Reckitt Benckiser Group plc

Bruce Wood - President and CEO Joe Baty - Executive Vice President and CFO Cathy Mattison - Lippert/Heilshorn & Associates

Nick Genova - B. Riley & Co.

Gary Giblen - XEM Capital Adam Fisher - Bernham Damien Wacowski - Gabelli & Company

Thank you, [Ebert]. Thank you all for joining us this morning for the Schiff Nutrition International fiscal 2009 fourth quarter and year-end 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. Good morning and welcome to our fiscal '09 fourth quarter and year-end conference call.

During the fiscal year just ended we continue to strengthen our balance sheet and we remain committed to our long-term goal of profitable growth in our branded business, while exploring new organic and external growth opportunities. Our full year net sales increased almost 8%.

We were solidly profitable and we added to our net cash position and what proved to be in overall challenging year. In the fourth quarter, our results reflected the ongoing very intense competitive environment in the mass market supplements arena, coupled with decreased demand, as many retailers reduced their overall inventory position in the face of difficult economic conditions.

Our fourth quarter net sales decreased just over 9%, where the branded sales decreased more than offsetting an increase in private label sales. Accordingly, our profit measures were down versus the year ago period and in a few minutes, Joe will cover the detail comparisons for you in his comments.

Despite these pressures and in keeping with our long-term investment philosophy, we continue to capitalize on our strong financial position. During the fourth quarter, we elected to invest in consumer marketing support of our brands at a level comparable to the year ago period.

Competitively speaking, our flagship Move Free brand sales, along with those of most other national brands were impacted in the quarter, by our resurgence in private label joint care volume. The overall IRI measured joint care category was flat in dollars, but up 10% in unit volume in the 12-weeks ending May 31st.

In the same period, private label dollar sales were up 3.9% and unit volume was up 6.9% reflecting a general consumer trend of trying cheaper products in this prolonged recessionary period. We continue to be encouraged with the performance of our new Schiff MegaRed krill oil product, which benefited in the quarter from national marketing support in the form of TV and print advertising, FSI couponing, in-store demos, PR and several accounts specific promotions.

While we expect the difficult competitive and general economic conditions to continue for the foreseeable future, we do remain confident in our ability to compete effectively in the long-term. We expect to continue our support of Move Free and MegaRed in particular and plan to pursue other organic branded and private label growth initiatives, as well as, potential acquisition opportunities.

At the same time, we remain committed to delivering value to our shareholders and are pleased today to announce $0.50 per share special dividend to our shareholders of record as of close of business, August 14. The dividend payment reflects our confidence; the company will continue to generate positive cash flows from operations during fiscal 2010.

We believe our cash position after the dividend payment provides us with the financial flexibility to continue investing in our business, funding growth initiatives, and exploring acquisition opportunities. Let me now turn the call over to Joe, for his comments.

Thank you, Bruce and good morning to everyone. Earlier today, we announced financial results for our fourth quarter and year-ending May 31, 2009.

Fiscal 2009 fourth quarter net sales decreased approximately 9.3% to $45.7 million from fiscal 2008 fourth quarter net sales of $50.4 million. Consistent with expectations on a quarter-over-quarter basis, branded sales decreased and private label sales increased.

Aggregate branded sales amounted to $30.5 million and $37 million respectively, and private label sales were $15.2 million and $13.4 million respectively. Fiscal 2009 and 2008 net sales were a $190.7 million and $176.9 million respectively, reflecting an overall increase of 7.8%, driven by private label sales growth.

Branded net sales were $131.8 million and $139.2 million respectively and private label sales were $58.9 million and $37.7 million respectively. We believe the overall 5.3% decrease in branded net sales which occurred during the third and fourth quarters, reflects among other factors, a reduction in joint care category volume resulting from adjustments to customer inventory levels, some shift to private label, due to significant price discounting and the impact of uncertain economic conditions.

