Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Prestige Brands Holdings, Inc. Earnings Conference Call. My name is Stephanie, and I will be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Dean Siegal, Director of Investor Relations and Communications. Please proceed.

Thank you, Stephanie. Good morning. As a reminder, there is a presentation that accompanies this call. You should go there now. You can access it through our website at prestigebrands.com. Click on Investor Relations on the left and Webcast and Presentations on the right. And I'm also required to remind you that during this call, statements may be made by management of their beliefs and expectations as to the company's future operating results, statements of management's expectations of what might occur with respect to future operating results or 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 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 that are filed with the U.S. Securities and Exchange Commission. Now I'd like to introduce Matt Mannelly, CEO; and Ronald Lombardi, CFO.

Thank you, Dean. Good morning, everyone, and thanks for joining us on the call this morning. As Dean said, to help us, as we've done in the past, and to help you in terms of walking through the results for the quarter, we have our earnings presentation. What I'd like to do is, first up, I'm going to talk a little bit about our strategy and how we delivered against that the first quarter. And then I'm going to go through some of the more specific highlights for the quarter. And then, Ron Lombardi, our CFO, will take you through a financial overview and some of the details. And finally, I will close with a few comments about the quarter and looking forward, and then we'll open it up for questions. So with that, if I could ask you to turn to Page 4 of the earnings presentation. Page 4 is important for us in terms of how we run the business, and it really is. We have a 3-pronged strategy, as we've talked about. First is, really, it's been critical to our success and will be critical moving forward is to drive our core OTC growth. And in doing that, as we have emphasized the last couple of years, it really is about investing our marketing dollars in our core OTC brands and driving those for growth today and future value creation. In addition to that, we have stated and it really changed a number of things in terms of our approach to new products and the importance of new products in our portfolio and how we're trying to take a long-term approach to that in terms of driving value and driving the top line. And finally, in terms of driving that core OTC growth, making select investment in…

Thanks, Matt, and good morning, everyone. A summary of financial performance for our first quarter results appears on Slide 15. As a reminder, unless otherwise noted, the financial information we're 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're very -- we are extremely pleased with our financial performance in the quarter. Our record revenue and solid earnings growth were driven by 3 factors: continued strong growth and share gains in our core OTC brands, driven by our effective A&P investments; the seamless integration of the acquired GSK brands and their performance that was in line with our expectations; and strong growth in EBITDA, earnings per share and cash flow from operations that was consistent with revenue gains. I'll give you more detail in each of these points in the next few slides. Turning to Slide 16, we have our Q1 results. Our solid Q1 results reflect the impact of the GSK acquisition and our transformed financial profile. Our sales were at a run rate of approximately $600 million annually. Our gross margins increased approximately 5 points, and our A&P level is approaching 14% of sales. During the quarter, our net revenue has increased approximately 55% over the prior year to $147 million. Our 9 core legacy OTC brands grew nearly 4%, marking our eighth consecutive quarter of growth, as well as our eighth quarter of consumption share gains. Household sales declined during the quarter due to the changes in the timing of promotional activities, as well as from a challenging category trend. The acquired GSK brands performed well in the quarter and were generally in line with our expectations, adding $52 million of revenue during the quarter. Our gross…

Thank you, Ron. So just a few comments before we open it up for Q&A, and if you'd turn to Page 21. I think we've talked about this a little bit in the past in terms of what sets us apart and how we believe we're set up to deliver value now and well into the future, and I think the 3 buckets here are very relevant in terms of our brand portfolio, our financial profile and the management team. In terms of the brand portfolio, I'd say that there are a couple of important items. One is, again, we have consistently delivered, outperformed the category in those core OTC brands, and we've delivered superior growth and market share gains. I think the second thing I would say is the portfolio overall -- we've got core portfolio, which many of you know, represents about 66% core OTC. And the portfolio overall is working well to deliver the financial results that we have previously stated. From a financial profile standpoint, I think we talked quite a bit earlier about how we have really transformed the financial profile of the company with this latest acquisition, and you can see it in terms of the numbers. Our margins, whether it's gross margins or whether it's our EBITDA margins, are very strong. We continue to have exceptional and consistent free cash flow. And as Ron just pointed out, as a result of that consistent and large free cash flow, we continue to rapidly deleverage our balance sheet. So our financial profile continues to strengthen as we move forward. And I think the last point that's important is the management team and a couple of things. Again, the strategy that's been laid out by this management team really has transformed Prestige. And really, today, we…

[Operator Instructions] Your first question comes from the line of John Altobello with Oppenheimer.

