Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Prestige Brands Holdings, Inc. Earnings Conference Call. [Operator Instructions] I now would like to turn the conference over to Dean Siegal, Director of Investor Relations. Please proceed.

Thank you, and good morning. As a reminder, there's a presentation that accompanies this conference call. It can be found on our website, which is prestigebrands.com, click on Investor Relations on the left and then Webcast and Presentations on the right. 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 are what is known as forward-looking statements. All forward-looking statements involve risks and uncertainties, which in many cases are beyond the control of the company and may cause actual results to differ materially from management's expectations. You are cautioned not to place undue reliance on these statements, which speak only as of this date. A complete Safe Harbor disclosure appears on Page 2 of the presentation that accompanies this call. Additional information concerning the factors that might cause actual results to differ from management's expectations is contained in the company's annual and quarterly reports that it files with the U.S. Securities and Exchange Commission. Now I would like to introduce Matt Mannelly, CEO; and Ron Lombardi, CFO.

Thank you, Dean. Good morning, everyone, and thanks very much for joining us this morning. As Dean said, Ron Lombardi, our Chief Financial Officer, is with us as well this morning. And as Dean also said, we're going to -- as usual, we'll use a presentation, hopefully to make it easier for everybody. So with that, I would ask you to turn to Slide 3 of the presentation so we can get started. I think overall, we're quite pleased with third quarter performance with revenue being up 17% to $106 million. Our core OTC growth of 3%, and you'll hear Ron talk more about this, as well as 3% organic growth for the company, we're quite pleased with. And our earnings per share of $0.25, being up $0.19 versus $0.21 last year, we're also quite pleased with the results at the bottom line for the third quarter. I think most importantly from my vantage point, I'd say 2 things. One is our core strategy continues to deliver, all right? And we're outgrowing the categories and we're gaining market share. So to us, that's important, and we believe that's the right way to create value long term for our shareholders. I think the other thing that's a little different this quarter than the last couple, we're actually quite pleased with the performance given -- and I'm sure you've heard this from other retailers and other manufacturers, a very soft start to the cough/cold season, which we'll talk a little bit more about. So we're quite pleased with the revenue numbers, given incidences in cough/cold are down 6.5% in this quarter to open the season. I think the other thing that we've talked about a little bit on December 20 is subsequent to the close of the quarter on January 30 --…

Thanks, Matt, and good morning, everyone. A financial overview of the third quarter results appears on Slide 12, so please turn to that page now. As a reminder, unless otherwise noted, the financial information we are discussing today excludes acquisition-related items and other adjustments. Our third quarter results are highlighted by a performance that's consistent with previous quarter results, including continued solid growth in our core OTC brands, driven by our effective A&P investments, growth in EBITDA and EPS attract sales gains and our consistent cash flow from operations during the quarter. I'll give you more details on each of these in the next few slides. Turning to Slide 13. We have our Q3 results, starting with revenue which grew approximately 17% during the quarter. As a reminder, we have begun to comp results from the Blacksmith acquisition, which was completed on November 1, 2010. Our legacy core OTC growth and organic growth in the Blacksmith brands were the drivers of revenue growth during the quarter with total organic growth approximately 3% during the quarter. Our 5 legacy core OTC brands grew over 3% during the quarter while acquisitions added approximately $17 million during the quarter. $4 million of the $17 million is from organic growth in the Blacksmith brands for the comparable periods. Gross margins were at approximately 52% during the quarter, which were consistent with the previous fourth quarters and, as expected, below the prior year level due to the impact of the Blacksmith acquisition. We increased our A&P spending by over $2 million over the prior year during the quarter, as we continue to invest behind our core OTC brands to increase market share and drive revenue growth. Revenue increases in EBITDA margin gains resulted in an increase of $2.2 million and adjusted net income to $12.5…

Thanks, Ron. Page 17. Just I'll spend a few minutes talking about the acquisition of the GSK North America brands. And if you turn to Slide 18, I think this talks a little bit why both strategically and financially we think this is a such a great fit with Prestige, and why we think it's going to create value for our shareholders. As I said, it really strengthens our core OTC portfolio both in terms of depth and breadth of brands. And this now says that OTC represents 85% of our revenue and 90% of our contribution. So we really are fulfilling our mission of being an OTC company. From a financial standpoint, and Ron will talk a little bit more about this in a few minutes, but it's quite attractive in terms of its accretive both at the gross margin and at the EBITDA margin level. It allows us to continue -- because of the high gross margins, it allows us to continue to invest and build these brands. And again, as Ron will talk about a little bit later, from a cash standpoint, we generate quite a bit of cash with this, and it's very accretive from a free cash flow. Slide 19 shows you a little bit -- I believe, we've showed this once before. But the fact that we're adding 4 core brands and 2 new platforms in terms of the platforms being powdered analgesics and GI, and the 4 core brands being BC/Goody's, Beanos, Gaviscon and Debrox. And if you turn to Slide 20, as I said, you'll see that how we really morphed the portfolio significantly in a very short period of time. And so we really are at 90% contribution, an OTC company as we sit here today. Page 21 shows you from…