The overall 56.2% increase in private label business was primarily due to incremental business awarded during the latter part of fiscal 2008, together with an increase in customer promotional activity on existing business. Gross profit as a percentage of net sales was 30.7% for the fiscal 2009 fourth quarter, compared to 41.7% for the fiscal 2008 fourth quarter.

Gross profit percentage for the fourth quarter decreased primarily due to a higher mix of private label sales, higher raw material costs, and incremental promotional costs. Gross profit percentage was 35% for fiscal 2009, compared to 42.1% for fiscal 2008.

The overall year-over-year decrease in gross profit percentage reflects, among other factors the reduction in branded joint category sales, the significant increase in lower margin private label sales, higher raw material costs and incremental promotional cost. Total operating expenses were approximately $13.5 million or 29.6% of net sales for the fiscal 2009 fourth quarter, compared to $16.8 million or 33.3% of net sales for the fiscal 2008 fourth quarter.

Selling and marketing expenses increased as expected to 19.5% of net sales for the current quarter from 18.4% of net sales for the prior year quarter, primarily resulting from incremental support for MegaRed. The approximate $2.9 million quarter-on-quarter decreased for other operating expense, primarily reflects certain costs incurred in fiscal 2008 that were not repeated in fiscal 2009.

These include among other items, $1.4 million in M&A related cost, $0.5 million in unusual compensation charges and $1.3 million in management incentive costs. Selling and marketing expenses as a percentage of net sales were constant at 17.7% for fiscal 2009 and 2008.

As reported operating income for the fiscal 2009 and 2008 fourth quarter's was $0.5 million and $4.2 million respectively. The quarter-on-quarter operating margin decline reflects the impact of the significantly lower gross margin, partially offset by the unusual product order expenses and much lower management incentive cost recognized in the current quarter.

Operating income from fiscal 2009 and 2008 was $15.2 million and $16.4 million respectively. Fiscal 2008 operating expenses include non-cash unusual compensation costs associated with the first quarter special dividend.

Compensation charge was $0.6 million for the fiscal 2008 fourth quarter and $4.9 million for full year fiscal 2008. Other income net, primarily consisting of interest income, net of interest expense was $0.1 million income for the fiscal 2009 fourth quarter, as compared to $0.3 million income for the fiscal 2008 fourth quarter, primarily reflecting a lower yield on investments.

The effective tax rate for the fiscal 2009 fourth quarter was 7.7%, reflecting further realization of more favorable than expected income tax credits. The fiscal 2009 effective tax rate was 35.2%.

As reported, net income per diluted share was $0.02 for our fiscal 2009 fourth quarter, compared to $0.10 for our fiscal 2008 fourth quarter and $0.36 for fiscal 2009 as compared to $0.40 for fiscal 2008. In regards to the balance sheet, working capital increased to $92.2 million at May 31, 2009 from $81.5 million at May 31, 2008 reflected primarily by an increase in cash and cash equivalents and a reduction in current liabilities.

Special dividend potentially aggregating almost $15 million will be funded from cash and cash equivalents. Approximately, $44.4 million of the distribution will occur in the next month.

The remainder will be distributed upon investing if it all of underlying stock, stock awards and in certain cases upon actual receipt of the deferred shares. In connection with dividends paid on outstanding shares we believe that distribution will qualify as dividend income to the recipient.

Stock-based compensation expense amounted to approximately $0.1 million and $0.9 million for the fiscal 2009 and 2008 fourth quarters and approximately $0.4 million and $3.7 million for fiscal 2009 and 2008 respectively. Depreciation expense was constant at approximately $0.8 million for the comparative quarters and approximately $3.1 million and $3.5 million for fiscal 2009 and 2008 respectively.

Capital expenditures were approximately $3.4 million and $3.2 million respectively for fiscal 2009 and 2008. Subject to the ongoing impact of competitive pricing pressures, including from both branded and private label products, stability in customer retail inventory levels and with raw material availability, among other factors, we are currently forecasting a low single-digit net sales increase for fiscal 2010 as compared to fiscal 2009.

