Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Prestige Brands Holdings, Inc. Earnings Conference Call. My name is Chanel, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Dean Siegal, Director of Investor Relations. Please proceed.

Good morning, and welcome. As a reminder, there's a presentation that accompanies this conference call. You should access it now on our website at www.prestigebrands.com. Click on Investor Relations on the left and then on Webcast and Presentations on the right. It will be the first listing. During this call, statements may be made by management of their beliefs and expectations as to the company's future operating results. Statements of management's expectations of what might occur with respect to future operating results are what is known as forward-looking statements. All forward-looking statements involve risks and uncertainties, which in many cases, are beyond the control of the company and may cause actual results to differ materially from management's expectations. You are cautioned not to place undue reliance on these forward-looking statements, which speak only 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 Ronald Lombardi, CFO.

Thank you, Dean. Good morning, everyone, and thank you for joining us this morning. We're very excited to share our results with you this morning. As Dean said, we will be using a presentation that we've used over the last several quarters of format. So with that, if I could ask you to turn to Slide 3, which is the agenda. What we'd like to do is first, I'll take you through some of the highlights of the fourth quarter. Then, what I'd like to do is step back and talk a little bit about what's made FY '12 so successful for us. At that point, Ron will then walk you through the financials for the quarter and the fiscal year end. And then finally, he'll turn it back to me, and I'll talk a little bit about where we are today and why we are confident in our future, based on our current strategy. So with that, if you would turn to Slide 4. I think to open, before we get into the quarter or annual results, I think it's important to step back and say, at the beginning of FY '12, we set some very clear goals for ourselves as a company. And I think you'll see that we exceeded the expectations of those goals in FY '12. We've talked quite a bit about our primary job, our number one objective is to drive core OTC growth and to invest in terms of marketing support to drive that revenue growth. And I think you'll see the results that have come out of that. A second objective for FY '12, after making the acquisitions of Blacksmith and Dramamine, was to continue to develop those brands to achieve their long-term potential after we successfully integrated them into the company. Again,…

Thanks, Matt, and good morning, everyone. A financial overview of the fourth quarter and full-year results appears on Slide 25. As a reminder, unless otherwise noted, the financial information we're discussing today excludes acquisition-related items and other adjustments. Matt has already touched on some of these numbers, and I will go into more detail on upcoming slides. But as you can see by these numbers, we are extremely pleased with our revenue and EPS growth in the quarter and for the full year. Our record revenue and earnings growth were driven by 3 factors: first, our solid growth in our core OTC brands driven by our effective A&P investments; secondly, the success, integrating and growing the Blacksmith and Dramamine brands; and finally, our growth in EBITDA and EPS that tracked sales growth and drove solid free cash flow during the year. I'll give you more details on each of these in the next few slides. Turning to Slide 26, we have our Q4 results. Strong consumption gains in our core OTC brands, along with the GSK acquisitions, resulted in excellent financial results in the quarter. Net revenues increased 39% over the prior year to $134 million during the quarter. Total organic growth, excluding the GSK brands, was a very strong 7.5% during the quarter. Our 9 core brands grew an impressive 14%, which marked our seventh consecutive quarter of growth. New product introductions helped to improve Household revenue trends to a modest decline of approximately 2%. And the GSK brands added approximately $30 million of revenue during the quarter. Our gross margins at 52.5% were slightly above the prior year due to higher OTC mix, including the GSK brands, that was somewhat offset by lower Household gross margins. A&P spending increased more than 30% over the prior year's level, with…

Thank you, Ron. Slide 23, the last part of the agenda before we open it up to Q&A. I thought I would talk a little bit about our results as it relates to our future. And with that, if you'd turn to Slide 34 please. I thought that we'd talk a little bit about what really sets Prestige apart and how we're building the company. As you are aware, we have -- almost 2/3 of our portfolio are brands that are number one or number 2 in their categories. As the result of the investments and the change in strategy in the last 2 years, our core OTC brands have been generating superior growth and are clearly gaining market share in our competition. Our strategy that we embarked on 2.5 years ago in terms of becoming primarily an OTC company is clearly working, and the results speak for themselves. Our ability, from an acquisition standpoint, to find acquisitions, to execute against them and to integrate them into the company, is something historically that we've done very well and we continue to do well. I think Ron has talked in the past about the valuable tax shields that we have with the acquisitions that we've made and what it does from a cash flow standpoint. And I think you can see in terms of the acquisitions, what it does from a margin standpoint and how it helps cash flow. And I think you're also seeing the fruits of the management team. A management team that's focused, first and foremost, on organic growth and delivering those results, but also a management team that has experience and the ability to do M&A activity while we are driving the operating results of the company. Slide 35 is something we're very proud of as a…