A few couple -- actually, a couple of quick questions here. First, I'm trying to understand the guidance for the full year. Obviously, you guys did over-deliver pretty significantly in the first quarter. How much did the TSA agreement or the TSA transition benefit you from a gross margin or EPS perspective? Because if you just take the first quarter and multiply by 4, you get $1.40 for the year, so I'm just curious why you're still maintaining your prior guidance.

Joe, it's a good question. I think, as I said, there may have been some revenue possibly that came in the first quarter as a result of the warehouse transition, that people wanted to make sure that they were fully stocked, right? I think we feel good about our brands. But right now, candidly, as I just said, I think we'll deliver at the upper end of that guidance. And I'm hopeful that we'll be able to go beyond it, but I really want to see the economy and retail in the second quarter before we really commit to that.

Okay. And so in terms of that last comment, Matt, it sounds like you guys are at least sounding a little bit more cautious with regard to the consumer this call. Are you seeing any pullback on the part of your retailers in terms of inventory management?

We're seeing a little bit of inventory tightening in the drug chain; a little bit at this point, not a lot. Our largest customer, as you've seen, is actually starting to rebound quite nicely, right? So we're seeing very good movement there. And as far as our brands, if you look at our consumption numbers and our inventory in general, Joe, is in very good shape right now. Our inventory and our inventory with our retailers, which we keep track of, is in good shape. So there are no warning bells right now for us. To me, it's more of a macro concern, not a Prestige or an industry concern, and so that's the reason why I'm a little bit cautious.

Okay. Got it. Just one last one, if I could. In terms of household, it looked like the household segment did take a bit of a step backward this quarter. How much of that was due to timing? And how much of that was -- maybe the March quarter was an aberration and maybe this quarter is an aberration. I'm just trying to figure out which one was a true indicator of where the trends are in that segment.

Yes, Joe. I think -- go ahead, Ron.

As I say -- Joe, we think, about $1 million of the year-over-year decline is directly related to the difference in timing of promotions.

So I think Joe, part of it is merchandising events specifically in the dollar channel that didn't fall in Q1 that are going to follow later, that Ron just referenced. So I think that is part of it. But I think you actually make a really good point, and that is, was Q4 an aberration? Or was this an aberration? I think, good news and bad news. The bad news is I'm a little disappointed in household's performance for the quarter. The good news is the portfolio, overall, is exceeding expectations, the cash generation part of the portfolio. So in general, we're doing just fine. I think we've made some adjustments. We've introduced stainless steel, which is more of a specialty item. We've just recently introduced Comet 2x, which is twice the bleach, which is at a higher price point and a higher margin, which should benefit the retailers and us. I think the macro trend, what happened in this quarter was the abrasive segment, not just our brand, but the abrasive segment was down double digit for the quarter for the whole segment. And as a large player in the abrasive segment, that's where the shortfall was for us. Does that help you at all, Joe?

Yes, it does.

The next question comes from the line of Jon Andersen with William Blair.

Just starting with the guidance for the year. I kind of understand your point, Matt, kind of early in the year and wanting to kind of wait to see how the macro environment evolves here. But with the core business, the core OTC brands up 3.7% or nearly 4% in the quarter, how are you thinking about at least that part of the portfolio performing through the balance of the year? Is that a run rate that you expect to be able to kind of maintain at this point? Because it did represent a fairly significant deceleration from Q4 and I don't know if you could talk about some of the puts and takes in terms of that deceleration from 14% to 3.7%.

Yes, Jon, I think it's a good question, I think. But as I said, for us, it's not about 1 quarter of that core OTC growth. And I know the fourth quarter at 14%, I've said it was phenomenal, and we've had 2 quarters that have been double digit in the last 8. But when you look at the categories in which we compete, all right? If we can go -- grow those categories, if we can grow 2%, 3%, 4%, we will outgain the category, we will gain market share and we will clearly create value for our shareholders. So I'm not -- candidly, I'm not disappointed at all in the 3.7% growth for the core OTC. On the contrary, I'm quite pleased with that. If we could deliver at that kind of number on an ongoing basis, we -- this portfolio would be tremendously successful. So I'm actually quite happy with it.

