Reckitt Benckiser Group plc

Cathy Mattison – Lippert/Heilshorn & Associates, Inc., Assistant VP – San Francisco Office Bruce J. Wood – President and Chief Executive Officer Joseph W.

Baty – Executive Vice President and Chief Financial Officer

Nick Genova - B. Riley & Company, Inc.

Gary Giblen - Goldsmith & Harris [Damien Wacowski] – Gabelli & Company, Inc. Richard Linhart – Opus Capital

Thank you Dan. Thank you all for joining us this morning for the Schiff Nutrition International fiscal 2009 second quarter results conference call.

By now you should have received a fax or email of the press release but if you have not please contact us at Lippert/Heilshorn & Associates at 415-433-3777 and we will forward you a copy immediately. As a reminder, this call may contain forward-looking statements, the risks of which are the same as those described in the safe harbor language in the press release and those detailed in the company’s SEC filings.

Actual results may differ materially from those described during the call. With us from management today are Bruce Wood, President and Chief Executive Officer and Joe Baty, Executive Vice President and Chief Financial Officer.

Please go ahead, Bruce.

Thank you Cathy and good morning. Season’s Greetings and welcome to our fiscal ’09 second quarter conference call.

During the quarter, our focus remained on pursuing our long term goal of profitable growth on our branded business while continuing to explore new growth opportunities. We experienced a 19.6% increase in net sales in the second quarter versus the year ago period.

This increase was driven by a significant increase in our private label business, primarily resulting from the incremental new business acquired during the fiscal 2008 fourth quarter. Our branded business also registered an increase during the quarter.

At the same time, gross profit and operating income increased modestly in absolute dollars versus the year ago quarter. As expected, however, the respective percentage margins decreased due to higher private label sales mix, marketing expenses and raw material costs.

Our branded Move Free net sales declined slightly in the second quarter versus year ago, reflecting the highly competitive nature of the joint care category. We continued to maintain a premium position in certain key accounts and that, coupled with some ongoing inventory reduction in some customers, led to the modest decline.

That said, we improved our competitive position in the IRI measured segment of our business. That is food, drug and mass customers excluding Wal-Mart.

For the 12 week period ending November 16, our Move Free brand was up 1.2% in dollars versus the year ago period. At the same time, the total joint care category as measured by IRI decreased 1.8% in dollars, but was up 3.4% in unit volume, once again reflecting the intense downward pressure on pricing in this segment.

Our remaining Schiff branded business and our Tiger’s Milk Nutrition Bar brand recorded solid net sales increases in the second quarter versus year ago. In addition, we continued the process of expanding the distribution of our Schiff MegaRed Krill Oil new product based on the continued positive performance of MegaRed in a lead customer.

While we are pleased with the expanded distribution, it’s too early to fully assess the consumer takeaway of MegaRed in these new customers, so we will have more to say on that front in our Q3 call. Despite the heavy emphasis on price discounting, we continued to support our brands with consumer marketing programs during the second quarter.

On our flagship brand Move Free, our consumers spending approximated the year ago period after a significant step up in Q1. We continued to employ a mix of national TV, FSI couponing, grass roots marketing and account specific promotions.

We also stepped up our joint care trade marketing investment in the period, in an effort to remain competitive in our key accounts. We expect to continue national marketing support behind our Move Free brand for the balance of the year and also expect to initiate national consumer advertising and consumer motion programs in support of our expanded Schiff MegaRed distribution.

As noted in our first quarter conference call, we have experienced increases in joint care and certain other raw material costs. This has not led as yet to any moderation in the level of price discounting in the joint care category from what we have observed.

All told, it remains difficult to forecast our near term branded joint care sales expectations given the volatile, competitive and cost environment. Nevertheless, we remain committed to supporting our brands and are confident that we can compete effectively in the near and the long term.

At the same time, we’re excited about the prospects for Schiff MegaRed and we plan to continue our efforts to explore other branded and private label growth initiatives that we believe will enhance long term shareholder value. In these trying economic times, our strong financial position underscores our confidence that we have the resources to capitalize upon new organic and other growth opportunities.

