Chattem Inc. F4Q07 (Qtr End 11/30/07) Earnings Call Transcript

Chattem Inc. (CHTT)

F4Q07 Earnings Call

January 29, 2008 9:00 am ET

Executives

Robert E. Bosworth - President, Chief Operating Officer, Interim Chief Financial Officer

Zan Guerry - Chairman and Chief Executive Officer

Analysts

Bill Leach – Neuberger Berman

Douglas Lane - Jefferies & Co.

Analyst for William Chappell - Suntrust Robinson Humphrey

Reza Vahabzadeh - Lehman Brothers

Jon Andersen - William Blair & Company, L.L.C.

Kathleen Reed - Stanford Group Company

Alice Longley - Buckingham Research

Reade Kem - Merrill Lynch

Brian Delaney - Entrust Capital Group

Gary Giblen - Goldsmith & Harris

Presentation

Operator

Good morning everyone, and welcome to the Chattem fourth quarter and fiscal 2007 conference call. Today’s conference is being recorded. Prior to today’s discussion, the company has asked for its forward-looking statements to be read. Statements concerning the company’s business outlook, anticipated profitability and sales growth together with other statements made in this presentation that are not historical facts are forward-looking statements as that term is defined under Federal Securities Law. It is possible that actual results may differ materially from the statements made in the presentation. All forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected, including those described in the company’s filings with the Securities and Exchange Commission. A reconciliation of the non-GAAP financial measures contained in this presentation to the most comparable GAAP financial measures is contained in our earnings release for the fourth quarter and fiscal 2007 which can be found on the Investor Relations section of the company’s website at www.Chattem.com. I now would like to turn the call over to Chattem’s President and Chief Operating Officer, Bob Bosworth. Please go ahead, sir.

Robert E. Bosworth

Good morning and welcome all to the conference call. As always, we much appreciate your interest in Chattem and the participation in these calls and I’m here today with Zan Guerry, our Chairman and Chief Executive Officer and Robert Long, our Vice President of Finance. In the call we’ll review our outstanding results which you saw in the earnings release for the fourth quarter and for the fiscal year ended November 30, 2007 and perhaps more important, provide the outlook for and exciting fiscal 2008.

Before we start, a few points regarding the call and the information that we’ll provide. First, Zan would like to comment briefly on the performance of and the outlook for our brands in our business. After the completion of Zan’s remarks I’ll provide additional commentary on 2007 results and our guidance for 2008. Then at that time we’ll conclude the presentation and open the floor for questions. We will limit the call out of respect for your time to one hour and would like to limit questions generally to strategic knowledge regarding the performance and directions of the business. To the extent of specific questions regarding line items or details regarding line items on the financial statement, for the extent that we’re not able to get to your questions, please call Katherine Baker, after the call. The number is listed in the press release. The third point I’d like to make regarding the information is that as we discuss earnings per share on the call all earnings per share data will be before FAS 123 charge and debt [extinguishing] charges both non-cash items and the cash flow that [inaudible] will be recovering in 2006. We believe these adjusted [inaudible]. Finally, in reference to guidance we will be providing updated earnings per share guidance for 2008 but as we’ve discussed in the past, we will not be providing full year guidance or [inaudible].

With all that said, our goal remains to help you understand the manner in which we think about and approach the business and from that context I’ll turn it over to our Chairman and Chief Executive Officer, Zan Guerry.

Zan Guerry

Thank you, Bob, and good morning, everybody. Bob and I have had the opportunity to report Chattem financial results for a lot of years, perhaps for more years than we really care to think about. Today clearly we have the opportunity to report to you the most outstanding, exciting results in our history. What really excites me today is that the majority of information I have for you is about the current year and beyond. We are not going to spend a whole lot of time on 2007 results. It occurs to me the better the results the less time we need to discuss them. From my perspective I am only going to point out two things about 2007 results.

First, a 72% increase in earnings per share to $3.36 is an outstanding achievement by our great Chattem team and I think it speaks for itself. Second, our Big Six brands had very strong years in 2007 and have entered 2008 with great momentum.

What I do want to do today is share with you some information on three important areas. First, some truly amazing Nielson results during December and particularly January. Second, some additional information on our new product launches that are occurring this year and then third, a very brief discussion of where we see 2009/2010 in terms of new products. For the first part, which we always talk about is all about consumer sales. If consumer sales are strong and growing, profits are going to follow. December Nielsons came in with the strongest overall performance of all year. Total Nielson sales, excluding Pro Therapy were up 7.5% and our Big Six brands were up double digits as they grew, led by Gold Bond and Icy Hot, our two biggest brands; Gold Bond up 22% for December and Icy Hot up 30% plus. Our December Nielsons which some of you have seen or are aware of, were very, very strong perhaps stronger than some of the other information indicated.

Beginning January 1^st, we added some significant new advertising investments, some new advertising, etc. We kicked off with ACT with a new commercial and a 50% increase in weekly target rating points for ACT. We added new winter advertising for the first time for quarter zone 10 and we increased advertising for Icy Hot and Gold Bond from strong levels a year ago. All of these moves are part of our budgeted media plan for the year.

The data that I am going to share with you comes from our four largest accounts. We get weekly standard data from a number of accounts and so the data that I am going to report to you is for the first three weeks of January from our four largest accounts. We started seeing this right at the beginning of January, some of these strong results and I think you will all appreciate the power of these.

