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Executives

Kirsten Chapman – Senior Vice President, Lippert/Heilshorn & Associates, Principal/San Francisco Office

Bruce J. Wood – President and Chief Executive Officer

Joseph W. Baty – Executive Vice President and Chief Financial Officer

Analysts

Gary Giblen – Goldsmith & Harris

Damien Wacowski – Gabelli & Company

Schiff Nutrition International, Inc. (WNI) F3Q09 (Qtr End 02/28/2009) Earnings Call March 17, 2009 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Schiff Nutrition International, Fiscal 2009 Third Quarter Results Conference Call. My name is Fab and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to, Kirsten Chapman. Please proceed.

Kirsten Chapman

Thank you Fab. Thank you all for joining us this morning for the Schiff Nutrition International fiscal 2009 third quarter results conference call. By now you should have received a fax or e-mail of the press release, but if you have not please contact us at Lippert/Heilshorn & Associates at 415-433-3777 and we will forward a copy to you 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. It’s my pleasure to now introduce to you Bruce Wood. Please go ahead, sir.

Bruce J. Wood

Thanks Kirsten. Good morning and welcome to our fiscal ‘09 third quarter call. Schiff continues to operate from a strong financial base despite the weak economy, and we remain committed to our long-term goal of profitable growth on our branded business while continuing to explore new growth opportunities. Our third quarter results reflected the ongoing difficult competitive environment that characterizes the mass market’s supplements category and the joint care segment in particular.

Our third quarter overall net sales increased just under 8% over the prior year period with a strong performance on private label more than offsetting a decrease on our branded business. Our profit measures were impacted in the quarter by sales mix and other factors, Joe will cover for you in his comments.

Nevertheless, we chose to continue a solid level of consumer marketing investment behind our brands. Consumer marketing expense increased almost 10% on a year-over-year basis, reflecting our ongoing commitment to our branded growth initiatives.

Our Move Free brand sales decreased in the mid single-digits percentage-wise in the third quarter versus a year ago. As our premium price position in certain accounts coupled with ongoing selective customer inventory drawdowns continued to impact sales. In the IRI measured segment of our Move Free Business that is food, drug and mass accounts excluding Wal-Mart, Move Free slightly underperformed the flat overall joint care category due to somewhat less promotion intensity versus year ago, compared to competition.

The IRI joint care category was up 0.3% in units, but down 0.6% in dollars for the 12-week period ending February 8th, once again reflecting downward pricing and discounting pressure. Our Schiff MegaRed Krill Oil new product performed well overall and appears to have benefited from the national marketing program, which started in early February. MegaRed second half support includes National TV and print advertising in addition to FSI couponing, in-store demos, PR and other account-specific promotions.

The MegaRed program is similar to the marketing support tactics we are using on Move Free in the balance of this fiscal year. In the face of near-term difficult conditions, we remained confident we can compete effectively in the near and long-term. In addition to supporting Move Free and our MegaRed new product, we expect to continue our efforts to explore other branded and private label organic growth opportunities, as well as potential acquisition opportunities. We believe our strong financial position gives us the resources to be able to execute growth initiatives that will enhance shareholder value.

I’d like to turn the call over now to Joe for his comments.

Joseph W. Baty

Thank you, Bruce. Good morning to everyone. Earlier today we announced our financial results for our fiscal 2009 third quarter and nine months year-to-date. Fiscal 2009 third-quarter net sales increased approximately 7.9% to $49.9 million from fiscal 2008 third-quarter net sales of $46.2 million. Net sales increased due to an approximate 78% increase in quarter-over-quarter private label sales to $15.2 million. Consistent with our comments on our second-quarter earnings call, overall branded business decreased on a third quarter-over-quarter basis. Branded net sales decreased to $34.7 million from $37.7 million primarily reflecting reduced shipments of joint category products.

Gross profit as a percentage of net sales was 34.7% for the fiscal 2009 third quarter compared to 44.2% for the fiscal 2008 third quarter. As previously mentioned, the quarter-over-quarter decrease among other factors reflects a much higher than budgeted mix of private label sales as well as the impact of raw material cost increases. As also previously noted, the impact of raw material cost increases on our branded business is more significant in the second half of fiscal 2009.