And I will now turn the call over to Joe for his comments.

Thank you Bruce and good morning to everyone. Earlier today we announced our financial results for our fiscal 2009 second quarter and six months year-to-date.

Fiscal 2009 second quarter net sales increased approximately 19.6% to $47.3 million from fiscal 2008 second quarter net sales of $39.5 million. Net sales increased primarily due to an approximate 78.4% increase in quarter over quarter private label sales to $13.2 million.

Our overall increase in branded business partially impacted by certain promotional shipments moving to the third quarter approximated 6.1%. The net increase of $2 million, $34.1 million versus $32.1 million was primarily due to incremental MegaRed sales.

Net sales were $95.1 million and $80.3 million respectively for the six months ended November 30, 2008 and 2007. Branded net sales were $66.6 million and $64.5 million respectively.

Gross profit as a percentage of net sales was 37.2% for the fiscal 2009 second quarter compared to 41.9% for the fiscal 2008 second quarter. As expected, the quarter over quarter decrease among other factors reflects a much higher than budgeted mix of private label sales as well as the initial recognition of raw material cost increases.

The raw material cost impact to our branded business will be more significant in the second half of the fiscal year. Total operating expenses were approximately $13.1 million or 27.8% of net sales for our fiscal 2009 second quarter, compared to $12.4 million or 31.5% of net sales for our fiscal 2008 second quarter.

As a percentage of net sales, selling and marketing expenses increased to approximately 17.8% for the fiscal 2009 second quarter from 17% for the prior quarter. The approximate $1 million quarter over quarter reduction for other operating expenses net among other factors reflects the prior year impact of the special dividend.

Reported operating income was $4.5 million for the fiscal 2009 second quarter compared to operating income of $4.1 million for the fiscal 2008 second quarter. Other income expense net primarily consisting of interest income, net of interest expense, decreased modestly to $0.3 million income for the fiscal 2009 second quarter.

The effective tax rate for the fiscal 2009 second quarter was 38.3% compared to 38.1% for the fiscal 2008 second quarter. As reported, diluted net income per share was $0.10 for both the fiscal 2009 and 2008 second quarters.

In regards to the balance sheet, working capital increased to approximately $87.6 million at November 30, 2008 from $81.5 million at May 31, 2008, primarily due to positive financial results. The reduction in cash and short term securities among other factors includes the impact from a significant increase in inventories, payment of certain current liabilities, and settlement of employee minimum tax withholding obligations for common share awards.

The increase in inventories, among other factors, reflects an increase in raw material quantities and costs; build-up for certain third quarter promotions; and the impact of greater than expected private label business. We continue to hold approximately $1.3 million in ill-liquid auction rate securities as a long term asset.

Stock-based compensation expense amounted to approximately $0.1 million and $0.9 million respectively for the fiscal 2009 and 2008 second quarters. Depreciation expense was approximately $0.8 million and $0.9 million respectively for the respective quarters.

Capital expenditures were approximately $1.1 million and $2.1 million respectively for the respective six month periods. Full fiscal year 2009 capital expenditure commitments currently approximate $4 million.

Regarding our current forecast for fiscal 2009, overall net sales are projected to be relatively flat for the second half. We believe the incremental private label sales volume acquired during the second half of fiscal 2008 will primarily offset the forecast decrease in branded business.

On the fiscal 2009 first quarter earnings call, we noted that private label sales could approximate $50 million versus $38 million for fiscal 2008. Our current forecast for fiscal 2009 projects private label sales in the mid-$50 million range.

Overall branded net sales for fiscal 2009 are currently forecast to be flat as MegaRed sales may not offset the impact for our joint category; of potential reductions in customer inventory levels; competitive pressures; and incremental price discounting. All forecasts are subject to the impact of ongoing competitive pricing pressures as well as the effectiveness of our joint category and MegaRed branding marketing initiatives, including our intention of increasing advertising support for MegaRed.

