Reckitt Benckiser Group plc

Rebecca Herrick - Assistant Vice President of San Francisco Office Tarang P. Amin - Chief Executive Officer, President, Director and Member of Executive Committee Joseph W.

Baty - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Michael W. Gallo - CL King & Associates, Inc.

Lee J. Giordano - Imperial Capital, LLC, Research Division Frank A.

Camma - Sidoti & Company, LLC Damian Witkowski - Gabelli & Company, Inc.

Thank you, Deana, and thank you, all, for joining us this morning for the Schiff Nutrition Fiscal 2012 Fourth Quarter and Year-end Results Conference Call. By now, you should have received a copy of the press release.

But if you have not, please contact LHA at (415) 433-3777, and we will forward you a copy. As a reminder, this call contains forward-looking statements that are based on management's beliefs and assumptions, expectations, estimates and projections.

These statements, including those relating to the company's fiscal year 2013 outlook, are subject to known and unknown risks and uncertainties, and therefore, actual results may differ materially. Important factors that may cause actual results to differ from those expressed or implied by such forward-looking statements are detailed in today's press release and the company's SEC filings.

In addition, the company's presentation today includes information presented on a non-GAAP basis. The company defines adjusted EBITDA as income from operations exclusive of completed acquisition-related costs and non-cash charges for depreciation, amortization and stock-based compensation.

The company believes these non-GAAP financial measures provide meaningful supplemental information regarding its operations. We refer you to the press release the company issued this morning, which is available on the company's website, for a reconciliation of the differences between the non-GAAP presentations and the most directly comparable GAAP measures.

With us from management today are Tarang Amin, President and Chief Executive Officer; and Joe Baty, Executive Vice President and Chief Financial Officer. It's now my pleasure to turn the call over to Tarang.

Please go ahead, sir.

Thank you, Becky, and good morning, everyone. We're pleased with our fourth quarter and fiscal year 2012 performance as it reflects strong execution against our growth strategy.

In the fourth quarter, net sales grew 30%, driven by a 59% increase in our branded business. Gross profit margin grew 1,100 basis points to 49.5% and adjusted EBITDA increased 66%, reflecting progress building premium brands, leading innovation, expanding the channel and geographic footprint of the company, pursuing acquisitions and driving world-class operations.

Our probiotics and Airborne acquisitions added to the strong contribution of our core brands, MegaRed and Move Free. For fiscal 2013, we are committed to growing our portfolio of leading brands through continued innovation and excellent execution.

Now I'll provide a brief update on our recent progress. Our first strategy is building premium brands.

At the beginning of fiscal 2012, we significantly increased our investment in selling and marketing. We believe that the category and our leading brands are better served to advertising innovation rather than by the deep price discounts, which are prevalent in our industry.

Throughout the year, this strategy drove strong growth in our business. The fourth quarter continued this trend with our branded business up 59% versus a year ago.

We grew all key brands, and we can see the correlation between our brand-building efforts and business results. This quarter, we started a new Move Free marketing campaign, Healthy Joints Move Free.

We've integrated the campaign across multiple consumer touch points, including television, print, digital, in-store and any website. Early results from this effort are promising.

Similar to Move Free, we will continue to refresh each of our key brands. We've also integrated Airborne, which we acquired March 30, into our existing brand infrastructure.

We're gearing up the marketing for Airborne and look forward to apply the same brand-building capabilities that we've used with our other brands. Our second strategy is leading innovation.

The best way that I know to build premium brands is to lead the innovation in our categories. In fiscal 2012, we did just that.

MegaRed Extra Strength, which provides 500 milligrams of our MSC-certified krill oil and Move Free Ultra, which provides joint care in the smallest pill available on the market, both led innovation in their categories. Progress continued in the fourth quarter.

For example, we expanded distribution for MegaRed Extra Strength to all Costco Club stores. Our innovation team continues to build and expand a robust product pipeline across each of our brands.

In addition to product advances, we continue to augment our industry-leading Scientific Advisory Board. When we announced the Airborne acquisition, we set the goal to bring on a leading expert in immunity.

During the quarter, Dr. Martin Blaser, Chairman of the Department of Medicine at New York University Medical Center during their SAB.

Dr. Blaser is one of the world's leading experts on immune support, and we look forward to collaborating with him.

Our third strategy is expanding the channel and geographic footprint of the company. Our most important focus is to help grow the category for our retail partners.

This fiscal year, we achieved significant expansion of distribution at many of our customers. We also participated for the first time in many of their key theme promotions, securing better display and feature support.