While difficult to predict the impact of ongoing uncertain economic conditions, we believe the majority of our customer's reset their retail inventories is complete. We also believe the modest increase will primarily be due to overall branded growth.

We are currently forecasting fiscal 2010 gross profit percentage to approximately 35% to 36% on the low end to 37% to 38% on the high end, compared to approximately 35% for fiscal 2009. The increase assumes a change in sales mix from an increase in branded sales, overall lower raw material prices, reasonably stable raw material availability, particularly for our key products and relatively constant promotional activity among other factors.

Selling and marketing costs as a percentage of net sales are currently forecast to approximate the fiscal 2009 percentage, subject to new product sales results and competitive pricing pressures. Other operating expenses net primarily excluding the potential impact of certain long-term management incentive plans may approximate $18 million to $20 million.

We are currently forecasting a high single-digit, low double-digit operating margin for fiscal 2010. We currently expect capital expenditures for the next 12 months to approximate $3 million, and our expected tax rate for fiscal 2010 currently approximates 36% to 38%.

Actual results for fiscal 2010 may vary and are subject to among other factors, factors noted herein and in our public filings. As further evidenced by payment of the special dividend, we believe our operating cash flows will be positive in fiscal 2010.

But our forecast will change as fiscal 2010 plays out. Again, thank you.

And now, I will turn the time back to our President, Bruce Wood.

To sum up then, while the intense competitive conditions and weak economy appear to be facts of life for the foreseeable future, we remain solidly profitable and financially strong. As a result, we're confident about our future prospects.

We are well prepared to compete aggressively, both the short and long-term and are committed to delivering value to our shareholders as evidenced by today's special dividend announcement. Thanks for listening, and Joe and I are now ready for your questions.

First question on the industry overall; it seems like the IRA data shows that branded sales remained strong even in this environment. It seems like you guys are seeing a little bit different impact within the joint care category.

Can you talk to what makes the joint care category kind of unique in this case? And what the outlook is specific to joint for 2010?

This is Bruce, Nick, good morning. I think you have an accurate take on the overall category.

It is showing a decent growth in the six plus percent rage as measured by IRA for all supplements. The joint care category, as I noted in my remarks is essentially flat in the last 12-weeks and is well below that growth rate of total BMS on an annual basis.

We believe first off, it's one of the more mature supplement categories. It's been in place now for over a decade.

So, there is certainly a familiarity on the part of consumer with that category. The most, I think the significant factor for joint care is that it's a relative expensive product, whereas we can get vitamin C, vitamin E, fish oil products for well below $10 for more than a month supply often many more months than that.

Glucosemine the growing product, because of the raw material costs are much higher priced in that $20 plus range and of course non-reimbursable in almost all insurance plans. So, it's a major outlay for the consumer.

They are by nature again our older consumers and therefore probably on more limited income. And that I think is a dynamic that continues to put the consumer in the bargain finding mode, and that's how the category is playing out right now.

We have certainly unit volume and the number of tablets being sold continuously increase. So, there is increased acceptance by the consumer at the same time they are paying fewer dollars for it and most notably recently private label.

So then when we are looking at the 2010 guidance, with understanding the dynamics within the joint care category. When you guys are talking about branded growth in 2010, how much of that is the joint care bouncing back or is it other products, such as new products or just existing branded products that are going to become a larger portion of the overall branded mix?

Well, we hesitate on providing too detail. We clearly, believe that our joint business will see some modest growth.

But say its combination of may be some modest growth in the joint category, coupled with probably some growth some of our other products including MegaRed.

And then on the margin side, you guys came in around 30% in Q4 I believe and then you're projecting a pretty nice rebound in 2010. So, I'm trying to wrap my arms around that.

Understanding the mix shift is going to play a big role on that. But what else are you guys seeing out there I mean are you comfortable with where private label margins are at right now or is there room to increase prices in that area?