ACT in December was up in Nielsons, a strong 23%. For the first three weeks of January in these accounts ACT was running at over 40% increase. Gold Bond in December was up a strong 22%. Gold Bond January to date is at 30% plus. Icy Hot was at 30% in December and is still at 30%. Cortisone made a big jump. It was doing fine at 6% and the new advertising has moved it to 20% plus. Unisom was at 5% in December and it is now at approximately 14%. Those are very outstanding numbers as you can appreciate. Selsun Blue, our other Big Six brand, was down somewhat in December and is down about 5%, actually Selsun Salon is what is leading it but we are now starting with advertising on Natural soap.

Those results are pretty good. One last kind of fun item, we just happen to begin to see some excitement on Kaopectate. Kaopectate as you know has been down and we have started some new advertising. We kicked off some strong advertising in January. In December, Kaopectate was down 15% to 20% and in January it is up 15% to 20%. We cannot tell whether it is our media working or Jim Kramer’s drinking all this Kaopectate, but we don’t care, we love to see that brand turn around and we feel that has good potential.

Three weeks out, obviously we can’t project to 52 weeks and there are some other factors, so I am not trying to unnecessarily excite you, but these are the facts we have. We don’t get full Nielsons until next week. At that time, I would anticipate that we will see, again the strongest Nielsons probably in our history, certainly on the Big Six brands and most of you have access to that, so you will see that. That is very exciting. I can tell you the range that we are contemplating for. Our earnings per share do not have any numbers like these in that plan. Everyone around Chattem is a little delirious right now looking at these numbers. What is even more exciting is that all of our new products are just rolling out now in terms of selling to the trade, advertising and breaking. We have looked to them to be the driver of growth in some ways for the year.

Selsun Blue Natural breaks as we speak. We have good distribution. We shopped the commercial and it tested on a par with Selsun Blue Original, so we are very excited about Selsun Blue Natural. We have got strong media February and March to kick that off and we are fairly confident that we will begin to see growth on the Selsun franchise again.

Cortisone Intensive Healing, the other ones they break in spring. Advertising breaks anywhere from March, April, May and in the case of one it breaks June. This is a spring, early summer kind of timing. Cortisone Intensive Healing is a great new product that brings a lot of the value of Gold Bond Ultimate Healing. Combined with the hydrocortisone we think it brings new uses perhaps, in the area of eczema it has tested very well. The commercial looks great; we are testing the commercial right now.

Icy Hot PM is a continuation of the strong Icy Hot line extensions. We shot that commercial. We have two commercials that will be breaking strongly this spring. Both of them tested equal to the back advertising so we are looking toward the growth there.

Gold Bond Restoring had tested in concepts and home use tests equal to Gold Bond Healing lotion. We have got some commercials, we have some great ones there that we have not tested those yet, but I am not worried that they will test well.

We have not talked about Aspercreme in a while. Aspercreme is an important product for Chattem and a few years ago it was doing very well. We have not added new stuff, but we have two new Aspercreme items this year, particularly Aspercreme Heat that brings a new dimension to it. Aspercreme PM that focuses on the arthritis. Those two products have been well accepted and we have commercials shot on those.

Finally, Unisom Fastmelt is the latest shipping. It ships in March and we will be doing advertising this summer. That is a quick-dissolving tablet that you just put in your mouth, no water. We think it is quite convenient. Many people when they get in bed at night, they don’t know if they are going to have trouble sleeping or not, and if they find that they are they just reach over to their night stand and grab one of the Fastmelts and you are on your way to sleep. That has tested very, very well.

That covers the line extensions, the new products. We have strong media plans behind all of them. As always, we will be watching them seeing who responds the most. We will be allocating our resources accordingly.

Finally, a quick touch on where we go from here. Right now at Chattem our focus is on what are we going to introduce in 2009, what are we going to introduce in 2010 and what does our pipeline look like. We have a lot of very good ideas, a lot of prototype products. Some are in Macy’s home use guides, some are in focus groups, and some are in various stages. We have an unprecedented amount of ideas. In particular, we have a specific, significant new product for ACT that we are very excited about. We have a continuation of the flow of Icy Hot ideas, two or three more that are in the vicinity of what we have been bringing. We have several Gold Bond initiatives. We are focusing on some staying in the lotion category and some going into a new category. We have two very interesting Cortisone new product ideas that we are pursuing. We have a Unisom extension that we will be doing focus groups on this week. We have two Selsun Blue new products that have come out of some research and that we are very excited about. We feel good about being able to continue this momentum.

In closing, we have a great Chattem team that has produced phenomenal 2007 results and we intend to keep that momentum going for 2008 and beyond. It is a pleasure visiting with you this morning. Thank you.

Robert E. Bosworth

Thanks Zan. As Zan indicated and as earnings release also showed, the fourth quarter in fiscal year 2007 were outstanding from a variety of perspectives and as I have said before, perhaps more importantly, it provides a platform for continued growth into 2008 and beyond. While the performance guides are relatively self-explanatory, a few comments are appropriate and I would like to turn first to the fiscal 2007 results.

First, total revenues and again here we are talking about factory sales as opposed to the Nielson retail sales that Zan was talking about. The total revenues for the fourth quarter group are 55% to a record $1 million for the quarter and by 41% for $423 million for the year. The revenue growth, as has been the case during the year, was led by the brand acquired by J & J early in the year, particularly the three key brands ACT, Cortisone 10, and Unisom and by a strong performance of our two largest brands, Icy Hot and Gold Bond. Selsun, the other of our six brands was down slightly for the year, with gains in the base business not quite offsetting a reduction of volume in Selsun Salon, which was launched in 2006.