Our efforts resulted in accelerated sales growth for our brands, with lower levels of price discounting. In the fourth quarter, we also continued expanding Digestive Advantage gummies into drug and mass merchandisers.

These gummies contain our BC30 probiotic and taste great. In July, we welcomed Rich Baruch to Schiff as our Chief Commercial Officer.

Rich brings an extensive background in sales, marketing and general management, with over 20 years of experience expanding brands and delivering results at leading companies such as Coca-Cola, Clorox and Procter & Gamble. Rich will work with the rest of the team to further expand our channel and geographic footprint.

Our fourth strategy is pursuing acquisitions. During fiscal 2012, we integrated 2 acquisitions: probiotics in the beginning of this fiscal year and Airborne at the end of the fiscal year.

Airborne is the year-1 synergies and people and warehouse consolidation have been confirmed and executed. Sales, marketing and other functional transitions have also gone smoothly.

We're now working on year-2 manufacturing synergies. Looking ahead, we continue to build our capabilities for future acquisitions, and we'll employ the same criteria to evaluate potential candidates.

Our final strategy is driving world-class operations. As I've stressed before, world-class operations start with world-class people.

I'm proud of the terrific team we have at Schiff. Recently, our EVP and CFO, Joe Baty, was honored by Utah Business Magazine as the CFO of the Year.

This well-deserved recognition reflects the many contributions Joe has made over the years to the company and in industry. We continue to build a team with world-class talent across each area of the strategy.

In summary, it's been gratifying to see how quickly the businesses responded to our 5 growth strategies. I am pleased with the results the team delivered in fiscal 2013, and I'm even more excited by our future prospects.

In fiscal 2013, we expect sales to grow between 40% and 43%, and gross margins to be between 48% and 50%. Now I'll turn the call over to Joe Baty for a more detailed review of our fiscal 2012 financials and fiscal 2013 outlook.

Thank you, Tarang, and good morning to everyone, and thank you for calling in today. I'd like to start by sharing some FDMx year-over-year IRI data for the 12 weeks ending July 8, 2012.

The overall supplements category grew at approximately 4%. Joint care was down 6%, probiotics grew 10%, and fish oil and overall immune support were relatively flat.

Schiff Nutrition net sales increased 30% to $67.4 million for the 3 months ended May 31, 2012, compared to $51.9 million for the same period in the prior year. The increase in revenue reflects significant branded growth, including new product contributions from MegaRed Extra Strength and Move Free Ultra, among others, and the impact of another quarter of the probiotics acquisition, as well as 2 months of the Airborne acquisition.

Please note, we will continue to provide total sales broken down by branded and private label. However, we will not break down sales by individual brand for competitive reasons, because we have achieved a level of diversification over the past 12 months, such that no single brand or segment dominates the portfolio to the magnitude joint care did historically for Schiff.

Branded sales grew 59% to $59.9 million, representing 89% of our net sales, which was slightly higher than expected. This compares to $37.7 million or 73% of net sales for the same period in the prior year.

Inorganic sales for the quarter were approximately $9 million, including the impact of both acquisitions. Airborne performed to our expectations for the first 2 months.

As previously disclosed, Airborne's revenue stream is seasonal, with lower contributions in our fiscal fourth and first quarters. Private label sales were $7.5 million compared to $14.2 million.

As previously guided, the decrease was consistent with expectations. Gross profit increased to $33.4 million from $19.8 million in the prior-year period.

Gross profit as a percentage of net sales increased to 49.5% from 38.2%, primarily due to the much higher mix of branded sales. Total operating expenses were $27.1 million as compared to $14.9 million reported in the year-ago period.

As previously guided, we increased advertising and marketing support. In aggregate, advertising, consumer marketing and other promotion expense in the fourth quarter increased almost $6 million versus a year ago.

Total selling and marketing expenses were 22.7% of net sales as compared to 16.2% for the prior year period. Other operating expenses totaled $11.8 million for the current quarter, including $3.4 million in costs associated with the Airborne acquisition, $0.6 million in incremental amortization expense, an increase in management incentive award expenses, other incremental personnel and infrastructure-related costs and higher legal fees, primarily related to litigation, among other factors.

This compares to $6.4 million reported in the year-ago period, which included $1.2 million in acquisition-related expenses. The effective tax rate for the current period was 55.3% compared to 36.2% for the prior year period.

Of the $3.4 million in fiscal 2012 fourth quarter acquisition-related expenses, $2 million is not deductible for income tax purposes. Accordingly, the tax rate for the current period increased significantly.

