Good day, ladies and gentlemen, and welcome to the Q2 2013 Prestige Brands Holdings, Inc. Earnings Conference Call. My name is Shanay, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today, Mr. Dean Siegal, Director of Investor Relations. Please proceed, sir.

Good morning, and thanks for joining us. As a reminder, there is a presentation that accompanies this call, which can be accessed on the company's website, which is prestigebrands.com. Click on Investor Relations on the left, and then Webcasts & Presentations on the right and will be the first presentation. 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 expectation. 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. And now I'd like to introduce Matt Mannelly, CEO; and Ronald Lombardi, CFO.

Thank you, Dean, and thank you, everyone, for joining us during this difficult week. For any of you or your families that have been caused hardship by Sandy, we wish you with speedy and successful recovery. So thank you, again, for joining us this morning. If you would please turn to Slide 3, the agenda for today. I'll talk a little bit about the highlights of the quarter. Ron will then take you through a quarterly -- a review of the financials. And then I'll talk a little bit about -- I'll summarize and talk about where we're going as a company. So with that, if you'd turn to Slide 4. So what I'd like to do is just really reinforce our strategy that we believe has been instrumental in our results over the last 2-plus years. And it really is a three-pronged approach. First is driving core OTC growth. And as we've said, and as you'll see here again in this quarter, it's about increasing our A&P and the effectiveness of that A&P to drive the growth of our core OTC brand. Our second strategy, which the company has employed for quite some time is all about strong free cash flow that allows us to reduce our debt significantly and rapidly. And we have a very high conversion of EBITDA to free cash flow, as you know. And all of that free cash flow is really used for debt reduction. In addition to that, many of you are very aware that we have a significant tax shield that also is incremental to our free cash flow. And then finally, the third strategy that we've deployed over the last 3 years has been around M&A and specifically OTC-focused. And as that relates to this quarter, it really is about the…

Thanks, Matt, and good morning, everyone. An overview of the second quarter highlights appears on Slide 13. As a reminder, unless otherwise noted, the financial information we are 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. As Matt mentioned, we are extremely pleased with our excellent financial performance in the quarter that included strong gains in sales, earnings and cash flow. Our solid revenue and earnings growth were driven by our continued strong growth in share gains in our core OTC brands, which is driven by our effective A&P investments, revenue from the GSK brands that was in line with our expectations and strong growth in EBITDA, EPS and cash flow from operations that was consistent with revenue gains. I'll give you more details on each of these in the next few slides. Turning to Slide 14, we have our Q2 results. Our excellent Q2 results continue to reflect our transformed financial profile. Our year-to-date sales were at a run rate in excess of $600 million annually. Our gross margin increased approximately 6 points over the prior year, and our A&P level was about 14% of sales. Our net revenues increased approximately 53% over the prior year to approximately $162 million during the quarter. Our 9 core legacy OTC brands grew 13 -- excuse me 11.3%, marking our ninth consecutive quarter of growth, as well as our ninth quarter of consumption share gains. Our legacy business realized 4.7% total organic growth during the quarter. And the acquired GSK brands performed well in the quarter and were generally in line with our expectation, adding approximately $51 million of revenue during the quarter. Our Q2 gross margins increased significantly over the prior…

Thank you, Ron. Slide 19. Just a few thoughts and a few slides to wrap it up, before we open it up to any Q&A. If you turn to Slide 20. I think for us, the 3 most important things that we think that really set us apart that have really contributed to our success, and we think will really ensure future value creation are first of all, our brands, all right? We have great brands in the categories in which we compete with great equity, and we're demonstrating that we can build the equity in those brands. Second of all, as Ron has pointed out a number of times, is our powerful financial profile and how it's really been transformed over the last year or so. And the free cash flow, the significant and consistent free cash flow that we generate really allows us a lot of flexibility and opens up a lot of opportunities moving forward. And then the final thing we think that really sets us apart most importantly is we're a company of 125 people, and we think our people, all 125 -- 125 of our people are leaders, so we talk about leadership a lot. And in a company, this size that makes a difference, and we think that's contributing significantly to our success. If you go to Slide 21, I thought I would just share just some organic revenue growth numbers versus some of our peers. And I think the point I'd just made here is if you look at the bottom, it's based on 52 weeks. If you look at the second row up is half year, and the third is on the quarter. And we show here both core OTC and total company. I think the point that I would like to…

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

First question, I guess, in terms of your categories and consumption growth, looks like consumption growth ticked up a little bit this quarter, which continues a bit of a trend we've seen the last couple of quarters. What do you think is driving the increased consumption across your categories, at least in the core OTC side?

