Virtus Diversified Income & Convertible Fund
Q1 2009 Earnings Call Transcript

Published: 26 Jan 2009

[Operator:]

Welcome to the Alberto-Culver Conference Call. A replay of this call will be available for 30 days beginning this afternoon. The calling numbers are 1800-642-1687 or 706-645-9291. Please enter ID code, 79930498. (Operator Instructions). If you have trouble accessing the operator, please call Theresa Miller at Alberto-Culver at 708-450-2545. (Operator Instructions). Before we begin, the company has asked me to remind you that the actual results with respect to any forward-looking statements that are made today might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause the actual results to materially differ are spelled out in Alberto-Culver's annual 10-Q and 10-K reports, which the company invites you to study. In addition, due to the disclosure of organic sales growth and financial results, excluding restructuring and discreet tax items, this call may include mention of certain non-GAAP financial measures. Reconciliations of these financial measures to the most directly comparable GAAP measures are provided on the company's website in the Investing Section and are attached to the earnings release issued this morning and filed on Form 8-K with the Securities and Exchange Commission. Now, I'd like to introduce Mr. Jim Marino, President and CEO, of Alberto-Culver Company. Mr. Marino, you may begin.

[Jim Marino:]

Good morning and thank you, Ruth. I'd like to welcome all of you this morning to our first quarter fiscal year 2009 conference call. I am joined today by Ralph Nicoletti, our Chief Financial Officer; and Doug Craney, our Head of Investor Relations. On a very cold day in Chicago, we are very pleased to report strong growth in first quarter revenues and pre-tax earnings. Sales increased 2.8% on a reported basis or 9.5% organically after excluding the impact of foreign exchange rates and the acquisition of Noxzema. While pre-tax earnings on a continuing operations basis excluding restructuring, increased to a very strong 24.5% to nearly $61 million. Our organic sales growth was driven primarily by growth in TRESemmé and Nexxus and continued strong gains in our international markets. Foreign currency negatively impacted our sales growth by nearly 9.5%. Now, although the dollar has been strong versus all of our international currencies, since our last call, the dollar strengthened significantly particularly against the British pound, our largest international market. In the U.S., our sales increased 8% to $224 million in the quarter led by double digit growth in both TRESemmé and Nexxus. During the quarter, we overtook Unilever to become the third largest hair care company in the U.S. as reported by IRI. We generated strong international organic sales growth, while on a reported basis international sales decreased 5%. This was adversely affected by nearly 24% of negative currency impact. TRESemmé once again led our international growth, but we also generated good growth in our multicultural brands and St Ives, while Alberto VO5 was flat on a constant currency basis. Now during the quarter TRESemmé generated double digit organic sales growth in the U.S. and internationally. U.S. consumption trends for TRESemmé remained very strong as it was the fastest growing top 10 hair care brand in the most recent 12 week period for IRI. Our introduction of TRESemmé in Spain continues to perform very well. But even when excluding sales in Spain, we would have still generated double digit organic sales growth for TRESemmé. Nexxus also recorded strong sales growth in the quarter mainly due to growth in the club channel, strength and styling and initial shipments of our new items for fiscal 2009. Building on our success of Nexxus in the U.S., we are in the early stages of introducing Nexxus in Canada and have plans to enter Chile later in the year. We continue to feel good about Nexxus and its potential outside of the U.S. Alberto VO5 sales decreased low single digits on a constant currency basis, primarily due to declines in U.S. styling and U.S. treatment products. In the U.S. our opening price-point shampoos and conditioners generated low single digit growth, despite the opening price-point category decrease in more than 25% measure dollars. Sales for our St. Ives skin care brand were flat for the quarter on a constant currency basis. Its strength in Latin America was offset by declines in U.S. lotions, which were mainly impacted due to the timing of our promotions. We remain very excited about the newest addition to our portfolio Noxzema, which we acquired at the beginning of October. We are presently working on integrating Noxzema into our operations, in addition to investing the consumer and market research and actively developing a brand strategy that will better position us for 2010. Gross profit margin in the first quarter decreased 40 basis points compared to last year. The decrease was mainly due to higher raw material cost which is similar to our fourth quarter, negatively impacted gross margins by approximately 250 basis points. Offsetting this cost increase were manufacturing efficiencies and favorable product mix. We expect higher raw material cost to continue in the near-term, driven by the lag effect of higher oil prices from earlier periods, as well as recent increases in other input cost such as tinplate and some other chemicals. Excluding the impact from foreign exchange, our advertising and marketing investments decreased slightly versus the prior-year. In the quarter, we optimized our advertising and marketing investments in the U.S. and shifted more emphasis to our international markets. As a percentage of net sales, we would expect it to be higher on the balance of the year than we reported in the first quarter, as we continue to support key initiatives in our brands and geographies. As a percentage of net sales, selling and administrative expenses decreased approximately 140 basis points from the prior year first quarter mainly due to cost savings initiatives in selling and distribution together with foreign currency transaction gains. These decreases were partially offset by costs associated with the startup of our Jonesboro, Arkansas, manufacturing facility and higher stock option expense. Net interest income in the quarter was $1.3 million, a $1.8 million sequential decrease from the fourth quarter. This was mainly due to significantly lower investment rates and lower cash balances after acquiring Noxzema. Looking forward, interest income for short-term safe investments will likely be lower the remainder of the year. Our effective tax rate in the first quarter of fiscal 2009 was negatively impacted by a discrete tax item. We expect the effective tax rate for the remainder of the fiscal year to be approximately 34%, which is similar to this quarter's level if you exclude the discrete tax item. Taking these strong results to the earnings per share level, when excluding restructuring and discrete tax items, our diluted earnings per share from continuing operations in the first quarter increased 24.2% to $0.41. We finished the quarter with more than $330 million in cash, cash equivalents and short-term investments. After using more than $100 million in cash during the quarter we acquired Noxzema, made capital investments and paid dividends. We have no debt and have full access to our $300 million revolver. We are in a very-very sound financial position and have the liquidity to continue to invest in our brands to pursue strategic acquisitions and expand into new geographies and to buy back shares when and if appropriate. Now before taking your questions, a few closing comments. Overall I feel great about our performance in the quarter and the progress that we've made on key initiatives in this very, very difficult environment. Despite hair care categories that continue to be soft around the world and softness in retailers to same-store sales comp numbers, we've been able to continue to gain market share and grow our sales and earnings. But we are in a very unique economic environment. It's impossible to predict how the remainder of this year will play out and how consumers will behave in this difficult environment. What we do know is that the hair care and skin care categories continue to be very attractive for us. We also know that our brands are strong and have good momentum. Together with our new initiatives planned for 2009 and continued success in new geographies, we believe that we can deliver mid single-digit organic sales growth for the full year. In terms of pre-tax, we expect the first half of the year to be hindered by higher input costs; while depending on severity of foreign exchange rate movements, currency is also expected to put pressure on our pre-tax growth throughout the year. We've taken steps to mitigate these pressures such as the selective price increase in January and carefully monitoring overhead capital spending. These are unprecedented times and fiscal year 2009 will likely be a tough year on many fronts. Fortunately, we are in a position of strength and have the ability to invest in our business. This is not the time to sacrifice brand investments for any short-term benefits to a quarter or a year. If that means difficult comps for a quarter, well, so be it. We are going to do the right things for the business, and we will remain focused on building shareholder value over the long term. We have the programs in place that we believe will continue to drive organic sales growth. I'll take the hair care category and continue to capture market share and grow earnings. I'd now like to open this up to any questions.