We forecast gross margin to approximate 36 to 38% which compared to our previous forecasts, reflects a higher mix of private label sales; increased raw material costs; the expected reduction in certain customer inventory levels; and incremental promotional support. The post-Olympics softening of raw material costs has not materialized, and that will impact our branded joint category margins.

We were successful in passing through higher raw material costs on certain private label items. Subject to potential impact from adjustment to and/or implementation of certain business initiatives, we believe selling and marketing costs will approximate 18 to 19% of net sales and other operating expenses will approximate $19 to $20 million.

While operating cash flows were not positive in the fiscal 2009 first half, based on our current forecast they will be positive for fiscal 2009. Actual results for fiscal 2009 may vary and are subject to, among other considerations, competitive conditions; raw material costs; and the other factors noted herein and in our public filings.

Our forecast will probably change as fiscal 2009 continues to play out. Again, thank you and now I will turn the time back to our President, Bruce Wood.

Thank you Joe. To sum up, we remain solidly profitable, financially strong and optimistic about our long term prospects.

At the same time, we recognize the general economic conditions will undoubtedly make the competitive environment even more intense in the [e-mass] category which may temper our near term results. Regardless, we are committed to competing vigorously on our base business while exploring new growth opportunities.

Thanks for attending today’s call and Joe and I are now ready for your questions.

Hi guys. Thanks for taking my call.

Just a couple of questions. First, on the kind of the promotional levels and how that will play out for the rest of the year, can you give us an idea of how promotional you guys were on the branded business during Q2 and then how that will play out over Q3 and Q4, if you have any visibility into that?

We’re continually promoting. I mean, if your question is in regards to promotional support for the second half as compared to promotional support for the first half, is that the gist of your question?

Yes, and just I guess at the level of looking at the retailer level as well, how they were pushing your product as well and how that will compare in Q2 to Q3 and Q4.

Well, just again looking back to the information that I provided, we do expect our selling and marketing costs in the second half to be above where they were for the first half, given that noted that overall for the year we’re currently forecasting them to be in the 18 to 19% range and they’re below 18% say for the first half. So and that’s from an overall standpoint which includes some additional TV and consumer support for both Move Free and MegaRed.

That’s the promotional support from the company. In regards to the retail accounts, we believe overall that there will be relatively consistent promotions playing out in food, drug mass.

We do anticipate there may be less promotional support or what we refer to as [pellet] programs in certain warehouse clubs in the second half, and that will clearly impact and leads to potentially some reduction in customer inventory levels.

And then on the inventory side, that was a pretty significant increase and I would have expected a lot of that build-up for at least the private label side to have already occurred in Q1 or Q4 of last year. Can you kind of give us an idea of what was the dominant factor in that increase?

Was it higher prices on the raw material? Was it because you guys keep getting more private label wins, can you give me an idea what that is?

Yes. Good question.

Fair question and certainly the private label component is included. However, the primary reason for the increase of say give or take $12 million from May 31 to November 30 really has to do with our buy forward strategy in situations where raw material costs have been going up, so we buy further out.

That, coupled with higher raw material costs is the primary reason for the increase. And then you have what I would refer to as the secondary reasons being, you know, the higher than expected private label business; the build-up for promotions in the third quarter; and so forth.

Can you go into that a little bit more on the buy forward strategy? I know you guys have been talking about that for a while, where you anticipate a higher raw material cost and so you were building up inventory.

And I guess if you were continuing to see pressure in this quarter, I would have expected, I guess, you guys to use some of your reserve in inventory and kind of wait or hope that the costs come back down. Do you guys – how much visibility I guess on that point is how much visibility do you guys have into raw material costs over the next 12 months or so?

Well, again, a fair question. I’m going to be somewhat hesitant to give you a full complete answer just for competitive reasons, but we do have and deploy a from time to time a buy forward strategy.

Clearly we’ve talked about that on previous calls. And then we have to weigh the pros and cons of trying to predict what’s going to happen in the future as to what extent we implement that strategy.