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

In terms of the organic growth, obviously, very impressive this quarter and this year, I think. What's the right organic growth number for your categories long term?

Joe, I think we've talked about this on past calls. I think, if you look at the categories and if you look at OTC in general, the industry, it's a very slow and steady climb. And when times are great, it doesn't get outrageous growth. And then when times are bad as an economy, it doesn't get significant declines. I think we believe that we can be very successful in this industry in terms of creating modest single-digit growth over the long term.

Okay. And with that modest single-digit growth, you can then generate the double-digit EPS growth that I think people are looking for, given the debt reduction, et cetera that you guys have in place here, as well as possibly some operating leverage. Is that fair to say?

I think that's fair to say. I think we've laid out a 5-year long-range plan that says we can do that. I think in some years, based on the acquisitions and the way we've paced everything, there'll be more investments in some years than there will be in others. But over a 5-year period, the answer is yes, we believe we can deliver that.

Okay. That leads me to my second question which is the $1.22 to $1.32 guidance you're looking at for this year. What's baked into that in terms of the new GSK brands? Are you assuming that there's additional investment in that? Or are you assuming any synergies in that?

Yes to both, Joe. I think first of all, the investment, one of the things that we have been steadfast on as a company is when we make these acquisitions, the new Prestige doesn't take that money to the bottom line. We're investing to grow those for the long-term. So we've proven that with Blacksmith. We've proven that with Dramamine. When we did this acquisition and proposed it to the board, we have the exact same intent that we expect to invest in these businesses the first few years. So from -- on a marketing standpoint, we're absolutely going to step up our spending. Clearly, there's some synergies with these businesses both from a G&A standpoint, obviously. And second of all, we think there's synergies in terms of from an operation standpoint that we can garner those synergies over the long-term. Probably, it don't happen as much in year 1 or year 2.

Okay. And just one last one for Ron, the leverage ratio slide you showed, and I guess it's about a quarter of turn reduction in fiscal '13. Given that you're generating roughly $110 million of free cash flow, why the slow initial deleveraging?

Yes, it's the result of the increased investment behind the GSK brands in fiscal '13 versus the pro forma results at the time of the acquisition.

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

Can you just clarify the new staff hiring you referenced on the GSK integration slide? How will, just in general, the incremental expense is to take over running GSK. How will that compare to the TSA expense you had this quarter?

Can you repeat the question again?

Sure. As you take over GSK and I guess you called out some hiring you had to do, specifically, how will your incremental expenses run GSK going forward? How will that compare to what you did, the TSA expense that you had during the quarter?

John, let me try and answer generally and then we'll see if Ron can give any more specifics if he would like it. But as I said, we have about 100 employees today than we did prior to the GSK acquisition. We built in approximately 25 new hires to go with this acquisition, all right? So that's the number of people. Second of all, we expect the ongoing G&A rate to be significantly less than what we have in for the TSA right now, which is why Ron had that called out. So over the long term, there are huge G&A synergies for this just as there have been for the other acquisitions. But we wanted to make sure that we had the right TSA in place in the short term so that we weren't penny wise and pound foolish. Ron, do you want to add anything?

Yes. And the $0.10 that we've called out for expected adjustments in Q1, part of that $0.10 will be the difference between the TSA cost and the costs that we incur versus a normalized go forward run rate for the business.

Okay, that's helpful. And how did the acquired GSK brands perform from a consumption perspective during the quarter?

I think the performance was as expected. I think, John, this is -- the size of this acquisition, coming from a bigger company, we're still in a transition. They're running those businesses for us today in a lot of ways from the transition services agreement. So we don't have the depth of visibility that we do to our own brands. But right now, they are meeting our expectations from a consumption standpoint.