Sure. Thanks, Matt. Slides 23 and 24 shows the impact of the acquisitions on a few metrics and point to key factors in our value creation proposition. On Slide 23, we compare a few of Prestige's metrics with others in the industry and again the impact of the GSK acquisition on us. Prestige's operating model results in industry-leading metrics. And the GSK bolt-on acquisition adds to our leading position over both large and mid-cap companies. Profile of our brands, our outsourcing model and lean operating structure result in high EBITDA margin. Prestige EBITDA margins at approximately 31% start nearly 10 points higher than the group average, with the GSK acquisition increasing this to over 14 points higher than the average, resulting in EBITDA margins at approximately 35% versus an average for the group of just over 20%. Capital spending as a percent of sales, which are the white numbers in each column, starts low at 0.2% of sales and is expected to increase slightly but will continue well below the average for the group, which is approximately 3%. High EBITDA margins, low capital spending, along with our deferred tax assets, results in solid free cash flow. Free cash flow at 15.6% of sales for Prestige starts approximately 5 points above the average for the group. And the GSK acquisition increases free cash flow to nearly 20% of sales. Again, this is after we service our interest expense. On Slide 24, we have information about the company's history of rapid deleveraging and estimates for future leverage levels as a result of the GSK acquisition. The table on the left shows the company's history of delevering and its ability to support acquisitions while reducing debt levels. Even after a series of acquisitions, with 2 major acquisitions in fiscal 2011, the company was…

Thanks, Ron. Just a couple of comments with regards to the integration. Slide 27. Again, I think we're quite excited about this acquisition because we believe not only strategically and financially that it's a great fit with us but also from an execution standpoint, it's very similar to our last several acquisitions. And it's very consistent with our business model in terms of sales and marketing and outsourcing all of our manufacturing. So we have a track record of being able to successfully integrate those types of businesses into the company. We're already calling on this customer base, so we're familiar with the buyers and the people, and we'll have a very seamless transition with them. We worked very hard on this acquisition and have laid out a timeline by function, by area, in terms of the integration, the transition services agreement and post-transition services agreement and how we expect everything to operate. As we said, similar to the acquisition of Blacksmith, we will invest in these brands. We will support these brands and build these brands for the first couple of years to get a solid foundation underneath them. And consistent with our last few acquisitions, we've set very strict objectives of what we want to accomplish. And with the recent acquisitions, we go back each quarter and look at whether we're accomplishing those objectives. And I'm happy to report on both Dramamine and Blacksmith, we're meeting or exceeding the top line and the bottom line objectives for both of those. And we expect to measure the GSK acquisition the same way. If you turn to Slide 28, it talks a little bit about the diligence and the process for us with regards to the integration of these businesses. And as I've said previously, we spent 5 months doing…

On Slide 30, we have some detail around the estimate for our Q4 acquisition and integration-related costs. During Q4, we expect approximately $15 million of costs associated with the acquisition and integration net of taxes. Included in this total is banker and other legal accounting professional fees of $11 million, integration and consulting costs of $2 million, incremental TSA costs of $4.5 million and finally, non-cash inventory and financing costs totaling $7.5 million. And again, that's non-cash. The impact of these adjustments on EPS is expected to be negative $0.30 in Q4.