[Operator:]

(Operator Instructions). Your first question sir comes from the line of Nik Modi. Your line is open.

[Nik Modi:]

Good morning everyone.

[Jim Marino:]

Hi Nik, how are you?

[Nik Modi:]

All right. Happy New Year.

[Jim Marino:]

Same to you.

[Nik Modi:]

Thanks. Just two quick questions. Just curious about the retailers responsiveness on your January price increase. Are they asking you to trade spend some of that back somewhere, just curious how they react to that? And then, the second question is, in terms of TRESemmé 24 Body and Nexxus, they released a few new product launches this year, how has the retailer responded to those in terms of incremental shops space et cetera? Thanks.

[Jim Marino:]

Okay, Nik. First on the price increase, you know it is very early on, but I will say we have had no issues with our retail customers with respect to the increase. I don't think it's going to be the retailer quite frankly that's going to put pressure on us in terms of pricing. If we get pressure, it will be consumer pressure, not customer pressure. So, we'll monitor that very, very closely, we'll do the right things and take action appropriately if and when necessary. In terms of TRESemmé 24 Hour Body in due released, the response from our customers has been very, very good. We are gaining great distribution on both of those new initiatives. In fact, in two of our major drug chains I think you will see them both already in the planograms, so if you happen to be in the Walgreen or CVS stop by and see our position. We are very, very pleased. All in all, when you take our new initiatives, when you take in to consideration, everything else that we've been pushing for in terms of planogram changes, we will end up with more retail geography after these planograms are set then we had before. So we are very, very happy.

[Nik Modi:]

And just a quick small question, Jim.

[Jim Marino:]

Sure.

[Nik Modi:]

On the de-stocking that, most consumer companies are talking about these days. I mean you had some pretty dynamic sales growth, just curious if you've seen any of that in any of your hair care, skin care categories and if you could just kind of give us the magnitude?

[Jim Marino:]

I guess the way I would think about it is, first of all you are right. The momentum of our brands, probably mask a little of that de-stocking issue at retail. We are seeing a bit of it here in the U.S., but we have primarily seen more of it outside the U.S. So that's been our experience up until now. I can't say that, when you roll it all up together that it had a significant impact on any of our number. So, we watch for that but again, and I think I've said this before, we manage a fairly significant percentage of our retailer inventories ourselves and we've been trying to do the right thing all along, and certainly taking this economic environment and its impact on the categories as we continue to manage their inventory. So, nothing that I would call real significant.