All right. And then lastly, I guess, first broadly, could you describe your process for setting guidance, which I guess is a new thing you weren't doing previously? And then, specifically relative to guidance, what do you assume for the pediatric platform in terms of competitive activity and market share?

I think, as it relates to guidance, John, we felt that with this acquisition, it increased the size of the company by 50%. I think the board felt it was the right time to give the Street some sort of broad guidance of what that meant. So that was the change and the rationale behind it. In terms of the pediatric platform, I think there's 2 things. Number one, first of all, we have the conviction on the brands that we own, specifically PediaCare and Little Remedies that we have every intention of making those viable leading brands in the categories in which they compete. And we've spent, at rates, the last couple of years, which do that. We hear all sorts of things on the Street in terms of when competition will be back, and we hear different things. And I can't tell you the answer to that. I'm not the competition. So we're building those businesses and spending at a rate that's significant to build them for the long-term again this year. Does that help you at all?

Yes, it does. If I could just ask a follow-up. Presumably, you build your guidance from the bottom up and have to make, obviously, you have to make some assumption about what that pediatric platform does. So assuming that presumption is correct maybe if you could just tell us directionally, whether -- do you expect some decline there or I mean, what is your current thinking that's incorporated in guidance?

I think in general for the pediatric platform in total, we believe we're going to grow this year.

The next question comes from the line of Frank Camma, Sidoti and Company.

Not to focus on the downside, but the Household business, why did the margins decline so much?

During the quarter, Frank, we had some significant investments behind new product launches and promotional activity in the Household segment.

Frank, specifically, when we introduce a new product in Household and into the food channel, there's a fair amount of slotting allowances that go on in the food channel still today.

Okay, great. And can you talk about how well the new product in Household is doing, specifically the stainless steel cleaner?

I think it's still early where we just started shipping the fourth quarter. We're just turning on support literally as we speak right now. So again, I think it's a little early to tell, but we're pleased with the testing that was done on it. And we're pleased with the retailer reactions so we're hopeful and confident that it's going be successful.

Okay, great. A question on Slide 37. You have the gross margin at 57% for the combined entity post GSK. Of course, it was about 53% for this quarter. How long does it take to get to that 57%? Does that assume some synergies or how are you getting to that?

I guess 2 things, Frank, first is in the fourth quarter, we only had 2 months of GSK. And we didn't have any sales for the final 2 brands, which we closed on March 31. So as we get a full quarter of all 17 brands' results, then we'll see a lift from that. And then over time, as I mentioned, when I talked about the Household business, we expect a recovery in the Household margins as well.

Frank, also just to add to it but to your point, I think it's a good question. Even with those additions, I'm not sure that you'd hit that 57% in year one.

Okay, so that's what I was getting at. My final question is just on -- just if you could give a little color on why did PediaCare perform so much better than Little Remedies? Is that just from a lower base or why is the percentage up so much?

I think it's a combination of the base as well as some distribution fills that PediaCare got in terms of new item introductions.

So they had more product innovation?

Yes. More new products introduced and accepted by the trade, yes.

Your next question comes from the line of Reza Vahabzadeh of Barclays.

Just on the -- a clarification on the GSK transition expense. So that expense that was incurred in this quarter, would you be able to run the business on a lower expense base than that number?

What was reported in the adjusted results had a normalized level of cost associated with GSK from a G&A standpoint. So that is about what we would expect going forward, of course, adjusted for a full quarter.

Okay, got it. So that cash expense is going to be -- that expense is cash and will be running through your P&L on a go forward basis?

That's correct.

Okay. And then for the full year, the adjusted EPS guide, what is the dollar amount of adjustments that goes into that EPS guide? So what is the, I guess, the gross number of adjustments that you will make? Is there a range for that?

For FY '13?

Yes.

There isn't a range. We've identified an estimate of $0.14 for the full year, anticipating $0.10 in the first quarter and $0.04 in the balance of the year.

And this is post tax, right?

Yes.

And then as far as the integration progress, can you maybe talk about certain milestones that you have achieved or would anticipate achieving in the near term, just to let us know how much progress you've actually made?