If you turn to Slide 31, just a couple of more slides and a few comments, and we'll open it up for questions. Again, we look at this acquisition, and we think it accomplishes our overall objectives and really sets us up to create long-term shareholder value on a number of fronts. As I said, it fulfills our mission of really becoming an OTC company. We continue to focus on core brands and core brands that have strong consumer franchises. As I said, in addition to the 4 core brands, we have 2 new scale platforms that we'll be building out with them in both powdered analgesics and GI. Ron talked about financially what this does from a gross margin and EBITDA margin profile, and takes our numbers which really are already industry-leading and makes them even stronger. I talked about from an integration standpoint, this is perfectly aligned with our operating model. It is the exact same way that Blacksmith worked, in terms of how we expect to bring it in from a supply and a demand standpoint. And we'll achieve synergies as a result of doing that and have limited overhead that will help us. And most importantly, from a financial metrics standpoint, it's very accretive long term and has very strong free cash flow which, as Ron said, will help us deleverage at a very rapid rate. So with that, Slide 32. I close with this just because we've used this slide a number of times. And I think it's critical because we are focusing on driving that core OTC organic growth, and we're delivering against it. We have another quarter here of exclusive OTC M&A focus that we've been successful in delivering on, and we continue to manage the portfolio. So in summary, we're quite pleased with the third quarter results. We talk a lot about manage for today and lead for tomorrow. We think the third quarter was a good example of that. Managing for today, we're quite pleased with the results given the environment and the cough/cold season, strong top line, 3% organic growth as well as very strong bottom line, plus 19% in EPS. And we also believe more importantly in terms of leading for tomorrow, we set ourselves up very well with the acquisition of the GSK North America brands, which we believe will help us create significant shareholder value long term. So with that, I will open it up to questions.

[Operator Instructions] And your first question comes from the line of Joe Altobello with Oppenheimer.

Just a couple of quick questions. I guess, first of all, obviously, the 3% organic growth, you said was overall despite a soft start to the cough/cold season. How should we think about that number given that I think your overall organic growth is kind of flattish for the first 6 months? Is this a number that you feel like is sustainable going forward?

Well, I think, Joe, we talked about this a little bit. I think organic growth in this environment, I think, 3% actually, especially given the environment, was quite strong this quarter. I'm not sure that I would model an ongoing 3% organic growth rate in this economic environment.

Okay, that's helpful. And secondly, in terms of GSK brands. Can you remind us what the seasonality is of those brands?

The seasonality, I'm going to have to get back to you with the specifics. But again, it's a diverse portfolio between GI, analgesics and some other things. So I don't think there's a very strong skew towards cough/cold with those businesses or any seasonality.

Got it. Just one last one for Ron, the interest expense you're looking for, for fourth quarter and then for fiscal '13.

We haven't given any guidance, Joe, on those 2 numbers.

Okay. In the 8-K you put out -- end of January, it looks like overall, you're looking about $90 million-ish. Is that a fair number?

Yes.

And your next question comes from the line of John San Marco with Janney.

Why do you think category consumption was flat in your cough/cold categories if cold/flu incidences were down 7%? And does that raise some concern for you all that the consumers' medicine cabinets might be a little stocked?

Well, I do think when I look at incidences, right, cough/cold and I look at flu incidences, et cetera, the numbers are down. The fact that consumption was flat, I think we're keeping our eye on Q4 right now and monitoring it very closely, John, to answer your question, yes.

Okay. And what about the other -- I guess, the other layer of inventory at the trade level, do you have any updates on what inventories look like at trade?

I don't, John -- I think the word I get from talking with our guys is I don't -- this is something we're monitoring. But I don't -- right now, I don't have concerns of heavy inventory for the reasons you're saying because the trade with what's going on in the economy in that retail, the trade worked on working capital in the third quarter, all right. So I don't think the trade loaded up for cough/cold as much as it has in previous years. So therefore, I don't believe inventory is bloated. But again, we don't have any signs of that right now, but we're keeping our eyes on it.

Okay, that's helpful. And then, with the spending program you referenced that were put in place by GSK when you were explaining the EPS neutrality through the March quarter, what were those spending programs exactly? And then, do they go away once we get to the March quarter?

Well, there's some TV spending and things on some of the brands that we may do things differently. But as you know, those sort of contracts are set 3, 6 months in advance, and we couldn't have any impact on those. So I think some of the things that are in place right now for Feb, March and even some of them in our first quarter are kind of locked and loaded. And we won't really have an impact on those businesses until Q2.

Okay. But is there -- I mean, in absolute dollar terms, is there a higher level of advertising spending? Or are there promotions that are net against sales or..._.

Well, there is -- on a couple of brands, there's some advertising and promotional things in place that we are going to change. So they've got higher levels on a couple of the businesses that we're going to reallocate that towards some other businesses.

Got it. And then, so maybe just -- I think, this will be a bit of a refresher relative to the disclosures you've already put out there. But just as an update, the 18% of sales or so that GSK historically spent on advertising, that number will be for these brands. Do you expect that number to be up or flat?

Well, we expect -- 18%, that number doesn't ring a bell for me, Joe -- or John, sorry. But what I will say is this, we expect to increase our spending on the portfolio just as we did with Blacksmith, just as we did with Dramamine. And we expect that increase in spending to be focused first and foremost against the core brands. So the answer is, yes. And again, the other thing I would point to when you look at the gross margins and the EBITDA margins and the way we do business, our intention is to increase that A&P support to grow the businesses long term.