Total operating expenses were approximately $12.1 million or 24.3% of net sales for our fiscal 2009 third quarter compared to $14.3 million or 30.9% of net sales for our fiscal 2008 third quarter. As a percentage of net sales, selling and marketing expenses decreased to approximately 16.5% for fiscal 2009 third quarter from 18.6% for the prior quarter primarily reflecting the higher mix of private label sales and lower personnel-related costs. The approximate $1.8 million third quarter-over-quarter reduction for other operating expenses among other factors includes a significant reduction in management incentive costs and the prior year impact of the special dividend.

Reported operating income was $5.2 million for the fiscal 2009 third quarter compared to $6.1 million for the fiscal 2008 third quarter. Other income spent net decreased to $0.1 million income for the fiscal 2009 third quarter primarily due to an overall lower yield on investments. The effective tax rate for the fiscal 2009 third quarter was 32.1%, reflecting realization of more favorable than expected income tax credits. The tax rate was 38.4% for the fiscal 2008 third quarter. Subject to adjustment of certain ongoing tax contingencies, we believe the effective tax rate will approximate 36% plus for fiscal 2009.

As reported, diluted net income per share was $0.13 for the fiscal 2009 third quarter compared to $0.14 for the fiscal 2008 third quarter. Net sales were $145 million and $126.5 million for the respective nine-month periods. Branded net sales were basically flat $101.3 million and $102.1 million respectively. Diluted net income per share was $0.34 and $0.31 for the respective nine-month periods.

In regards to the balance sheet, working capital increased to approximately $90.3 million at February 28, 2009 from $81.5 million at May 31, 2008, primarily due to positive financial results. The increase in cash and short-term securities among other factors reflects the impact of positive year-to-date earnings partially offset by an increase in inventories. The overall change in inventories among other factors reflects an increase in raw material quantities and costs.

At February 28, 2009, we held a certain investment securities valued at approximately $1.1 million as a long-term asset. Stock-based compensation expense amounted to approximately $0.2 million and $0.9 million respectively for the fiscal 2009 and 2008 third quarters. Depreciation expense was approximately $0.7 million and $0.9 million for the respective quarters. Capital expenditures were approximately $2.5 million and $2.6 million respectively for the nine-month periods. Fourth-quarter capital expenditures may approximate $1 million plus. Regarding our fiscal 2009 fourth-quarter forecast, we believe overall net sales will approximate $45 million to $50 million as compared to $50.4 million including $37.1 million branded for the fiscal 2008 fourth quarter. On a quarter-over-quarter basis, we believe private label sales will be up due to incremental business and customer promotional activity. Branded sales are forecast to be down, while year-to-date branded sales are relatively flat, ongoing adjustments to customer inventory levels, timing of certain promotional shipments and uncertain economic conditions among other factors influenced the downward forecast.

All forecasts are subject to the impact of ongoing competitive pricing pressures as well as the effectiveness of our joint category, MegaRed, and other branded marketing initiatives. We forecast gross margin to approximate 32 to 34% for the fourth quarter, which compared to second-quarter comments approximates the low-end of the estimated range for full year 2009. We believe selling and marketing costs will approximate 19 to 21% of net sales for the fourth quarter and other operating expenses will approximate $4.5 million to $5.5 million presuming very modest management incentive costs. Overall, we currently forecast a significantly less profitable fiscal 2009 fourth quarter as compared to the prior year quarter.

Actual results for the fiscal 2009 fourth quarter may vary and are subject to among other considerations competitive conditions, sales mix, change in marketing strategies, and other factors noted herein and in our public filings. We plan to comment on fiscal 2010 during our fiscal 2009 year-end conference call. Again, thank you for your participation and now I will turn the time back to our President, Bruce Wood.

Bruce J. Wood

Thank you, Joe. To sum up, the weak overall economy and reduced consumer confidence have led most if not all companies to reassess their near-term expectations and Schiff is no exception. We do expect the supplements category to become even more competitive. Nevertheless, we remain solidly profitable, financially strong, and we believe we are well prepared to compete aggressively over the long term.

Thanks for listening today and Joe and I are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question will come from the line of Gary Giblen from Goldsmith & Harris. Please proceed.

Gary Giblen – Goldsmith & Harris

Hi, good morning Bruce and Joe.

Bruce J. Wood

Hi Gary, good morning.

Gary Giblen – Goldsmith & Harris

You know, I noticed, Bruce, in your summary comments that you said you expected the industry to get more competitive and I think that is a different tone than before where you were saying that the industry is highly competitive but the sense was that it wasn’t any more competitive. Is there a different outlook there, or is that due to the consumer or the retailers getting more aggressive, can you elucidate?