And I mean just in general, how much of the outside of mix? What are the other factors playing into the increasing gross margins?

Well, I think there are two or three other key factors. First position, I try to address couple of these in my comments.

As we do believe and what we're seeing is overall lower raw material costs and we talked about that on the last call or so, although we had bought four over, so we didn't necessarily realize much benefit of that in FY '09. But we clearly expect to see some benefit of lower raw material costs in fiscal 2010.

In addition, we have seen evidence that there is room to pass on price increases for certain private label products and so forth. So, we believe that will factor in.

So those factors coupled with some more, hopefully some relatively stable promotional activity and a little bit better branded mix in the overall sales mix. We believe in aggregate lend themselves to and improvement in our gross profit percentage.

Then final question, on the MegaRed product and specifically national advertising, it sounds like you guys did pretty solid campaign in Q4 for that product, national campaign. Do you expect that to continue at the same rate going into 2010, are you cutting back ink a little bit color behind that?

Well for a number of reasons our go forward plan is going to reflect an increase in the full year for the brand spending on MegaRed because, we are encouraged by the results and there response to the advertising in particular. But, how that plays out quarter-by-quarter, we're still considering in the sense that we're still rolling distribution out and expected to do so in the fall.

So, we want to true that up and distribution increase with the spending on the advertising, to get the best bank for the box.

I have a couple of questions, please. The inventory reductions mentioned in the press release, are those reductions of days on-hand, or does it also include situations where whole brands might be eliminated by some retailers?

While Gary it's a combination of both. Where we have good visibility to retailer inventories of our products, we've certainly seen decreases in weeks of supply as they managed down their inventories on SKUs that they intend to carry going forward.

There has also been pronounced efforts particularly in the drug class of trade to also decrease the total SKU count in the stores, in general and certainly the BMS category is no exception to that. So there has been and if you follow in any of the major national drug chain earnings calls, you'll note that there are some pretty specific numbers that are offered in terms of numbers of SKUs or percentage of SKUs that have been discontinued to offer more clean environment and stick with the best selling products.

Do you feel that Schiff has maintained its share of shelf space? In other words, if Walgreen as we do, just to pick company as publicly announced the SKU reductions, if they have reduced 15% of their BMS SKUs so are you inline with that or a better or worse?

I mean not Walgreen specific, but just in free drugs…

Our major SKUs, our experience has been positive.

So, you feel like you're being reduced less than the general industry?

We feel we are pretty well positioned in terms of our SKU count. Our approach to the market is not to try to over SKU, our brands or overload the retailer with SKUs that are ultimately not going to make the cut.

So in that sense, we stay very focus and discipline in that regard.

During the quarter, did you make a strategic decision to keep the selling and marketing expenses up, despite the demand? I mean I guess the earnings release implies that yeah, you did that, you consciously did not reduced your marketing as much as you could have.

So I guess the question is, was that a reasonable option as well. Could you have had lower selling and marketing inline with the lower gross margin and lower sales and then just choose to invest a bit for the future that's the general senses?

In my remarks Gary, I think I answered that question in a sense that, we do run this business for the long-term and it was clearly not the best quarter results wise for us. But, we remain committed to growing our branded volume and supporting it with consumer marketing and that was just distinct and deliberate decision to do, so in the face of some short-term headwinds.

So, we are very financially strong as you know and that is our long-term commitment to grow our brands.

Just finally, do you think the promotional environment is just stable now or is there any relief in sight?

Again in general, and I think in joint care in particular the price promotional activity is pretty intense. It would be difficult to foresee it getting even more intense because promotion frequencies are very high and high, low retailers.

And there is not much room for moving beyond the promotion frequency, so that we are seeing right now. So I would say we don't see any slackening in that at this stage because of the fight for market share and we have other aggressive competitors.

But we again believe we are well prepared to deal with that.