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

Just sticking with advertising for a second. Matt, do you expect overall across the portfolio, your advertising and promotion spending on a rate basis or percent of sales basis to increase over time? I understand that you're going to reallocate within the portfolio away from non-core and towards core. How does that play out kind of overall across the portfolio over the next 12 to 24 months?

Jon, the answer is yes. We do expect it to increase. And again, I think we now have a history of that, right, over the last 2, 2.5 years here. And I think the way we've described it to people is, we're going to be brand builders. We're going to invest in the business. But that investment philosophy and strategy is going to be a little bit of pay-as-you-go. So you can see that we've been gradually taking up our A&P spending over the last 24 months and getting results, and we expect to continue to do that with these acquisitions.

Okay. And just a question on, I guess, the 4 core brands that you added with the GSK acquisition. I'm just trying to better understand, what is it that's different about these 4 brands from the other 11 that you acquired such that you defined them as core? And then, I guess, second, what does that mean in terms of the opportunity that you see there and how you plan to grow those specific brands? Any color there would be helpful.

Sure. I think, Jon, it's fairly similar to the way we look at our current portfolio, and that is we look at it from a category standpoint. Does the category have potential from a brand standpoint and where the brand stands? Does it have potential with the consumer and versus the competition? And then we also look at what's been the support behind the business. And if you put more support behind it, could you, in fact, change the slope of the growth rate? So those are kind of the criteria that we look at. And again, similar to those 4, those brands, BC/Goody's, Beano, Gaviscon and Debrox, we think they meet the criteria both from a category and a brand standpoint, that if we put increased spending and support and attention behind them, we can get the kind of growth that we're looking for. So that's a little bit of the criteria of how we look at them. Does that answer your question?

Yes. That's helpful. Just 2 more. One, Matt, you talked about kind of the strategic focus that you laid out 1.5 years ago or so to drive core OTC, exclusive M&A in OTC and then "optimize the portfolio." I'm just wondering how you're thinking about the third dimension there and more specifically, the Household Cleaning business at this point in time, given that clearly the business remains challenging from a competitive standpoint. How should we think about your commitment to that business and plans for that business going forward?

Yes, I think, Jon -- I think that's a fair question, and I think we talked about a little bit. I think we've somewhat answered it, right, in terms of I said, 6 months or 9 months ago, or I said really 2 years ago, we're going to be an OTC company. With these acquisitions, we really are an OTC company already with 90% of our contribution coming from OTC. Household plays a role for us in terms of the cash generation, and the role that it plays there is that cash generation allows us to invest in our other OTC brands as well as delever the company. We will continue to invest in Household to the extent to support the business as required and utilize it to do that and also to, like I said, allow the cash to help us invest in other businesses or delever. Does that answer your question?

Yes, it does. Last question I have is just on the -- some of the metrics you provided around the GSK acquisition. In our model, we have you at around 30% to 31% EBITDA margins in fiscal 2012. You put a projection out there in the presentation today that GSK would take you to 35%. Does that happen just by a function of bringing the business on board? Are there assumptions baked into that around growth or cost savings that need to be considered as well? I guess, what I'm trying to get at is, do we go from 30.5% to 35% in fiscal '12 to 35% just by function of kind of onboarding business?

Well, Jon, that 35% is on a pro forma, I believe, through 9/30 of '11, right? And I would expect that we would move towards those numbers. I don't think it happens all at once because I think in FY '13 between the transition services agreement, between some other things as far as moving the business over, but I would think we'd be moving towards those numbers in '13, yes.

And your next question comes from the line of Reza Vahabzadeh, Barclays Capital.

As far as the GSK branch is concerned, are the -- have the recent results been relatively close to your expectations?

Yes. In terms of the -- in the interim, the updates on the businesses are all within the bandwidth of what we expected, yes.

Okay. And have you updated your thoughts as far as what level of incremental investment marketing or otherwise the portfolio may need in the first year or 2?

Yes. When we did the acquisition, part of the diligence, part of bringing Boston Consulting in was we took a look not only on what's happened but what would we do with the business and what would we require. And we modeled everything in terms of our assumptions after that. And we would expect to increase that investment.

And I think last time on, I think, maybe the high-yield bond conference call, I can't remember, but I thought your comments suggested maybe $6 million to $8 million of additional spending on GSK?

I don't believe -- I may be wrong, but I don't believe we gave any specific number on incremental spending. Because $6 million to $8 million doesn't sound -- that doesn't ring a bell with me. We didn't give an absolute number. We haven't given -- we don't typically give guidance on that. I think I would ask you to look to the May conference call. And once we've owned the business for a quarter, we'll try and flesh out a little bit more in terms of the strategies and the financials for the business.