Also in this performance, were, again as we had talked about previously, reductions in Dexatrim which suffered heavy competitive pressure from Alli from Glaxo, the absence of a major new product launch in 2007 under the Dexatrim name and a comparison with the launch of Dexatrim Max₂0 last year and also a reduction in Icy Hot Pro Therapy. Excluding these acquired brands, Icy Hot Pro Therapy and Dexatrim, taking away those three unique situations, organic growth of the base business was approximately 8% and 7% with a quarter and year respectively. If Dexatrim were included, the organic growth would have been 5% for the year and 3% for the quarter, respectively. So, we have very good revenue performance, particularly from the key brands that we have talked about as the Big Six.

Looking at adjusted earnings per share, for the quarter they were $0.81, 153% increase over the prior year. They grew by 72% to $3.36 in 2007 from $1.95 in 2006; again, great performance. Importantly, these earnings exclude the cash tax shield related to the amortization of the tangible and the purchase bond heads for tax purposes but not book purposes. For the quarter and for the year, this tax shield aggregated about $0.23 per share and $0.90 per share, respectively. Again, that is a huge cash contributor, cash generator.

Third, from an operating perspective, we realized 139% growth and adjusted EBITDA for the quarter and 83% for the year that importantly represents about 32% of revenue even though we are providing very strong advertising and promotion support.

Our fourth point to make, and while not a precise measure, our cash flow has been very good. The performance base and acquired business has generated cash from the date of the acquisition, which is January 2, 2007 to the end of the year, allowed us to reduce debt by $62.5 million to fund the purchase of a net-bond hedge in the amount of $12.1 million in conjunction with a convertible debt offering. We acquired the worldwide rights to ACT for $4.1 million. We repurchased about 400,000 shares of our stock at an average price of $58.98 for an aggregate purchase price of $23.6 million and through all this, reduced our debt to EBITDA ratio to about 3.8 times which was below what we had anticipated at the time of the acquisition.

As a function of this performance, and the successful integration and more of an interesting point than anything else, total market value of the equity has risen from about $640 million on the day before the announcement of the acquisition only 16-months-ago, to about $1.3 billion as of the close of business yesterday.

Finally, and this does bear mentioning, we did record a loss of $0.24 per share in the fourth quarter related to Icy Hot Pro Therapy. Finally, some loss and altered distribution in the fourth quarter a detailed evaluation of trade inventory returns exposure and the inventory in Chattanooga was conducted and it resulted in the creation of incremental returns and inventory reserves of $4.5 million and $2.5 million, respectively. With this reserve, there is no further exposure to the company related to Icy Hot Pro Therapy.

So those are the highlights for 2007. As we consider these financial and qualitative accomplishments in 2007, we can now look to 2008 where we are raising the guidance. Specifically we are raising the guidance range to $4.20 per share from the prior range of $3.90 to $4.10. At the mid point of the new guidance, this represents a 22% increase over the adjusted earnings per share of $3.36 we achieved in 2007. For purposes of clarity, it is somewhat repetitive; the EPS data excludes debt extinguishment charges and FAS 123 at our charges. The latter of which, the FAS 123 charges will be $0.21 per share in 2008. Again, repeating what I said about 2007, it is important to note that this guidance excludes the cash tax shield of approximately $19.7 million or about $1 per share. It’s exciting guidance for 2008.

This increase reflects several things, and these things are incorporated in our guidance. The strength of our brands, particular the Big Six, the anticipated success of our new product launches with Zan is outlined, improvements in gross margin resulting from the full-year impact and the bringing in-house a certain manufacturing operation, which should bring gross margins back to historical levels in the range of 70% to 72%. We will have significantly increased absolute dollar investment in advertising promotion, with those expenses anticipated being in the historical range of 26% to 28% of total revenue. We will continue to gain SG&A leverage as revenue increases and we don’t increase fixed expenses, commensurately moving down to 13% of revenues. We should have an income tax rate in the range of 35.5% to 36%. The rate was somewhat lower in 2007 due to reconciliation of tax accounts at the end of the year. It should be 35.5% to 36% moving in to 2008.

Finally, we will have the impact of delivering through strong cash flows which should allow us to reduce debt by $90 million to $100 million over the course of the year, which would reduce our debt to EBITDA ratio well below three times. So, those are the highlights of the way we are looking at 2008. There are a couple other points that I should make related to questions that have been talked about in the press a lot.

First, Chattem has not been subject to the recessionary pressures in general as our key products are not generally discretionary purchases. Pain and itching cannot go away during recession and people need to buy those products. So, recession historically has not been an issue and we have not seen it as an issue in this cycle.

The second topic that has been talked about is we have been able to mitigate increases and purchase material and freight costs through careful management of those costs and through very selective price increases taking into account the price to the consumer of about up to 5.4% on items that represent just over 15% of total revenue. Again, to repeat that, we have taken some limited price increases in April of this year of up to 5.4% on selected items that account for a little over 15% of revenues.

Finally, I would just like to make the point that from a capital structure perspective, we are in a very strong position that will get even stronger as we go through 2008. This strength and the support of our lenders and investors, which has been substantial, provide a great deal of flexibility to reduce debt, purchase stock opportunistically, or to make acquisitions.