You know, what we believe the future price of raw materials are going to be and hence to your question, whether we say reduce our inventories on hand by dipping into our reserve as you say or continuing to buy forward. Again, without going into too much further detail, at least for the first six months of the year we have continued to buy forward, given the our belief as to what was happening in regards to raw material prices.

Now whether we continue to deploy that strategy for the rest of this fiscal year is yet to be determined. And we’ll see as we get data and intelligence from our various sources as to whether we continue the strategy over the second half.

And then final question is on the MegaRed. Do you guys have any significant new distribution wins in there and can you give us any sort of a sense – I know you’ve never wanted to get too specific in the past, but can you give us some sort of a sense on the magnitude of the revenues you guys are getting to date or what you expect to see in the latter half of the year?

Well, you know, I think we certainly talked about the distribution in Costco, certainly in Walgreen’s at this point. We do have it in a couple of the other drug accounts at this point and a couple of food accounts.

It is in as I believe you figured out, that it’s in a test basis in Sam’s Club and so forth. So we’ll continue to move forward with expanded distribution as we believe makes sense.

Again, the jury’s out still as to the long term potential for MegaRed, but obviously we’re we continue to be pleased with the results in certain accounts, as both Bruce and I referenced we do intend to put some TV support behind MegaRed in the second half because of our belief that and in support of expanded distribution in FDM. And in the warehouse clubs.

Regarding the retailer inventory rationalization, I’m just wondering are you seeing that in line with their general programs to rationalize inventory, or is there some special focus being placed on the VMS category?

I would say, Gary, that it’s a more broad scale reduction that we’re seeing. And it’s not universal just yet, but certainly large there are large national retailers who are taking a hard look at their inventories in light of reduced say same-store comp sales.

With the general economic conditions being what they are and I don’t think VMS is being singled out but it’s certainly not excluded from that process either, from what we can tell.

And is the inventory rationalization roughly equally applicable to all your products? Or is joint care perhaps less sensitive to that, because it deals with a more acute benefit to the customer?

Well, clearly we’re and I don’t think it’s any secret that the joint category or our joint category business is clearly historically been how we’ve buttered our bread. And we see the rationalization impacting the joint category as well.

And let me just add that you know to some degree, given the overall situation and the market conditions and what-not, and some uncertainty on a lot of fronts in regards to how calendar year 2009 will play out, I mean in my mind it’s a bit of a joint effort here. Maybe it makes sense.

You know, the retailers thinking it makes sense for them to have less inventories from a broad standpoint, including the supplements category. We believe some fronts that it may make sense for the retailers to carry less inventories as well, to see how calendar year 2009 plays out.

The short answer is it will impact our joint category as well.

And then finally is there actual reduced consumer take-away of VMS or especially joint care? Or is it just the retailer and competitive factors that are causing the difficult and challenging environment?

It’s the latter, Gary. The category as a whole continues at least as measured by IRI, so it doesn’t include the club or Wal-Mart sales.

But we’re still seeing category growth in dollars of, you know, well in the last 12 weeks even in the 6% range dollar wise. So there’s certainly some vitality on the consumer take-away front in the category as a whole, and joint care in particular.

I noted was down in dollars a couple percent but up in tonnage, so we’re still seeing positive improvement in consumer take-away even on the joint category as far as unit volume is concerned. So this inventory reduction is more of an internal realignment than a what I’d say is a reaction to problematic take-away in the joint care or the VMS category in particular.

Now again that varies by retailer, but it’s not a reduction that’s driven by a reduction in demand so far.

And on that, I mean we read all the newspaper headlines about the reduced prescription utilization and reduced doctor’s visits and you know those kind of effects due to the depths of the consumer slowdown, so I guess what we’re saying is that has not affected the VMS segment discernibly yet.

Not discernibly. Certainly some people may have cut back, either on their dosage rates or they may have moved from more expensive brands to cheaper brands, although that’s not necessarily a trend that you can discern either.