Got it. And last question is, as far as the -- any potential return of one of your competitors in the cold products category, any latest updates on that?

Well, I think we're no different than you. We hear and read everything that you read. And there were some information recently that said some people are coming back and are starting to trickle back, and we're starting to see that.

And your next question comes from the line of Karru Martinson with Deutsche Bank.

With the Stainless Steel Comet cleanser launch, how much is going to be the incremental cost to sell that in, and the marketing support that you guys are putting behind that repositioning?

There will be incremental costs with that, associated with the sell in. The Comet business, the Household business as you -- I'm sure you know, there's a fair amount of business in the food channel. And the food channel operating model is still -- and having worked in the food business going back 30 years, they still utilize slotting allowances and things like that, that require investment in year 1. So there'll be some of that. And also, we will invest in terms of some marketing support out of the gate to launch the business. So there will be some incremental costs associated with the launch of Stainless Steel.

And that primarily will be in the next, let's say, 2 quarters or so?

I think it will probably run 2 to 3 quarters, yes.

Okay. And when we look at the BC/Goody's business that you're acquiring, you described it as the diamond in the rough here, I mean, who are the competitors in that powdered analgesics side? Are you still -- are you going up against the major players, or is it still more of a fragmented smaller market?

I think it's one of those. It's like a lot of the businesses that we're in. They're somewhat under the radar. BC/Goody's is the powdered analgesic segment. So there aren't really any competitors. So our challenge is, how do we bring more people into that segment, not how do we beat the competition in that segment?

Okay. And when you look at the headcount to run the combined businesses, I think I heard you say there's 20 open spots. What's the timing in terms of filling that? And what's your outlook on G&A as we go forward?

Well, I think the timing to fill it, we would expect to have all those positions filled within the next 2 quarters. And the outlook on G&A, we don't give specific guidance on that, but I think as far as our synergies, we have significant synergies from a G&A standpoint with this that we baked into our numbers.

Back in the December announcement deck that we had, we had that -- current G&A is approximately 8% of sales. And on a pro forma basis, we dropped to about 7%. You can go back and look at that for some additional insight.

Appreciate that. And just lastly, you guys are still all in outsourced model. I know we've talked about in the past if the right acquisition comes along, moving into manufacturing. Has that changed with the GSK acquisition or you'll still open to that transformation?

No, it has not changed. And we've looked at all sorts of alternatives with this acquisition as well as others. And for us, that decision, similar to other decisions associated with the acquisition really is 3 criteria, strategically, would it work for us, is it the right thing to do, I should say. Financially, could we get it to work? And executionally, do we think we'd be successful at it? And all acquisitions including GSK that we looked at, we evaluate the manufacturing facilities based on those 3 criteria. And if it meets those criteria, we would do it.

And your last question comes from the line of Frank Camma with Sidoti & Company.

Most of my questions have been answered, just a clarification on one though.

[Operator Instructions] Frank, please proceed.

Just a minor point on -- you had mentioned that the 9 brands that you own, the core brands grew by 9.5%. I was just wondering the timing of that. Was that quarter-over-quarter that you were referencing?

It was comp period, so it was when we owned those brands, so it wasn't quarter-over-quarter because we didn't own for the full quarter those Blacksmith brands. So it's just like comp store sales. It's on a comparable period for when we owned them.

Frank, it wasn't the 9 core. It was the Blacksmith brand.

Oh, just the Blacksmith brands.

Yes. Because we didn't own the Dramamine business in that quarter. So it is an apples to apples, Frank.

Okay, great. And final minor point, I know it's a diminishing portion of your business, Household Cleaning, but I just wanted to get an update on some of the initiatives that you kicked off last year, [indiscernible] going into dollar stores and penetrating home improvement. Has any of that taken traction? Or do you see that improving at all?

Well, I think, we've had success in the dollar stores. We've had success in home improvement. I think it's been tough sledding in food. It's been tough sledding in mass. As I said, we just introduced Stainless Steel. I'm optimistic that the fourth quarter numbers will be improved versus the third quarter, and we're continuing to look at other opportunities and initiatives to stabilize the business.

I'd now like to hand the call back to Matt Mannelly for closing remarks.

Okay. Well, I think, as I said, we're quite pleased with the quarter. We appreciate everyone's questions and your following the business. And we look forward to talking to everyone again at the upcoming conferences as well as next quarter. Thank you for joining us this morning. We appreciate it.

Ladies and gentlemen, that concludes the conference. You may now disconnect. Have a wonderful day.