We are looking forward to a great 2008 from a business and a brand perspective, from a financial perspective, and from a capital structure perspective. And with that I will open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bill Leach of Neuberger Berman. Please proceed.

Bill Leach – Neuberger Berman

Good morning, everyone. Congratulations on a great quarter and a great year. Bob, just to follow up on your comments, is there any reason why we shouldn’t add back the $0.24 write-off in the fourth quarter and come out with operating EPS of $1?

Robert E. Bosworth

Couple things there, Bill. One, you are right; you should add back the $0.24. That was included in the $3.36, so you would add back that $0.24. There were a couple of adjustments in there that I should note that were non-recurring or unique in the quarter. One was we had some final purchase accounting adjustments made relating to cost of goods and inventory levels and we did have final reconciliation. You do need to add back the $0.34 about $0.10 in other charges related to one-time events related to purchase accounting and reconciliation of those accounts and reconciliation of tax accounts at the end of the year.

Bill Leach – Neuberger Berman

I couldn’t hear you too well, but basically you are saying the net gain is more like $0.14?

Robert E. Bosworth

Yes, that would be the right way to look at it.

Bill Leach – Neuberger Berman

Do you have a forecast for interest expense this year?

Robert E. Bosworth

For 2008?

Bill Leach – Neuberger Berman

Yes.

Robert E. Bosworth

If you look at it and it is fairly straightforward to add, so if you take just interest on the senior supported notes and assuming we paid down $100 million over the year, you get to include the amortization of debt cost about $22 million.

Bill Leach – Neuberger Berman

Okay. Thanks very much Bob.

Robert E. Bosworth

Thank you.

Operator

Your next question comes from the line of Doug Lane of Jefferies. Please proceed.

Douglas Lane - Jefferies & Co.

Good morning, everybody. Bob can you remind us how long that tax shield lasts on the purchase and the hedges?

Robert E. Bosworth

The hedges last for 7 years from the date of the occurrence, which would have been November of ‘06 and April of ‘07, so those will last through 2013 and 2014. The full amount of the amortization of intangibles will last through roughly 6 years, but the biggest part of that is the amortization of the J & J brands, which will last for 15 years.

Douglas Lane - Jefferies & Co.

15 years, okay. Where do we stand with Icy Hot Pro Therapy? Is that no longer a product or is it still going to be out there in some form?

Robert E. Bosworth

Pro Therapy, and again I repeat one point and make another point. The one I would repeat is with this $0.24; we have eliminated the need to talk about Icy Hot Pro Therapy in terms of loss going forward. We have eliminated that exposure. The second thing is we do have a relatively small number of accounts that still carry the product and we are still servicing them. A couple key accounts, a few smaller accounts and we continue to service them and work with them. We do see continued movement through Nielson and through mass POS status. It is a very limited number of accounts at this point, but we do continue to service them.

Douglas Lane - Jefferies & Co.

Okay. For fiscal ‘08 what should we think of in terms of organic growth for the company now that we have anniversary de-acquisition? What is your go-forward kind of target for organic sales growth?

Robert E. Bosworth

What we have said, and what we continue to say, again recognizing that we don’t give revenue guidance, mid to high single digits growth is the target that we have over a period of time. That is the perspective how we would look at this one.

Douglas Lane - Jefferies & Co.

Okay, thank you.

Operator

Your next question comes from the line of Bill Chappell of Suntrust Robinson. Please proceed.

Analyst for William Chappell - Suntrust Robinson Humphrey

Good morning. This is actually Mark in for Bill. I am sorry if you have already addressed this, but can you talk a little bit about what you see as far as an attraction for bringing a brand in-house if that is attributing to gross margin growth, which was pretty exceptional for the quarter, and what you expect from that?

Robert E. Bosworth

Let me make again two comments on that. First of all, because of the demand for the product that we acquired; Cortisone, Balmex, and Unisom running ahead of schedule or ahead of our expectations in 2007, we started selling in-house manufactured products in the fourth quarter ahead of plans. The fourth quarter benefited from the in-house manufacturing efficiencies. We will have a full year of that next year, and that is factored into the 77.2% gross margin number. We have a couple of other opportunities to improve cost, not to that level of significance going into 2008. Obviously, the big one would be ACT, which we are evaluating our alternatives now. The soonest that we can have that online will be 2010 and we have a contract for 2009. There is nothing significant, other than the fact that we are getting a full-year benefit of the manufacturing efficiencies in 2008.

Analyst for William Chappell - Suntrust Robinson Humphrey

Okay, great. Can you talk a little bit about the international segment? Is that strength there from ACT? Have you started to expand that internationally? Is there something else working there?

Robert E. Bosworth

There are three things there. One, it includes about $1.5 million but we increased it from about $30 million. We had a couple million dollars of incremental growth from acquisitions. A little over $1 million came from ACT which we acquired in April and May of 2007. About $1.2 million came from the brands we acquired from J & J in the Caribbean, so we had about $2 million to $2.5 million increase. We had about $1 million of increase in revenues coming out of the exchange rate, gains if you will, though the profit impact is only about $100,000. We have had some strong growth in Canada and Latin America with some of our key brands, Icy Hot and Gold Bond in particular.

Analyst for William Chappell - Suntrust Robinson Humphrey

Okay, great, thanks, good quarter.

Robert E. Bosworth

Thank you.

Operator

Your next question comes from the line of Reza Vahabzadeh of Lehman Brothers. Please proceed.

