet. Are you restricted from buying back stock, or is this just a strategy here ahead of this transaction that you're not repurchasing shares right now?

As you look at the S-4, because of the transaction that we're entering into with Agis, there is -- I think there's a clause that goes both ways. The transaction and until closing, we're not permitted to buy back stock, and neither are they. So it's a really -- we haven't been in the marketplace at all because we really in that transaction are not allowed to. That's a pretty standard sort of agreement in a merger of this sort.

Thanks. Finally, you guys are also expensing stock options. Could you remind us again what that amount is this year, if we were to try to add that back?

My gosh -- I'm going to do a little bit from memory. It's about $5 million pretax; I think maybe 5.5. We can get you in a more exact number, but that's the number that I believe we've been tracking.

Thanks a lot.

Collette Visalo (ph), Citadel.

Good afternoon. Actually, it's (indiscernible) Fasso (ph) from Citadel. Just want to follow up on Agis with two more questions. Could you tell us if the transaction has been authorized already by the FTC? And also, what's the status of the discussion with the SEC on the approval of the S-4?

The Hart-Scott-Rodino waiting period has already expired without any request for additional information and I don't see any other antitrust hurdles remaining in anywhere else either. So I believe we are through what we need to do there. Regarding the SEC, we're well into the process of getting clearance from both securities authorities, both the SEC in the U.S. and the Israeli authorities, but I can't really give you a specific date at this time.

What about the Israeli approvals? Because I think you need approval from the government, from the (multiple speakers) you said it was fine (multiple speakers)?

There are some other approvals, and all I can tell you is that from what I hear in keeping up with it that we're making good progress on obtaining any of the other necessary Israeli approvals.

And also, to follow up on a question that was raised before, you said that there were discussions around the prices of the companies. With the agreement already filed, I find it surprising that there are still discussions around the prices of (multiple speakers) Agis.

I was asked were there discussions about the performance or prices or anything, and I said yes, we have opened discussions with the people from Agis on all different topics. So we continue to have a very open discussion with them on every item as we move towards the shareholder vote and getting approval and moving ahead. So (multiple speakers) is going very well. What I see are both sides that are committed to making the merger happen, and to bring this to a successful close.

And that includes the consideration being offered as well?

I'm sorry, I'm not maybe catching the question.

The question is -- there are a lot of discussions where between the two companies, which is normal. Is the offer terms, like the share and cash offer that is put on the table are subject to discussion as well?

I see where you're -- what your question is. And I guess I would say I'm not going to speculate on anything that might happen that hasn't happened, or comment on a lot of specifics. The best thing I can say is that in the spirit of open and honest discussion, we've talked with the Agis folks about a lot of their performance, and we've talked about our performance. We watch their prices, they watch ours and we have discussions regularly about it. But that's the best I can tell you. I'm certainly not going to be speculating or not going to be having any detailed feedback on everything we talk about.

Thank you.

Drew Figdor, Tiedemann.

You've had a couple months since the deal has been announced. I guess it was announced in late October. I'm just curious, now that you've sort of seen more -- the more customer response and how the businesses could be integrated vertically and maybe the synergies, do you feel like you can get the same level of synergies? Do you feel better about the transactions today? What concerns do you have, if any?

I think we feel very good with the way the integration has been going. It has been moving along very well, and there's a lot of information in the S-4 that would outline for you the types of synergies and opportunities that we see. And beyond that, I can only tell you the integration is going very well, and teams from both sides are working very well together at identifying and following through and getting ready to bring the two companies together.

Are you as excited about the prospect today as when you announced the deal?

Yes we are. I think people on both sides are excited about the opportunities.

And you say the vertical opportunities that you thought of combining the two businesses, does that seem any stronger today, or is it going to be more difficult to sort of achieve the vertical integration aspects with the API business, etc.?

I think we see pretty much the same opportunity today and we see ourselves making progress down the path to making it happen.

And the customer response to that opportunity?

Customer response has been good.

What is your expected close date?

Sometime between the end of March and end of May.

And what's the dating item? Is it the proxy or is it something else?

Drew, I guess I would remind you that we've got an S-4 in the filing queue and we're really fairly limited on how much we're allowed to talk about this transaction outside of that. I think in the S-4, you'll see that we're really anticipating trying to close this transaction by the end of March. There are obviously many things that can happen in that process, but we've got the regulatory clearances on the antitrust, we've gotten through the SEC, and we're well on the way to the Israeli filing. So I think that's really all we can comment on the timing and how the transaction will work.

We've gotten through Hart-Scott-Rodino; we're in the process of going through the SEC.

Okay.

Charlie Carter, Trustco (ph).

I have a question concerning the cold season trends that you referenced, 30 percent down for the year. I was just wondering if in your research you noticed that -- I know like the healthier lifestyles are affecting kind of the food and beverage industries relatively dramatically and I was wondering if that's showing up at all in your internal research concerning kind of cold and I guess the cold season and people having alternative lifestyles or having more holistic health orientation. So anyway, just wanted to know if that showed up, because that 30 percent number is pretty dramatic. I know it's one year's data, but nevertheless, I just thought I'd ask.

We have not tied that into the holistic -- I think it probably has more to do with the strain of flu that hits each year, and it ebbs and flows. There are some years that are big years. When we were in the midst of this year, seeing that the season never hit, we went back in early January to look back over historical trends for different years. And just -- it's almost a little bit random. There are high years and lower years. They generally end up within a range of, oh, minus 5, 6, 7 percent up or 5, 6, 7 percent down. But it can vary from year-to-year. You'd like to think that people taking all those store brand vitamins are helping to reduce the incidence of cough/colds and flu, but I really don't know. We have not done the research on that.

And we'd like to think everybody at this point, appreciate your participation, and look forward to keeping you up-to-date in the future.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.