Its people in this category seem committed to preventative health and committed to continuing to take the supplements they believe in, and perhaps are cutting back elsewhere.

Or maybe you would have had even more robust growth if not for the economy, but the point is that you’re still having good sales trends. Well okay.

Thank you for your insights.

Just going back to inventories, can you expand on what raw materials in particular are continuing to increase in price? I think everyone expected them as you did to sort of decrease and maybe not even post-Olympics, but now that the economy is slowing.

So what’s the raw material that’s really giving you trouble? Is it across the board or is there one or two in particular?

Well, I think, broadly speaking I mean certainly raw material costs, especially those sourced out of China, have seen an increase. Now for us, more in particular the joint category which you know includes glucosamine and chondroitin are certainly pretty critical to us, and certainly in those with those raw materials again primarily sourced from China, there has been a pretty significant increase.

Now there was some belief and speculation and hope that post-Olympics, there would be a meaningful softening of the upward trends we were seeing pre-Olympics, but as of the end of the second quarter and that had not materialized. We certainly hope it materializes going forward, but as of yet has not materialized to the level we had hoped for.

And now what, I mean, as you think about this, is it just because there’s only one source? I mean, is it that demand is increasing and supply isn’t keeping pace?

Or –

Well, there’s – I’m sorry, go ahead.

No, go ahead.

I was just going to say there’s you know it’s a fair question and one I wish we had a, you know, we really knew all the answers to. Certainly there are a number of sources from China.

There are a number of factories and so forth that provide both ingredients and letter vitamins and so forth and so on. They’re typically multiple facilities over there that produce the various ingredients.

Pre-Olympics a number of those facilities were closed down, you know, and you speculate it was partially due to try to assist China in cleaning up their air and so forth and so on. The belief was that they would all open back up post-Olympics.

Some of them have not yet opened up, and so you know they have clamped down a little bit on the supply on that front. But in addition, you know, there’s some speculation that the stronger dollar, you know, foreign currency is impacting the pricing; just the desire to improve overall conditions over there; and so forth and so on, as far as how people are paid and treated.

So there are a number of factors. You know, we’re not sure which of those is say the primary fact or primary factors.

There’s a lot of speculation, but again, per our pre-Olympics belief and hope, you know, we have not seen the softening in a lot of the raw materials that was anticipated.

And that’s a big part of your inventory increase, I think you pointed that out, probably –

Well, higher raw material costs coupled with again from my earlier comments, you know, our buy forward strategy that we’ll deploy from time to time, given some uncertainty as to where raw material costs are headed, the combination of the two is certainly a key factor in the build-up of our inventories. And then as I noted earlier, you know, there are other considerations there as well.

I probably missed it, I know that private label sales were up 78.5% quarter over quarter. Your branded categories, which were did they all increase?

Or I think the number you gave out was it up 6% for the quarter?

It was up yes approximately 6%, 6.1% to be exact quarter over quarter. We had certain categories within our branded business that were up, but overall on a net net basis the increase, if you will or the 6% was driven primarily by MegaRed.

And you don’t break it out between units versus price, the actual increase?

No, we don’t, but I would tell you that and again going back to just the overall price comparative arena that we participate in with supplements, you know, volume or units would have been up a little bit north of that. But the price discounting will temper that a bit.

That’s encouraging if you have, you know, I mean this kind of captures October and November obviously, and some of the worst retail months we’ve seen on record, and the category is still up although prices are obviously going the wrong way. But that’s encouraging.

A couple questions about the raw materials and about the pricing. First on the raw materials, could you give us a sense of the magnitude of the increases?

Whatever metrics you’re comfortable talking about. And also what are some of the key raw materials that you’re buying and how far out have you contracted looking forward at the current or recent past prices?

Okay, let me – if I miss one of your questions, please remind me. So let me try to process those one at a time.

In regards to the magnitude of the increase, for competitive reasons we don’t want to be too specific other than to say as compared to what we were paying, raw materials in say fiscal ’08 versus what we’re paying for them in FY ’09, again keep in mind our key joint category business, the increase is significant. Okay?