Reza Vahabzadeh - Lehman Brothers

Good morning, Reza Vahabzadeh here. Bob, as far as the free cash flow that looks to be more generous in 2008 than 2007 how would you anticipate deploying or see cash flow going forward?

Robert E. Bosworth

There are two components of that. One, as we have said often times, the highest and best use of our capital is good acquisition but we don’t predict the timing of those. Two, we would plan on using the cash flow to reduce that, which would get it down under the three times debt EBITDA level. We have, as you know, on occasion opportunistically repurchased shares, but the principal would be to reduce debt until we found acquisitions coming available.

Reza Vahabzadeh - Lehman Brothers

I see. As far as the potential acquisition activity, is there much to anticipate on that front or would you anticipate that to be relatively quiet? Any expectations on that front would be appreciated.

Robert E. Bosworth

It is very hard because it only takes one acquisition in some cases to turn you, so it is not so much the number as the quality of acquisitions and then of course just because something is available it doesn’t mean that we buy it. I think that we would have to characterize the environment as relatively favorable for acquisitions, but again, you can have a relatively favorable environment and not make one. There are some things stirring around out there and we hear from various sources they may be open to next year to more stuff stirring around. We feel very good about the environment.

Reza Vahabzadeh - Lehman Brothers

Got it. This inventory reserve that you took in the fourth quarter, doesn’t that help your EPS guidance in 2008 by some allowance and is that a portion of the EPS guidance increase in ‘08 in your prior expectations.

Zan Guerry

It does in a sense. It helps make it look certainly easier, as we heard Bill Leach had some back. Obviously if you add that back, then $4.00 to $4.20 looks much more achievable when you say I am coming off of, lets call it, $3.50 plus as opposed to $3.36. I think what you have heard is with the growth in the brands, with the full year of cost savings, with debt reduction, we feel extremely confident in the range for the new year. Obviously, it is more fun to beat ranges as opposed to coming in under. We generally try to start conservatively and being aware of Pro Therapy makes that number conservative. We have a lot we need to accomplish with five new brands and the more new brands we have the more flexibility we like to build in. Again, it is hard to predict sometimes brands can be exceedingly great and then we want to fund them even more and of course they can go the other way. On a short-term basis, when you have a number of brands to support, we build in flexibility so we have room to move whichever way it goes.

Reza Vahabzadeh - Lehman Brothers

Got it.

Robert E. Bosworth

I would comment that the increase in the guidance would not in any way to taking a Pro Therapy hit in 2007. It relates to our confidence about the business.

Reza Vahabzadeh - Lehman Brothers

Yes, I understand the business is healthy. Lastly, obviously your consumption trends for your products seem to be pretty solid. Have you seen, or do you anticipate seeing any inventory adjustments, cutbacks by your major customers?

Robert E. Bosworth

A couple years ago we saw inventory rationalization in a couple big accounts. We have not seen that as a major issue with the accounts this year.

Reza Vahabzadeh - Lehman Brothers

I got it. Thank you.

Operator

Your next question comes from the line of Jon Anderson of William Blair. Please proceed.

Jon Andersen - William Blair & Company, L.L.C.

Good morning. This question is on what appeared to be very strong retail scanner figures. The first question is, are the new products that you plan on launching in 2008, reflected in that data? Two, in terms of the strength, how much would you attribute to the uptake in the new advertising campaign versus a better distribution and shelf placement at retail?

Robert E. Bosworth

The first one is it doesn’t, which is why I started the conversation by saying what was really exciting and somewhat amazing, is these numbers did not include any of the new product sales. The answer is that was not in there. In the terms of things moving, we did have a lot of momentum on a couple. I mean our two biggest brands in December were growing 20% and 30% plus, so we had momentum. I think what we saw that changed was the higher level and the new commercial on ACT performed exceedingly well. That would be a comment. I think that the Cortisone winter advertising that makes sense. You know a lot of people think of steroids as being for summer bug bites and rashes and other stuff, but actually winter dry skin is a very strong target. I think that we saw a big impact on Cortisone. I think we are continuing to see good work on Unisom. In the case of Gold Bond and Icy Hot, we just are building on that momentum. We did get we think on Gold Bond some weather help this year versus last year. That probably is why our lotion is most responsive to weather of any brand we have. It seemed to be not in Chattanooga, Tennessee, but elsewhere a lot colder this January and we think that drove lotion sales. It was new advertising, more advertising, a little bit of weather and just momentum we had going into the year.

Jon Andersen - William Blair & Company, L.L.C.

Okay, great. With the eight new products, I think it is eight for 2008, can you just put a little more color around the distribution. Is the trade acceptance thing good? Is it what you expected? Is it better than expected and maybe some thoughts on the timing of the shipments of at least most of the major new products?

Robert E. Bosworth

Well, with that number of products, the simple answer is the selling is meeting or exceeding our expectations pretty much across the board. There is always one account, here or there, that the timing is different but most of them ordered it or are shipping in the first quarter, the majority so it will be on the shelf at the majority of the accounts, the ones that we are specifically looking at for March, April and May advertising, are Cortisone Intensive Healing, which we feel very excited about. Selsun Blue Natural is already out there. We are starting Icy Hot PM and it is shipping and we will start on that. Gold Bond Restoring is having great distribution and the ads for cream items are in good shape. We are lined up and ready to go. The advertising is set to break and we will be reading March, April, May, June, and July sales to see which of the line extensions are adding the most value at that time.