No, understood, agreed. You've talked a lot about taking market share, and I think that Slide 10 demonstrates how you're doing that with your performance, outpacing that of categories you're in. Is there a way you can help us think about kind of your aggregate market share today and how much opportunity there is that lies ahead? I mean, who are you taking market share from? Is it private label? Is it other brands? Just trying to get a sense of that.

Well, I think it's a tough one because, Jon, we compete in so many different categories, right? So it's not like we're in the shoe business or the beverage business and you're just taking it from one competitor. We're in different categories. We're taking it from some of the larger competitors, for example, in some categories versus in other categories at some of the smaller competitors. So it really varies by category. We're actually picking it up from private label again, when you -- in pediatrics, we're actually picking it up from private label right now. But in other categories, private label has gained a little bit. So I couldn't give you one answer for that because it really varies by category. And we obviously monitor every category quite closely.

Okay. Fair enough. Just 3 kind of housekeeping-related questions. First, and maybe for Ron, full year interest expense expectations. Second, the G&A run rate in the first quarter was quite a bit below what we anticipated. Is $10.8 million, $11 million the right way to think about the quarterly run rate going forward? And Matt, with your comments on A&P spending going up or marketing support going up in Q2 and Q3 because those tend to be seasonally higher in terms of dollar sales, are you talking about kind of an absolute increase in ad spend or an increase in the ad ratio as well?

Ron, I'll let you answer the first.

Okay. So for full year interest, Jon, I think if you take a look at our interest expense in the first quarter and annualize that and then reduce it for anticipated debt reductions, that will get you close to a full year number. In terms of G&A as a percent of sales, we might expect it to tick up slightly from the 7.7%. But I think what we've said in the past is that we expect G&A to be approximately 8% of sales.

And finally, Jon, in terms of A&P, the second quarter and the third quarter as I said, it's both in terms of absolute A&P goes up in that quarter, and A&P percent of sales typically goes up in that quarter as well.

Your next question comes from the line of John San Marco with Janney Capital Market.

What was the consumption growth for the entire OTC segment? And then, maybe as a follow-on, what happened in the tail of the OTC portfolio? Was there a brand or 2 that drove tail growth ahead of the core 9? I think that's the first we've maybe seen that since you've been talking about refocusing your investments on the core.

John, let me start with the question on the tail. During the quarter, our Dermoplast brand saw a peak in orders. A lot of that brand goes through distributors and then out to hospitals. And occasionally, we'll see peaks in that business, and we saw a fairly meaningful peak during the quarter for that brand. So that was the primary driver behind the non-core.

Got it. And then in terms of consumption growth for the entire OTC segment?

Entire -- for our brands, entire brand portfolio, John, or the categories?

For your brand portfolio, for the whole segments -- the core and non-core.

Our consumption growth, to Ron's point, for the entire portfolio was obviously actually slightly above the 6.9% for the core OTC for the quarter.

Got it. How -- so in that context, how fluid is your definition of what constitutes the core? And I guess, how willing are you or how frequently do you reconsider non-core brands' long-term opportunity?

John, good question. I don't think we're very fluid at all when it comes to the core. And I think I've said this in the past. We're going to focus -- where it's been 9 brands, now with the acquisition, it's going to be 14. Those are the 14 main horses that we're going to ride moving forward. Those are the ones that we believe can deliver the most value. Now the corollary to that though is, just because a brand is not a core OTC brand doesn't mean we're not going to do anything with it, doesn't mean we're not going to invest, doesn't mean it's not going to grow. It's just we have to make decisions, and we have to prioritize. So whether it's Dermoplast or whether it's New-Skin, there are growth opportunities in some of those brands, and we'll try to take advantage of them. It's just like anything in life, you've got to prioritize and you got to get after the big stuff first.

Makes sense. A couple of housekeeping items. What seasonality should we expect in the GSK revenue contribution, if any?

It's a good question, John. I don't think I have the answer for that off the top of my head. Ron, do you?

Yes. John, when we -- obviously, we're doing due diligence of the GSK portfolio. What we saw historically was not a lot of seasonality from quarter-to-quarter, a little bit of an uptick around the Christmas holidays. But other than that, it was fairly consistent. Unlike the Prestige business where from the first quarter to the average sales for quarters 2, 3, and 4 where we've seen an $8 million to $10 million uptick, the GSK portfolio, we think, is going to be a bit more consistent.