Bruce J. Wood

Well, I think, Gary, it’s a certainly one a qualitative comment and relates to the factors you just mentioned. Clearly retailers in general and certainly specific large retailers are reassessing inventory levels of products, reassessing the mix of branded versus private label, reassessing SKU counts in categories as a whole. So all of that leads to some uncertainty and certainly scrambling for business and the category does remain in a positive growth mode, albeit reduced from 52-week levels so we are seeing continued modest category growth as measured by IRI. But the battle for the pie I think will get more intense with those other factors just noted.

Gary Giblen – Goldsmith & Harris

Okay that helps, and just my second question was, can you describe what changes in the marketplace or competitive changes that you’ve observed from the new ownership of Liner?

Bruce J. Wood

At this stage, I would be hard-pressed to give you a very insightful comment. I certainly NBTY remains overall a very large and aggressive competitor on the branded side and certainly they remain a vigorous competitor on the private label side. As we have noted in previous calls, we have benefited from the Liner situation last year in our private label business. That was really prior to the acquisition, but we continue to believe that there is opportunity in the private label side for us notwithstanding the increased size and heft of NBTY as a total entity.

Gary Giblen – Goldsmith & Harris

I mean, was there any notable price increases or promotional intensification, is that’s what they tend to do when they make acquisitions, but maybe not in this case but...

Bruce J. Wood

Well, from what we have been able to observe, certainly NBTY has gone on record that they have been implementing price increases through their conference calls. Certainly there has been some pricing available because of the increased costs the raw material costs have been uniformly higher in the last several months. And at this time, I would say it is really a combination of trying to recover margin where possible, but also maintaining the promotional intensity as it always has been at a pretty high level.

Gary Giblen – Goldsmith & Harris

Okay, so just do sum that, it sounds like it’s tough but rational. Is that a reasonable way to look at it?

Bruce J. Wood

I don’t know if I can define rational for you in this environment.

Gary Giblen – Goldsmith & Harris

Okay.

Bruce J. Wood

Anymore Gary. It’s a tough environment and we do expect it to intensify for my prepared comments.

Gary Giblen – Goldsmith & Harris

Yeah, okay very good. Good luck in the coming quarter.

Bruce J. Wood

Thank you.

Operator

(Operator Instructions) And your next question will come from the line of Damien Wacowski from Gabelli & Company.

Damien Wacowski – Gabelli & Company

Hi, Bruce. Hi, Joe.

Bruce J. Wood

Good morning Damien.

Damien Wacowski – Gabelli & Company

A question on just continuing on raw materials, to date is there any break and increases there or are we still continuing to see the same pressures we did in the second quarter?

Joseph W. Baty

We have seen some stability and some softening of certain raw material costs here during this most recent quarter. Now the potential benefit of the softening really for us is more of a late fourth-quarter FY ‘10 situation versus much nearer term.

Damien Wacowski – Gabelli & Company

Okay.

Joseph W. Baty

Just given, as we commented before, our prior decision to buy forward on certain raw materials to make sure that we certainly had enough to meet the demands of our customers.

Damien Wacowski – Gabelli & Company

And Joe, if you wouldn’t mind just going back on your fourth-quarter guidance for the top line, I think I got a $45 million to $50 million in total but I missed the branded versus private label part?

Joseph W. Baty

Well, what I said was in looking at the $45 million to $50 million on a quarter-over-quarter basis, the prior year quarter in total sales had $50 million, a little over $50 million, $50.4 million of which $37.1 million was branded. Now in breaking down the 45 to 50 for the fiscal 2009 fourth quarter, we are saying or our current forecast is we expect private label sales to be up and our branded business to be down. So clearly providing guidance that we believe branded sales in the fourth quarter of FY ‘09 will be below the $37.1 million and the private label sales which in the prior year quarter were $13.2 million or so in our current forecast is, it will be north of that. So we didn’t go beyond that, but the key thing is branded quarter-over-quarter forecast to be down, private label quarter-over-quarter forecast to be up.

Damien Wacowski – Gabelli & Company

Okay. Thanks.

Operator

(Operator Instructions) There are no further questions in the queue. I would now like to turn the call back over to management for closing comments.

Bruce J. Wood

Thank you Fab. We do appreciate your interest in Schiff and we look forward to reviewing our Q4 and full year fiscal ‘09 results with you in late July or early August. Good day.

Joseph W. Baty

Thank you.

Operator

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

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Source: Schiff Nutrition International, Inc. F3Q09 (Qtr End 02/28/2009) Earnings Call Transcript

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