Reza, I think that's on -- I think that is actually on, what page is it, 22?

Right.

So I think we laid that out on Page 22. That literally goes through milestones, specific milestones of what we've accomplished to date.

With the big milestone being, the end of June where we finish up the vast majority of the TSA services with GSK. And then as the year continues, there'll be additional integration initiatives underway as we completely fold the GSK brands into our business.

Yes, I see that. And then, did you talk about how the GSK brands are doing, just on an apples-to-apples basis versus their prior-year performance or versus your expectations?

They're meeting -- Reza, they're meeting our expectations that we put in the acquisition model. As of right now, they've met all of our expectations to date. It's still very early in the game. We're still transitioning the business.

Your final question comes from the line of Carla Castles [ph] , JPMorgan.

I was wondering if you could give us a little more color on what you're seeing in the market in terms of acquisition opportunities or multiples. Are you seeing industry multiples changing dramatically? Or additional opportunities or fewer opportunities than you saw in the past?

I think I'd say it's still a fairly robust market. I think it changed. I think versus 2 years ago, there wasn't a lot as much out there. In the last year, there have been a fair amount of opportunities that we've looked at. I think we continue to see that in the marketplace. So as far as the pipeline of opportunities, I think it's decent. In terms of multiples, I'd say I think they're pretty healthy. Given the cost of financing today, I think the multiples continue to be pretty healthy. Does that answer your question?

Yes, it did answer the question. And do you have a target of what you will spend for every -- do you target achieving a certain multiple or a certain level of multiple post synergies?

We don't have a specific target, but Carla, in the past, I mean we've been pretty, I'll say, disciplined in terms of looking at our acquisitions in terms of strategic fit, financial fairways and our ability to grow the businesses that we've stayed true to over the last 2 to 3 years, which has led us to certain acquisitions and has gotten us to pass on other ones. So I think we have a pretty clear criteria that we operate under today.

You have a question coming from the line of John Anderson, William Blair.

It's actually Ryan Sundby in for John this morning. So just to follow up on the last question there, Matt, let's say in the year, and Ron's comments on capacity to do another deal, I guess. I guess could you maybe talk about what leverage ratio you'd be willing to stretch to, number one? And then two, is there any concern from an operational capacity standpoint to do another deal as you kind of integrate these last 3 deals of the last 18 months?

Let me start with the last question first, Ryan, which I think is the most important one. Our number one priority is the operating business and continue to drive operating results that we've driven over the last 3 years. So I don't think we would do any acquisition that we felt would jeopardize that. I think that's the most important point. I think the second thing is, any acquisition that we would look at, we don't control that market necessarily. Those things become available, and so you don't control your destiny there. So we would need to determine whether they were a good strategic fit, a good financial fit, et cetera and how it fit with how our organization was operating at that time. We have had times, in the times I've been here, where we've passed on opportunities because we said from an operational standpoint, we thought we had higher priorities. So I think, does that answer your question?

Yes. I guess just to follow kind of on that, looking at the pro forma portfolio here, it seems like the portfolio is pretty balanced at the top among analgesics, cough/cold, GI, and eye and ear care. Is there a particular category you're kind of interested in pursuing? Or would you be looking at adjacent categories that kind of fit within your current OTC platform?

I think it's a combination of both, Ryan. And I think more importantly, I think we'd -- as I said we want to build on platforms and categories in which we compete but we've also said we're willing to look at tangential categories. I think the most important criteria as it relates to which of those categories, can we continue to acquire within port brands or portfolios we acquire, core OTC brands that we think we can build. Because that's what we really want to do is we want to morph the portfolio over time, it's a marathon, not a sprint, into a portfolio of core growth brands. And that takes quite some time to do. That's our number one criteria as we look at categories. Does that help?

Ladies and gentlemen, that concludes the Q&A session. I'd now like to turn the call back over to your CEO, Mr. Matt Mannelly.

Okay. Again, we'd like to thank everyone for taking time to join us this morning. We're very pleased with the results. We appreciate your support, and we look forward to talking to you in the coming weeks and in the next quarter. Thank you, and have a good day.

Ladies and gentlemen, that concludes the conference. Thank you for your participation. You may now disconnect. Have a great day.