Jon Andersen - William Blair & Company, L.L.C.

Okay. Last question. What are your expectations for Dexatrim in 2008? I know it has been a bit of a drag on the top line this year. Does that ease during 2008? What do you see now and what are your expectations as we move through the year?

Robert E. Bosworth

I think having the expectations about the weight loss category is probably like having expectations about the weather. It is a very challenging variable. Consumers can respond quickly to new advertising and new products. They can move around where some of the competition can shake out. We have spent a lot of time, perhaps as much as anything on Dexatrim, new products for the next few years because that is where, when we have been successful on Dexatrim it is new products that drive it. For 2008, we don’t have a monumental new product but we have one that lasts all day type thing. We have some pretty new advertising that seems to be resonating with consumers. Again, it is a fickle market in terms of what commercials they respond to. We have had two or three that they have responded very well to. We have some that haven’t. So far in the early data, we are seeing a pretty good response and it looks better through December, January than it was last summer. We feel cautiously optimistic. We feel better about some opportunities in 2009/2010. You know, big picture this market was tremendously too many competitors, too much media, and too much stuff going on over the last number of years. It looks like that people have decided that there is no gold rush in the diet market. We are not seeing as many people in that, absent Alli, which is kind of a separate subject unto itself due to its high price. We are looking at the Dexatrim name has survived. It is among the top names. It is probably the only name that has really survived a lot of this. So, we are cautiously optimistic that we have two, maybe three ideas for 2009 that look quite exciting. In 2008, our goal is to live to fight another day, so to speak and right now it looks like we are going to be able to do that.

Zan Guerry

Let me provide a couple of perspectives on that because a lot of attention has come around Dexatrim and some of it we have brought to Dexatrim. One, just from a comparison purpose, the comparison is going to be a lot easier in 2008 than they were in 2007. The second is, again the perspective, the total Dexatrim revenues are around 3% of corporate revenues. If you looked at a percentage of EBITDA it is even less than 1.5%. This is not a significant matter in terms of our earnings guidance.

Jon Andersen - William Blair & Company, L.L.C.

Okay, thank you very much. Congratulations on a great quarter.

Robert E. Bosworth

You are welcome. Thank you.

Operator

Your next question comes from the line of Kathleen Reed of Stanford Financial. Please proceed.

Kathleen Reed - Stanford Group Company

Good morning. Just a quick question if you can talk a little bit about the A&P spending that you’re seeing for next year and in this quarter also it was down in the 25%, slightly below 26% range. That is a lot lower than it has been historically, which is great giving your great sales growth. Can you just talk about how you are getting more “bang for your buck” for your ad dollars with a lower rate of spending at least on a percentage basis?

Robert E. Bosworth

That is a great question and we build the advertising budget brand-by-brand and in this particular year, I can tell you every brand submitted fairly aggressive. The TRPs that we are putting before the consumer are very, very high levels. The question is how do you get that done? Some of that is efficient media buying. Some of it is as a brand gets bigger and bigger, your percentage of sales can decline and you are still spending more in advertising. The place that an advertiser struggles the most is when you have $5 million and $10 million brands and you need to spend $2 million or $3 million to make an impact and then your percentages look very high. You get a bigger brand and you move towards $100 million on Gold Bond as you move in that direction. On Icy Hot, you can increase media, you can increase TRPs significantly but your percentages decline slightly. It’s not just advertising, that is advertising promotion. Some years we have heavier spending on FSIs and consumer promotion and I think this year we are in particular focusing our energy we think on our advertising this year. So, a combination of more efficient promotion, efficient media, the bigger brands growth all give us an advertising promotion in percentage that is good, but it is probably a lot more impactful than it even appears to be.

Kathleen Reed - Stanford Group Company

That is great. Can you comment a little bit about your new numbers for ‘08? When you were talking in your prepared remarks about the really strong growth you were seeing in the Nielsons for the month of January, and I know it is only a month, but it seems like you had said that your new guidance had factored in that level of sales growth. If you can just give us a little more about what you think these numbers are based on and if you think they are pretty conservative, definitely doable, or what would be the upside potential there.

Zan Guerry

Well, definitely doable is definitely true, I think. As I said, it did not take into account that those numbers we are seeing in January are about twice what we anticipated. We continue to see that and this range is probably irrelevant, but that is as you said only a month and we have a bunch of months to go. We were not anticipating that kind of strength. I think, again, when you are in a high-margin business as we are, incremental of $10 million sales swing one way or another; $20 million swing can get you some real earnings per share. We saw that happen this last year. We did not purposely go in and say, “How low can we make the range”, but obviously we ended up, if you adjust for the Pro Therapy, we ended up beating what we really thought we might have $0.50 a share. As I told Bob, I don’t think you are going to see a $5 number coming out this year, but we do have a fair amount of upside if these new products work as we say. If they don’t work, we still should make the $4.20, but our resource allocations will be more challenging. We should be, I think if we watch March, April, and May. You know, we are watching every week because every week we see another week of this kind of growth and that really boosts our confidence. Right now that is a nice issue to be watching.

Kathleen Reed - Stanford Group Company

Bob, can you clarify the $90 million to $100 million debt paydown target for ’08? Is that set in stone or is that if you do not have an acquisition?

Robert E. Bosworth

That is if we do not. That is using the cash flow, generated to pay down debt.