Can you just talk a little bit more about some of the new products that kind of bar opportunities that you're investing in whether we'll see any in kind of the new fiscal year? And maybe specifically talk about the new Infinity product and how that's going?

Well, let me address infinity. First, we did a market test on our product with the brand name Schiff Infinity vitamin D based product, with other ingredients.

It was in our limited regional test and one large retailer. We've completed that test.

We believe that the category will continue to support new items, the vitamin D categories is very vibrant right now. We believe also that we need to recalibrate that particular product that's why we do tests.

So at this point, we're completing the test and will obviously be thinking about how we recalibrate that product for future distribution.

But that's an area that a vitamin supplement that you guys continue to be interested in and it's relatively large market as far as I know, right?

Yes, vitamin D has more than doubled than the past year as measured by IRI. There is a wealth of positive press on the products and on the basic vitamin, so there is a little controversy about its benefits.

So, we believe that it continues to offer opportunity and as we do with our other brands, we look for opportunity to differentiate and offer, perhaps the period of benefit. So that's our future plan for Infinity as to…

Do you calibrate on a couple of fronts? Do you think that reformulation will be; is a relatively simple task for you or do you know you need to do or it is more kind of fundamental?

Well, we are not getting into the specifics for competitive reasons. Well I think we have a clear idea of what we'd like to do differently.

And one of the aspects of this category is that things move, competitors move very quickly and we need to in a sense consider that we want to leapfrog, the current state of the vitamin D category competitively speaking with our future offering. And the second question that we definitely have plans to continue to test in fiscal '10, again for competitive reasons I won't share specifics.

But we believe you'll see a test in certain retailer in the second quarter.

Questions to raw materials you said specific benefit in the fourth quarter because your hedge. Just wondering what your hedge position is for next year, if any?

Yes, I did comment that, well just historically we've typically brought forward through X number of months and we continue to do that. I would say, on certain raw materials for FY '10, we have brought through at least through the first couple of quarters, which gives us again a little more confidence in regards to that gross profit percentage.

Because they are on average lower than a year ago?

On average it's compared to a year ago, I mean in terms of the raw materials I would say as of 6 months ago, we're probably a little further out as compared to a year ago, maybe we're a little less further out.

Then on private label you commented that that's where the growth is in general and in joint category in particular. But if you are assuming the next year, the growth for you is going to come from the branded category.

Is that deliberate or is that because you are seeing more competition on the private label side and you just don't want to lower your prices that much?

Damien, let me just make sure I understood your question, you cut out their in the middle. Is your question in regards to, can we believe that our growth in FY '10 is pretty much of branded.

So then as far as private label we don't like see much growth their, because relatively constant pricing and/or constant volumes, was that [logistively] there?

The question is really, are you seeing the business just get so competitive price wise that you don't want to compete in the category, because I am assuming the category, the private label category, even beyond joint help is still growing. You had tremendous growth in 2009 for obvious reasons.

But now that you're cycling those numbers next year I mean, you don't think you can not gain any share in the private label categories?

I understand the question, good question. As we sit here today as looking at our forecast for FY '10.

We see relatively constant private label sales and you're correct. We are anniversarying here in the fourth quarter, what some of the business we picked up from the fourth quarter of 2008, so in regards to our forecast as of today, relatively constant or flat private label sales with expectations.

Now having said that, we are still very interested in pursuing additional private label business and as opportunities arise and we believe they will that include, reasonable rate of return and so forth, we will certainly pursue those. On the next call, in fact we've picked up some additional private label business and it impacts our forecast and we'll update the guidance.

Do you do any private label in joint care or is it all branded?

Well, yes. I mean, the short answer is yes.

I mean, we do provide some private label in joint care category, for certain accounts.

Thank you, [Ebert]. To all who are listening we appreciate your continued interest in Schiff today.

We look forward to reviewing our fiscal '10 first quarter results with you in late September. Good day.

Thank you.