Well, Joe, it's a good question. I think what we're seeing is we're seeing consumption growth across all the brands in that core portfolio. Now, clearly, we've talked about we benefited with PediaCare and Little Remedies with the competitive situation. But I'd also point out that we had strong double-digit consumption growth in Efferdent this quarter -- with Efferdent Crystals and the fact that we put advertising on air, which advertising hasn't been on air for Efferdent in years. We also increased significantly the Beano advertising when we purchased the brand, and we're seeing double-digit growth in terms of consumption growth on that business. So Chloraseptic, we're seeing strong consumption growth as a result of incidences being up in the first part of the season. So the reason we're seeing this is we're seeing across really all the brands across the core. It's not just a couple of brands that are carrying it.

I'm actually thinking more of the overall category, Matt.

In terms of why the category is up?

; Yes, yes.

Well, the category, I mean, again, we're seeing -- categories up, I think 1.5, right? The categories in which we compete, right Joe?

Right.

So, again, strong cough/cold incidences to open the season, I think, is carrying it up a little bit. But again, whether it's up 1.5%, up 0.8%, down 1.2% the last, for -- it's -- I think it's pretty consistent with historicals in terms of flat to up 2%. And I think with the strong cough/cold to open, it's kind of trending up a little bit. Does that answer your question, Joe?

It does, it does. And secondly, in terms of the acquired GSK brands, you've talked about new products and geographic expansion. It sounds like you're relatively fully integrated on those brands right now. So when should we start to see some of the benefits from the increased geographic expansion, for example, and the new product introductions?

Well, I think Joe, I think that's still to come, all right? As you know, for OTC products, to get things to the marketplace, whether it's new products, right, for some of the things we do. This is a marathon not a sprint. We're using FY '13 to set ourselves up, and really FY '14 is going to be the year that we're going to start doing some of those things and making those investments, all right? So we're still laying the groundwork as we speak for that.

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

Why was the timing of cold flu ordering different this year? And can you share your thoughts on how much of a revenue impact that might have had on 2Q?

Well, John, I think it's a question. I am -- again, why it was different maybe a little bit is, again, we get the Fan Flu data, so do all of our retailers. And Fan Flu data is incidences are up solid-single digits, 6% to 8%, to start off the year. So as a result of that, I think that caused the retailers to say okay, incidences are up for openers, looks like we may have a solid year, we better take product in a little bit sooner rather than new later. How much that has impacted the second half? I can't tell you, because it really depends on how those incidences play out in the next 3 to 5 months. Because if incidences continue to go strongly, we'll get reorders for that. If incidences wane at all, not buying in previous quarter, well, there won't be as much repeat business in the third and fourth quarter. So it really is dependent on how incidences play out in the next 5 months.

Got it. And then on BC/Goody's, are you doing any thing differently yet versus how GSK was managing the business and spending marketing dollars, et cetera?

I think we're looking -- we're doing some things -- our focus on it -- I think one of the things, John, that you've seen is GSK is a terrific company that does a great job with its brands. But like us, they focus on their high priority brands, and these were tail brands for them. We're giving them a little bit more attention now internally and with the retailers, so I think we're seeing some benefits on that. I'll also tell you some of the things we're doing, as I said to Joe, we're setting ourselves up for future growth with some of the work -- positioning work, creative work, and some of the other programs that we're currently developing that we expect invest in FY '14. So there's more to come on that.

Got it. And maybe if you could just clarify what you mean, you're getting more attention. Does that mean senior management, you're getting involved in the sales processes? Or is there any specifics you can offer on what more attention entails?

Sure, I can tell you, for example, that Tim Connors, our Executive Vice President of Sales and myself were down at Walmart last month on a call with regards to those brands. That's the kind of attention that was getting.

Very helpful. And then lastly, and I think you sort of touched on this talking about second half investments, but I'd like your thoughts anyway. The guidance implies lower second half EPS than first half. I'm just wondering if that is there conservatively? Or if that reflects A&P investments will be abnormally back half-loaded this year?

Well, I think, if you look at the last couple of years, our A&P, we spend more in the second half than the first half. And then the second thing I've said, Joe -- John, I'm sorry, is we also will increase our A&P spending a little bit in the second half as well.

So perhaps more than you typically have historically?

Yes, yes.

[Operator Instructions] Your question comes from the line of Reza Vahabzadeh with Barclays.

This is Jamie Robins on for Reza. Could you provide some additional color on how you plan to use free cash flow generated over the next 6 to 9 months?

Jamie, Ron Lombardi here. We will use our cash flow exclusively to pay down debt, absent any M&A opportunity that may come up.

Okay. And then, I guess, following in that line, what do you see the opportunities for M&A looking like over the next 6 to 12 months?