Kathleen Reed - Stanford Group Company

Okay. Lastly, can you touch on Selsun Blue, the franchise? You said it was down a little bit in the fourth quarter and I know you have the Natural product launching. Is that product because you compete with Proctor there? Is that one a little more subject to more competition maybe from somebody else? Can you just talk a little bit about that brand? Thanks.

Zan Guerry

Selsun Blue is a very, very solid, good franchise. What is going on here is Selsun Salon did not work to our expectations, so when you see it down, what we are seeing is Selsun Salon did pretty well for a while and never met our expectations. On that particular one, and we have not seen it before and everything is unique. The product tested extremely well. The concept tested well. The advertising, we couldn’t somehow break through and get our point across. There was no reason, looking at the commercial, but we just didn’t get the kind of break-through scores. When we test commercials, we test in awareness and a motivation score. We like to see the awareness numbers or the break-through numbers 70% and that is what we are seeing on all the new products that we are talking to you about. We are seeing 70%, including Selsun Blue Natural.

On Selsun Salon, we were in the 40% to 50%. We tried three different commercials to try and get out of there. It may have been that we misnamed the product. We should have called it Selsun Blue Salon from the get-go. It may have been, you know there are always challenges. I think that Selsun Blue Natural had the highest home-use test scores that we ever had of any product. It had very strong concept scores. Now it has strong commercial thing. The market place is where they tell you whether it is working or not and we should, by the end of March. We are breaking very heavy advertising February 1 on Selsun Natural. Almost all of our advertising is going to be Selsun Blue Natural. Hopefully, the next time we talk, we will have a growing brand.

Kathleen Reed - Stanford Group Company

That’s great. Congratulations.

Zan Guerry

Thank you.

Operator

Your next question comes from the line of Alice Longley of Buckingham Research. Please proceed.

Alice Longley - Buckingham Research

Hi, good morning.

Zan Guerry

Good morning, Alice.

Alice Longley - Buckingham Research

I am looking for an update of the quantification of the synergies from the acquisition of the J & J brands. You originally said the synergy should be at least $0.25 in ‘07 and at least $0.75 to $1.00 in ‘08. Could you update us as to what the synergies were in ‘07 and what they should be eventually?

Robert E. Bosworth

That initial guidance was provided to give a prospective around how we saw the business playing out. Two things, I would say, because we don’t give product-by-product or group-by-group profitability information. It is safe to say that the brands contributed more to our earnings in 2007 than the quarter we originally said. For 2008, they would similarly contribute more than we had originally estimated as well.

Alice Longley - Buckingham Research

Okay, fair enough but I guess one of my points is that if we add back $0.14 to earnings to what you reported and for the Pro Therapy charge and then make earnings grow your normal 15% and then add something incremental for synergies for this year, you get well above your guidance. Is that a fair way to be thinking?

Zan Guerry

It depends what you mean by incremental. That $0.75 to $1.00 was over what we were making back in 2006, not $0.25 then $0.75 to $1.00 more. We need to be careful about how we address that issue.

Alice Longley - Buckingham Research

All right, I will go over this with you offline more, but it is fair to say that there are incremental synergies that are significant again in 2008 from the acquisitions?

Zan Guerry?

Certainly the acquisition will add more to profitability in 2008 than it did in 2007. That is absolutely an accurate statement.

Alice Longley - Buckingham Research

Okay.

Robert E. Bosworth

Synergies is a funny word, I mean really it comes from incremental revenues and incremental variable contribution. It’s not as you would consider most acquisitions where you are rationalizing sales forces or that kind of thing.

Zan Guerry

The important thing to think about, however you add it up, new products by nature are risky and so the more you have from new product sales, no matter how good it is, you say I am going to be a little conservative. They also can cannibalize more than you think. I mean generally we have had very good results. Gold Bond Ultimate Softening did not cannibalize Gold Bond Ultimate Healing really at all. As a matter of fact, we thought it would do some. Gold Bond Ultimate Restoring if we build in a little bit it may cannibalize or it may not work as well. What we have is, we are full throttle ahead in the first half of the year spending on very successful, or what we think are going to be very successful new products, but we are not estimating major successes in our guidance. We are saying if these new products work, we are going to be ahead of the game, if they don’t, we are still okay. We are, because of that, hedging if you would, our best a little bit.

Robert E. Bosworth

We can talk offline, Alice, about reconciling those two numbers.

Alice Longley - Buckingham Research

Okay, that’s great. I have one other question. When you did the acquisition, you said at that time you assumed that organic sales for the required brands would be flat for the first year. Can you bring us up-to-date on what the organic growth of those acquired brands was in the first year?

Zan Guerry

It is a lot higher than flat. Nielson sales roughly speaking, what you saw during the year, one reason why we beat estimates throughout the year was that the brands responded quicker. As you may recall, by March/April we had taken Unisom from a negative to a strong positive. We had taken Cortisone from a negative to a positive. We had upped ACT. So in total, that group was more like 5% to 10% growth as opposed to flat. These are Nielson numbers I am giving you.

Alice Longley - Buckingham Research

Right.

Zan Guerry

There was a big turnaround and our advertising when we made it, we did not know that it was going to work quite as quickly or quite as well. So, that was a huge success this year with getting those brands. As I gave in the January Nielsons those same brands that we talked about being flat, the four brands that we had Kaopectate up 22%, ACT up over 40%, Cortisone up 25%, and Unisom up 14%. Balmex I don’t have in here. I don’t know what it is but it is reasonable. Those brands have been hugely successful.