For our fourth quarter ended May 31, 2012, as reported, net income was $2 million or $0.07 per diluted share compared to $3.1 million or $0.10 per diluted share for the fourth quarter ended May 31, 2011. Adjusted EBITDA was $12.4 million compared to $7.5 million for the prior year quarter.

Now moving on to the full year fiscal 2012. Net sales were $258.9 million compared to $213.6 million for the prior year.

Net income was $13.7 million compared to $12.6 million. Earnings per diluted share were $0.47 for fiscal 2012 compared to $0.43 for the prior year.

Adjusted EBITDA was $38.7 million compared to $28.9 million. On to the balance sheet and comparing May 31, 2012, to May 31, 2011.

Working capital was $52 million at May 31, 2012, as compared to $79.6 million at May 31, 2011, primarily reflecting the impact of 2 acquisitions. Cash and cash equivalents, including both current and long-term investment securities, were $14.4 million compared to $46.7 million.

During fiscal 2012, we paid down in aggregate $48 million of $190 million borrowed to fund 2 acquisitions. We also incurred $9.2 million in debt issuance costs and invested $2.7 million in capital expenditures.

The aggregate $59.9 million use of cash was partially offset by strong operating cash flows of $28.9 million in fiscal 2012. Inventories were $41.4 million and $34.9 million at May 31, 2012, and 2011, respectively.

The year-over-year increase primarily reflects the impact of both organic and inorganic sales growth. Shifting gears to our fiscal year 2013 outlook, we currently forecast overall net sales growth between 40% and 43% for fiscal 2013.

As compared with fiscal 2012 sales of $258.9 million, the growth ranges from approximately $103 million to $111 million, which includes contribution from new products, brand building and Airborne. As previously disclosed, Airborne sales for the 12 months ending February 29, 2012, were approximately $72 million.

Private label sales are expected to be flat to modestly up for fiscal 2013 as compared to fiscal 2012. Gross profit percentage is expected to be in the range of 48% to 50% compared to 46.1% for fiscal 2012, reflecting the higher mix of branded sales.

Selling and marketing expenses as a percentage of net sales are expected to be in the range of 25% to 27%. The increase from fiscal 2012 primarily reflects continued investment in our key brands, including the impact of the Airborne acquisition and support for new products, funded in part by expected incremental gross margin dollars.

Other operating expenses, net, including assumptions regarding the impact of management incentive awards and ongoing legal fees, among other factors, are estimated at $35 million to $37 million. The increase from 2012 is primarily attributable to a significant increase in amortization expense, investment in key personnel and infrastructure in support of our long-term growth initiatives, incremental research and development costs in support of new products and third-party professional fees, among other factors.

Fiscal 2013 amortization expense is currently forecast at approximately $6 million but subject to change, based on final valuation of net tangible and intangible Airborne assets. We currently expect our operating margin for fiscal 2013 to approximate 12.5% to 14%.

Overall cost of borrowing is estimated at 7.5%. The outstanding Term B debt amount of $140 million requires repayment of $1.4 million during fiscal 2013.

Planned capital expenditures approximate $5 million. Depreciation expense is forecast at $4 million to $4.5 million.

Non-cash stock compensation expense is forecast at $4 million to $4.5 million. Our effective tax rate is expected to be 37% to 39% for fiscal 2013.

Again, thank you for participating today. And now we will turn the time back to our President and CEO, Tarang Amin.

Thanks, Joe. Fiscal 2012 demonstrated the power of strong execution against a simple, yet compelling strategy.

We did what we said we would: invest in our brands and innovation to accelerate the growth of our business. As a result, our net sales, gross margins and adjusted EBITDA grew.

We also continue to position Schiff for the long term, building capability and making key acquisitions to expand our portfolio of leading brands. For fiscal 2013, we remain committed to building upon this momentum.

I very much look forward to sharing our progress during future calls. Now operator, we can open up the call for questions.

Tarang, my question is on just the distribution opportunities, some of the SKU opportunities that you see at Airborne. I wasn't sure if I call it right in the remarks, but it sounded like we hadn't really forecast any meaningful growth in sales at Airborne.

I was wondering if you could just clarify what's kind of embedded in the expectations. And then if you could talk about what kind of distribution opportunities and SKU opportunities that you see at Airborne as you look at putting it through, obviously, your own sales and distribution network.

Sure. So Michael, what I'd tell you on Airborne is we're no longer breaking out individua brand's detail, but what I will tell you is the overall sales growth that we have forecasted at 40% to 43% includes growth for Airborne, as well as our other core brands.

In terms of distribution opportunities, we're going to use the same things we did in 2012. We grew major distribution points across a number of retailers on our core brands, MegaRed, Move Free, as well as our probiotics business, primarily through innovation and getting our new items out there.