I think we've said, Jamie, that the M&A market, as you can see, as a result -- there were some announcements this week, continues to be active. We continue to be aggressive and disciplined in our M&A approach and active in the marketplace.

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

I guess my first question was just kind of referring back to Slide 7 from the presentation. In the last -- I guess, over the last 8 quarters -- you had 4 quarters of double-digit organic growth in the core OTC business and then a number of quarters with kind of low- to mid-single digit organic growth. I'm just trying to get a better handle on the variability from quarter-to-quarter over the last couple of years. Is that just kind of a normal course of doing business? Is it amplified by new product introductions? I'm just trying to get a better sense for why such volatility.

Well, I don't -- I think, John, as you can see, it's not happening in any one quarter. You can see Q3 '11, Q1 '12, Q4 and then Q2. So it's happening in different quarters. I think the way I look at it candidly is look at category growth over those last 9 quarters. Category growth is -- I'm going to say, if I did it in aggregate, it's for sure, 0% to 2%. So every one of our quarters, we're outgrowing the category. So candidly, just so I'm clear, I look at 3.7% last quarter, and I'm thrilled with that, in terms of core OTC organic growth. It's just so happens, as I said to Joe, that a number of our brands really, really dialed it in from a consumption standpoint for different reasons this last quarter. Do I think we can sustain ongoing double-digit core OTC growth? I don't think that's possible in this category. Do we think we can sustain solid single-digit growth and outgrow the category for the foreseeable future? Yes, we do and that's what we're trying to do.

Okay, that's helpful. Just sticking with that for a minute. So over the last 9 quarters, so you're -- you've kind of taken your view kind of the aggregate performance. It's clear that you're outperforming the categories, and you're taking market share. Have you seen any kind of competitive response to your share gains? Or is there anything that you see competitors doing in terms of dialing up their response, because you've dialed up your performance as well?

John, I'd say a couple of things. Number one, we have the ultimate respect for all of our competitors, and so we don't take them lightly. We have respect for what they do. There isn't anything we've seen specifically with one of our core brands where people are doing things markedly different to come after us. And so we're trying to focus on our brands and what we do with the consumer and how we connect to make a difference with those consumers. And we haven't really seen market changes from any of our key competitors.

Okay, terrific. Last -- just one more, guys. The gross margin rate in the quarter was terrific. I guess around 57%. Ron, I think you mentioned that the increase on a unit year-over-year basis was twofold, part -- driven in part by the GSK acquisition and then also improvement in, I think, you said improvement in the gross margins in the legacy business. Is there any -- can you kind of get a little bit more granular on that in terms of the relative contribution of those 2 factors? And what's driving the gross margin improvement in the legacy business at this point?

So John , the first question, what's the relative proportion of the increase in gross margin between the impact of the GSK acquisition and the gain in the legacy business. The vast majority of the gain is coming from the impact of the GSK mix. So the higher gross margin on the GSK. In addition to that though, we have seen an increase in our legacy OTC gross margins do both to mix. We've had some increases in sales in our higher gross margin categories and brands, in addition to realizing some ongoing cost-reduction improvement programs that we've had in place.

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

Just couple of quick questions. One is on your G&A expense. After adjusting it for the adjustments you called out, basically essentially flat from prior quarter, is that something we should expect? Or should we expect that to tick up as you -- I know you've obviously moved into a new headquarter, so we should have some expense there, but is there much that we should expect from additional G&A that you took on from GSK?

Frank, Ron here. In general, our G&A expense should be fairly consistent quarter-to-quarter. We may have some small variability from time to time, but in general, we should be in the $22 million to $23 million ballpark each quarter. Excuse me -- for about $11 million to about $11.5 million, excuse me.

Right, right, right. Okay, good. And I noticed -- it's not a big part of the story anymore, but I notice that the Household Cleaning sequentially went up pretty nicely, the revenue at least. And I was wondering, is that a result of the new stainless steel cleaner? Is there something in particular that is driving that revenue -- improved revenue?

I think the revenue from Q1 to Q2 is up slightly, Frank; versus previous year's quarter, it's down. We're seeing -- where we are seeing the benefit in household is the new -- the introduction really of Comet 2X, with twice the bleach, which is driving incremental sales.

And how is the -- is the competitive landscape still the same in that business, a lot of discounting and such?

Yes, the category -- I mean, category remains very, very price-value-oriented and overall, category trends continue to be negative.

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

Okay, again, just in closing, I think most importantly, we'd like to thank everyone for joining us on the call today. I know it's been a very difficult week for those who live in New York and New Jersey and Connecticut. And we really appreciate you making the extra effort. And, as I said at the beginning, most importantly, if you or anyone has been affected, we wish you a very successful and speedy recovery. So thank you very much, and have a good day.

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