Alice Longley - Buckingham Research

Great, thank you very much.

Zan Guerry

You’re welcome.

Operator

Your next question comes from the line of Reade Kem of Merrill Lynch. Please proceed.

Reade Kem - Merrill Lynch

Thanks very much. Bob, just one quick question, I was wondering on the occasional share buy-backs that you do. What you know under your 7% notes what your constraints are to do that at this time.

Robert E. Bosworth

That would be the constraint that we are limited to about $70 million additional repurchase right now.

Reade Kem - Merrill Lynch

Thanks a lot.

Operator

Your next question comes from the line of Brian Delaney of Entrust. Please proceed.

Brian Delaney - Entrust Capital Group

Good morning, thanks for the call. Quickly on the $7 million write-down, can you tell us geographically where that went through on the P&L?

Robert E. Bosworth

Yes, the $4.5 million was previously a reduction in sales. That was returned to reserve and the $2.5 million was treated as an increment to cost-of-goods sold as inventory [inaudible] and reserve.

Brian Delaney - Entrust Capital Group

So, the $4.5 million reduction to sales and $2.5 million increase to cogs? You mentioned earlier there was some other though items going against that? What were those items again and where did they reside on the P&L?

Robert E. Bosworth

Two things. One was, as with any acquisition, you have a final purchase accounting reconciliation after the dust settles. We had somewhere in the range of $1.5 million of what would be favorable cost-of-goods sold that would offset that $2.5 million unfavorable with Pro Therapy and that is just reconciling the final allocations between inventory and tangibles.

Brian Delaney - Entrust Capital Group

Okay, I am sorry and a dollar amount again?

Robert E. Bosworth

It is about $1.5 million.

Brian Delaney - Entrust Capital Group

Okay. You talked to, over the long run, mid-to-high middle singles digit organic sales growth. Is there anything that we should be considering as to why ‘08 relative to ‘07 that is reasonable or unreasonable given we had a great year? Are there things we should keep in mind when we are trying to model out of the ‘08 comparison?

Zan Guerry

I think in many ways we produce ‘07 results with what I would call reasonable but not extraordinary strong Nielsons. A lot of it was comparison to a really weak 2006, et cetera. The Nielson growth that we saw throughout the year was moderate, but the Nielsons that I mentioned, December was the strongest period that we saw all year, kind of across the board and January appears to be stronger. I think in some ways we will have more sales driven momentum in 2008 than we do in 2007, particularly considering the new products. It should be an above-average growth in our sales.

Brian Delaney - Entrust Capital Group

Okay, so in 2008 we should see or are thinking about an acceleration of what we saw in 2007 and that is the kind of thinking behind the guidance?

Zan Guerry

Yes.

Brian Delaney - Entrust Capital Group

Okay, thank you. I appreciate it.

Zan Guerry

The guidance doesn’t assume all of that, but that is what our goal is. We are not assuming extremely strong growth, but it will be stronger growth than it was in 2007.

Robert E. Bosworth

To put that into perspective, generally we don’t provide for reason revenue guidance. But if you look at it, I think I have stated that the organic growth including the short term with is a real gamble, is in the 3% to 5% range for the fourth quarter and the year. I think that as you look at some of the numbers Ann quoted for the December Nielsons which were out and that was at 7.5% kind of number. We again are focused at the longer term and that is the hardest thing to do, but there can be some fluctuation on the market condition, those kinds of things on a year-to-year basis.

Brian Delaney - Entrust Capital Group

Okay, thank you very much.

Operator

Your next question comes from the line of Gary Giblen, Goldsmith & Harris. Please proceed.

Gary Giblen - Goldsmith & Harris

Hi, good morning and good quarter.

Zan Guerry

Thank you.

Gary Giblen - Goldsmith & Harris

I know that you don't give quarterly guidance, but can you give us directionally a sense of whether the year will be evenly spaced in terms of earnings or more backended because you have product intro costs in the first half?

Zan Guerry

Quarterly patterns -- again, we don't provide quarterly guidance. The only substantive difference that I would make is -- state is that the first quarter should be relatively strong compared to last year because of the addition of the 12 months of the acquired brands.

Gary Giblen - Goldsmith & Harris

Okay. That's helpful. And then just the only other one is many of your products have long maintained price premiums at retail to national brand counterparts, so is there any thought to changing that in light of a strapped consumer?

Zan Guerry

No, we are not planning on that. We have not seen in most of the categories, as you know. Some categories, there is a lot heavier impact than some of ours, so we are not contemplating any such thing.

Gary Giblen - Goldsmith & Harris

Okay, great. Thanks.

Zan Guerry

Operator, is that the -- we've reached the 10 o'clock hour I believe.

Operator

Would you like to take the last question?

Zan Guerry

Yes, we’ll take the last question.

Operator

Okay, your next question comes from the line of Chris [Shively]. Please proceed.

Zan Guerry

Hello? Maybe he’s gone. Operator, we are not hearing Chris [Shively] speaking.

Operator

His line was open, sir, so I don’t know why he wasn’t speaking. At this time there are no further questions.

Zan Guerry

Thank you all very much for tuning in and we hope we can give you further good news on our next call and it is going to be a very exciting spring. Hopefully you will all rush out and buy all our new products too. So it should be a good period and we will speak to you again in about three months. Great. Thanks.

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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