We have many of the same plans for Airborne. They had a very good innovation last year in terms of Airborne chewables, which has done extremely well in the marketplace.

We plan to get that out into more doors, as well as additional innovation that we'll talk to you about next quarter.

Additional innovation, would that be something we're looking at the BC30 combination or is that still further out?

We usually don't talk about our innovation until we get it into our customers, so I'm going to continue not talking about it. But I will tell you is there will be a robust pipeline of innovation in Airborne, just as there has been on our other brands.

Okay, great. And then just something that would help, Joe, in the future.

And I think there was a little confusion on there just the reported results, given the -- sort of breaking out the $3.4 million. You had to kind of dig through the tables, I think, to find it.

So I think, I guess, if you could sort of break it out maybe a little more upfront. I think it's just be a little more helpful in helping people analyze it.

But thanks very much.

Okay, thank you.

Can you talk a little more about the joint care business? Are you continuing to see a stabilization there?

And just any color on the category overall would be helpful.

Sure. I think Joe shared the numbers.

Accordingly, IRI data, the last 13 weeks in joint care for the total category is actually still down. It's about 6%, if I recall, down.

Our business again, while we're not providing the specific details, was significantly up and did certainly beat those category trends. We believe the combination of our investment in Move Free, particularly in the advertising consumer initiatives as well as our innovation, Move Free Ultra has done extremely well in the marketplace, has really helped our joint care business in total, as well as what we're seeing in other joints.

So we remain very confident of our strategy and our plan to continue to drive that business.

Great. And then just on the acquisition environment, how do you see the opportunities moving into 2013?

And what is your appetite for a near-term acquisition, considering you're still integrating Airborne?

We feel great about the integration so far of Airborne. As I mentioned, the marketing has been totally integrated into our brand organization.

We've already confirmed many of their year-1 people and warehouse, as well as some of the other transitions that we've done. So we feel great about our ability to kind of integrate in the acquisition.

We'll continue to look at acquisitions that meet our criteria, particularly if they allow us to build a premium brand, expand our channel and geographic footprint or lead innovation. And so -- and under the same types of criteria we've looked at other ones, I'd say we still have continued appetite for acquisitions.

And then just lastly, does your guidance include any additional one-time integration costs for Airborne? Or is that all behind us at this point?

That's all behind us at this point, substantially behind us.

I know you're not breaking out brands, but could you go a little more detail into what was the organic growth for the year and the quarter? I think you gave some numbers, but I didn't write it down quick enough.

For the organic growth -- inorganic growth in the fourth quarter, in my comments was $9 million this quarter. And the probiotics business for the quarter was reasonably consistent with what it had been in previous quarters, and the Airborne results were close to our expectation for the 2 months.

I would just remind you, Frank, that for Airborne, our fiscal fourth quarter and first -- fiscal first quarters are the lowest revenue quarters, given the seasonality of the Airborne business.

Yes, okay. I understand that.

What -- now are you considering inorganic Airborne, as well as the probiotics business?

Inorganic was -- the $9 million that I quoted for inorganic business for the fourth quarter consists of both probiotics and Airborne, yes.

Great, great. Okay, that clarifies.

Okay. Just a couple of housekeeping questions.

What's your pro forma leverage now when you look at it on a debt-to-EBITDA basis?

Well, if you think in terms of the adjusted EBITDA, per the schedule, okay, for FY '12, you start there with the $38 million. If you were to go back to the 8-K that we filed in regards to Airborne, right, and then -- and the trailing 12 months of operating results, plus the expected year-1 synergies, you would think in terms of something in the mid-50-or-so trailing EBITDA on a pro forma basis.

Now our aggregate debt at the end of fiscal 2012 was $142 million.

$142 million?

Yes.

So you paid some of it down to the term loan debt?

Yes. As I noted in my comments, we borrowed in aggregate of $190 million in the -- during the last 12 months for those 2 acquisitions.

But over that, we've paid down $48 million. So back to your leverage question, you've got $142 million in outstanding debt at May 31, 2012, and to your question, pro forma EBITDA of something there in the mid-50s.

So that gets your leverage multiple.

Okay. Okay, great.

So less than 3x of it?

Yes.

Okay, great. You gave the cash flow from operation for the year.

Could you just like go over that one more time. I wrote it down really quick, but I was trying to tie out the quarter.

What I noted was that in describing overall change in working capital, obviously, it's down. It primarily reflects, though, the impact of 2 acquisitions.