John, the GSK actually, to Ron's point, I think, it's almost evenly split. It's actually slightly weighted towards the first half of the year, slightly.

Okay. And then in the presentation, the PowerPoint, how do you define BC, Goody's category? Is that just the powder part of the analgesics category?

Correct. Powdered analgesics is how we define it, yes.

Okay. Is there an opportunity to deliver other products in your portfolio in powder form like BC, Goody's? And do you now have the product development capabilities to do that?

We're -- John, we're actually looking at some things on that as we speak. I mean, that's one of the benefits of some of these acquisitions. They bring new technologies, new thinking that we can explore in other areas of the portfolio and vice versa. We have some technologies and things in our current portfolio that we may be able to bring to BC and Goody's.

Your next question comes from the line of Frank Camma with Sidoti & Company.

Just could you add some color on the gross margin? Was there anything unusual? I mean, I know you told us 57 -- to expect 57%. It seemed rather strong at that level. I just wanted to know, was there anything unusual in the quarter or anything seasonal affecting it other than the fact that you brought on the Glaxo brands?

There really wasn't anything unusual, Frank. And as you said it, gross margins were largely in line with the guidance that we've given for the company. Now you may see small seasonal impact to that over the year. But it was largely in line with what we expected and really driven by the transformation of the company to an OTC company.

Okay, great. That's good. So we can just expect to model that out for the rest of the year, I mean, based on what you're telling us?

Well, I think, Frank, I'd add one other thing to what Ron said. If you look at it are -- the only thing I'd say that maybe was a little bit of a bump was you'll see that our OTC business growth was so strong, and that's a higher-margin business. So that's what really bumped the overall gross margin, right?

Correct. Okay, sure. And because the household cleaning was relatively so low, that would improve overall margin?

So I think that's -- from a modeling standpoint, that's the part that may have -- it may have adjusted it slightly, right?

Yes. Okay. And just a clarification on the A&P spend. Obviously, we knew that it was going up, and we had that in our models. But then you said second and third quarter should be the highest period and then tails off in the fourth quarter, is that correct?

I think historically we have always spent at the highest level in the -- I think historically we have spent at the highest level in the second and third quarter.

Yes. It actually was -- the fourth quarter of last year was a little higher than the second quarter. But I think that's just because you were in the process of ramping up your spend on the core brands.

Yes, yes. Fourth quarter of fiscal '11, there was significant investment behind the PediaCare, yes.

PediaCare, okay, okay. That's not normal?

Right.

Okay, good. And just on the household cleaning, I know it's becoming less of a story, but could you just give us some update on how the stainless steel cleaner turned out and some of the new products that you rolled out behind that brand and how that's going?

I think stainless steel has just been rolled out to the marketplace. I think, as you know, stainless steel is a little more niche, as opposed to broad. So it's still early in that process. And then, we also just rolled out Comet 2x, as I said, which is twice the bleach level, which that's fairly new also, although we're seeing pretty good consumption trends initially out of the gate for that, Frank.

Your next question comes from the line -- your final question will come from the line of Reza Vahabzadeh with Barclays.

This is Jamie Robins on for Reza. When do you think is the earliest that you would be prepared to make another acquisition?

Well, Jamie, I'd say -- I'd give a couple answers to that. One, we feel really good about where we are on the transition of the GSK brands and the integration. It has gone extremely smoothly as a result of incredible planning and commitment by the organization. Second, as Ron pointed out, our balance sheet is healthy enough that today, if the right opportunity was there, that we actually could do something. And third, oftentimes, we don't really control that timing. It's the sellers that control that timing. But I think to answer your question from a readiness standpoint, both financially and from an organization standpoint, we could be ready to move immediately.

Okay. That's helpful. And if I could, just one last question. Within the acquired GSK brands, how were sales during the quarter compared to last year for these brands?

Sales compared to the last year were, I think, basically close to flat versus last year, in the first quarter. All right. I believe that's it for the questions. So we'd like to thank everyone very much. Appreciate it in this month of August, when I know it's tough, there are a lot of things going on. We appreciate everyone's time commitment. And we appreciate your support on the business and look forward to speaking to everyone again soon. Thank you, take care, and have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a great day.