Clearly significant. Now your next question was?

What are some of the raw materials, some of the chemicals that you’re buying?

Okay, so in regards to that again as I tried to explain before, for us where a significant part of our business in the joint category which is commonly referred to as the GC category, glucosamine and chondroitin, are certainly key raw materials that we source from China. In addition to those, I mean obviously we buy virtually all of the letter vitamins and you know a number of other raw materials as well.

And again, when it comes to letter vitamins, by and large they’re sourced from China as well, and generally speaking there’s been a pretty significant increase on a number of those as well.

Are you – obviously a lot of chemical prices have run up with general commodity prices and with [material] prices and now are coming down. Are you impacted by that, both on the way up and the way down?

Or is it a different pricing cycle?

Well, I mean, to some degree we’re impacted and we believe going forward the fact that energy prices have clearly come down recently, you know, we certainly haven’t seen a direct correlation in raw material pricing with the reduction in the price of oil or the per barrel price of oil. Now does that impact?

Will that impact the overall pricing or should it impact? Yes, we believe yes, but do we believe it will materially impact that one factor?

I would say no, but it should impact and still should represent some benefit to the pricing, but where again where most of the source is China we don’t anticipate a significant reduction in pricing due to the per barrel price of oil being down dramatically.

On the prices either the wholesale prices or the retail prices, just first of all, is there pressure on both? Are retail prices down as well as wholesale?

Or is it primarily the wholesale prices [inaudible] pressure?

Is your question in regards to raw materials or our products? I’m sorry.

I had switched them. I’m now talking about products.

Sorry for not clarifying that. I’m now talking about the products, the prices you’re receiving on the revenue line.

Is it a wholesale price pressure or is it both wholesale and retail?

Well, it’s more at a retail price. I mean, at a wholesale price, you know, there’s always a debate, there’s an ongoing debate, especially when you’ve got higher raw material costs as to whether you attempt to pass through price increases, either for your brand new products or for the private label products that you may be manufacturing for a customer.

As I noted in my comments, we have been successful in passing through price increases on certain of the private label business that we have. In regards to our branded products, I wouldn’t say there’s been a tremendous pressure on the wholesale pricing but there certainly has been ongoing consistent and frankly increasing pressure at the retail pricing level such that, you know, our sales as well as the competition have pretty consistently been promoting our branded products in the form of, you know, various price discounts and so forth.

Does that answer your question?

Somewhat. Could you maybe give an example for a high volume SKU you have, what it might be selling for at retail today versus let’s say a year ago?

Well, on an everyday basis, I don’t know that you would see on a non-promoted, everyday basis the price should be pretty close to the same. Okay?

But now if you factor in promotions, and please keep in mind that a lot of products, a lot of supplements as well as just generally speaking consumer packaged goods, much of it sells on promotion versus off promotion. So if you look at it that way, as compared to a year ago, maybe your price discount this year or the coupon that you’re running this year is say $5 off versus a year ago or 18 months ago, it would have been say $4 off.

Does that give you a little bit of a perspective?

Yes, thank you. And I guess just maybe to sum up on both my questions, I might have missed it, did you give any overall impact of A, the raw material price increases or B, the pricing pressures?

Did my comments include specific impact of just the raw material costs? Is that your question?

Yes. Like the impact on cost of goods versus a year ago was X% due to higher raw material prices.

We didn’t – I didn’t go into that much detail. I did say that, you know, we now are forecasting our gross margin this year to be in the 36, 38% which is clearly down from say it was a year ago.

And part of that is certainly due to higher raw material costs, but there are other key factors as well, not the least of which is a much higher mix of private label sales in our portfolio versus a year ago. And private label sales just generally speaking have a lower gross margin attached to them than our branded business.

Thank you Dan and thanks to all who are listening again for your interest in Schiff. We do look forward to reviewing our fiscal ’09 third quarter results with you in late March, and in the meantime have a happy and healthy holiday.