So our use of cashes were close to $60 million. Between the $48 million that I noted in aggregate debt paydown, along with $9 million in debt issuance costs, and close to $3 million capital expenditures, you've got $59-plus million in use of cash.

Now that was partially offset by almost $29 million in operating cash flows. That was the number I quoted.

Okay. That was for the year.

That was for the year, yes.

Great. And final question is just, you gave CapEx for the guidance.

Can you give it for the quarter?

CapEx for the quarter were around $600,000, $700,000.

Just -- if I look at the organic growth during the quarter, the $7 million, $8 million of organic growth, where is that -- is that coming -- do you break it down between units versus price? Is it sort of split evenly or is it mostly pricing?

What I'd tell you is we -- it's mostly units. Our pricing has been relatively stable.

Now we do have some premium innovations. If you take a look at Move Free Ultra relative to Move Free or MegaRed Extra Strength to MegaRed, those do come at a price premium.

So I don't think we've broken out the percent difference. But I'd say, mostly, it's by movement.

Okay. And then if I look at Airborne, remind me, is -- was Airborne already sold in places like Costco and Walmart before you acquired it?

Airborne was. Airborne had pretty broad distribution, although more limited in some of the places we were particularly strong such as club.

Okay. Is there still opportunity to get a more shelf space?

Or is that just simply driven by the innovation you hope to do with the brand?

We believe there's opportunity in all of our brands. When you take a look at our -- both our channel footprint, as well as the number of items in each store and our overall shelf position.

That was actually -- one of the big drivers this year was our strong execution even on our core brands -- getting more items in, even on core items, and better shelving.

And in that category, I mean it's Airborne, it's emergency, any new brands that are up and coming and what's happening with pricing in the category?

In pricing has been relatively stable in the categories in which we compete at least. And what we see is there's really 2 main scale players, as you mentioned, the Airborne and emergency.

There's a number of other brands but no one that really amounts to the same amount of scale that either of those 2 have.

Okay. And then seasonality-wise -- I mean Q2 and Q3 of your fiscal year are the biggest for Airborne.

Can you give us a sense of how big those are in terms of -- I mean, is it 80% of the sales for the year in -- around those 2 quarters?

We wouldn't go as far as trying to break that down to that level. I mean, suffice it to say, they're clearly significant part of the business, those 2 quarters, as compared to Q1 and Q4.

The other thing I'd say is, due to the nature of seasonality, a lot of it's season dependent. So last year, for example, it was relatively mild season weather-wise.

And you can see different shifts in terms of earlier cold spells versus later ones. And again, that's one of the other reasons why you'll see some shifting around, depending on weather patterns.

Yes. And in your guidance for top line growth, 40% to 43% for the year, you -- do you assume a certain amount of new doors for the year, meaning...

We do. We have very specific objectives from a distribution standpoint.

But for competitive reasons, we don't give out what the specific number is. What I can tell you is we grew a significant distribution this past year and our intend would be to do the same this next year.

And you've done a great job with joint care, with Move Free, especially with the smaller pill. And I don't know if -- again, if you can talk about it, but are there other opportunities with your other brands to make the actual pills smaller?

And is it a, proprietary technology? And b, what kind of a -- I mean -- and then not exactly, but what kind of sales lift do you think you're seeing just from making the pills a lot easier to take by making them smaller?

We believe that the Move Free Ultra, which is the smallest joint care pill in the market, is a major innovation in which we do have proprietary rights in our channels -- exclusive rights in our channels. So we believe that is a major innovation, and we have exclusivity.

And we believe that's been an important benefit. I brought in the question that answer though and say what we really believe is better user experiences really drive consumer acceptance.

So on Move Free, we've seen the small pill has very strong acceptance even at a very high premium. MegaRed has long exhibited really strong consumer acceptance with the one small pill.

But I even tell you on our probiotic business, one of the things that makes us most excited is our Digestive Advantage gummies. It's the only probiotic with BC30 in it, and it also tastes great.

And we've seen consumers and customers really respond very well to that. And so I think many of these things have better delivery devices are important drivers of the category.

The gummies are great. I bought them and I keep up in them throughout the day.

But a -- the last one, if I may, just on commodities, any big shifts that you're seeing down the line or in the marketplace? Or where are you in terms of -- do you actually hedge out your -- some of your big commodities going forward?

I would say this. Overall, we've seen relatively stable commodity pricing for both FY '12.

And as forecast for FY '13, we expect it to, again, be overall pretty stable.

Well, thank you for participating in our call today. As discussed, we're really encouraged by our progress and look forward to keeping you updated.

We hope you have a great day.