[Nik Modi:]

Okay. Thanks a lot Jim.

[Jim Marino:]

Sure, Nik.

[Operator:]

Your next question comes from the line of Bill Schmitz. Your line is open.

[Bill Schmitz:]

Hi, good morning guys.

[Jim Marino:]

Hey, Bill. How are you?

[Bill Schmitz:]

Good, good, good and how are you?

[Jim Marino:]

We are doing great.

[Bill Schmitz:]

Great. It looks like it by the numbers. Can you talk about the FX transaction gains, like what was that being sourced from?

[Jim Marino:]

Sure, I'll let Ralph handle that one.

[Ralph Nicoletti:]

Bill, when you look at all the inter-region transactions that we have, the gains came about by some movements between the British pound and the euro in our business relative to Spain and Ireland. So that's where we had some of the transaction gains.

[Bill Schmitz:]

Okay. Are those big businesses, Ireland and Spain?

[Ralph Nicoletti:]

Ireland is not too big. Spain is getting bigger each quarter. So, we're doing very well in Spain.

[Jim Marino:]

And those are partially offset by some negative impacts in…

[Ralph Nicoletti:]

Latin America.

[Jim Marino:]

In Latin America primarily, but the net impact was a positive.

[Bill Schmitz:]

Okay, great. And then if you look at the scan channel trends in Nexxus, I mean it's still growing, but it's decelerated quite a bit. I mean is there anything you can do to kind of get that growing again at those high single-digit rates? And again, I am only looking at some data. So, I clearly don't see the Costco stuffy side or Wal-Mart.

[Jim Marino:]

Right. And I think what you are looking at quite frankly, you are seeing deceleration in the category. And the growth rates on brands declining and/or the declines in other brands accelerating. And I think that's kind of the environment that we're in. With respect to Nexxus specifically, we're certainly pleased with our club business on Nexxus. We think we continue to perform very well in those measured outlets. But our new initiative, the Nexxus due release, we think is going to really help kick start some of those U.S. channels where growth may be slowing down a bit. So, we're pretty comfortable with how Nexxus is performing and certainly our customers are.

[Bill Schmitz:]

Great. Thank you very much.

[Jim Marino:]

Sure, Bill. Take care.

[Bill Schmitz:]

You too.

[Operator:]

Your next question comes from the line of Chris Ferrara. Your line is open.

[Jim Marino:]

Hey, Chris, how are you?

[Chris Ferrara:]

Good. How are you?

[Jim Marino:]

Very good.

[Chris Ferrara:]

A question on some of the commentary around the pressures on pre-tax in the first half. So I think we get commodities and the lag may be a little bigger than we would have thought, but that's understandable. On the FX side, I thought last quarter you guys had said that the bottomline impact in FX is negligible. Wondering if

[Jim Marino:]

I'll let Ralph speak to that, Chris.

[Ralph Nicoletti:]

Chris, since the last call, I think principally what's changed significantly is the British pound has really weakened substantially relative to the dollar. And in the UK, we have a nice business with very good margin. So it's placed more pre-tax pressure than where we were at the time of the last call. If you look at the fourth quarter, the calendar year, the British pound depreciated pretty substantially. So that's what's weighing on us now more than what we had previously had talked about.

[Chris Ferrara:]

If we just sort of take the pound rate a couple of weeks before you guys reported last time and where it is today, I mean is that a good way to get a sense of it? And I guess could you give a little color on margin mix; in other words, like how strong those margins are relative to the Fleet average?

[Ralph Nicoletti:]

Well, our business in the UK is higher than our average margins. We won't quote specific profitability by region, but it does have very good margins. When you look at the markets today, our sales are impacted by about 9.5%. And now, as we look at our profits, they would be impacted by about that same amount. This quarter, we had some transaction gains. It's all toe to neck. Looking forward, we may still have some of those, but I think to a lesser degree than we have this quarter. So, we do see some pressure on the pre-tax side from that.

[Chris Ferrara:]

Just to make sure I am getting it, you're saying this quarter had nine change points on a top-line, it also had nine change points on the bottom line, but you got the offset from transaction gains and that transaction gain will go away, or maybe even reverse. So in the next quarter you'll actually see it all flow through the bottom line, is that right?

[Ralph Nicoletti:]

Yes. I mean in reverse, we probably wouldn't enjoy to the extent what we had on this quarter. I wouldn't think we're going to see as much next quarter. So, it's not going to have as much of an offset as it did this quarter because this quarter we did have about 9.5% plus translation exposure, but again it was mitigated by some of those transaction capabilities.

[Chris Ferrara:]

Got it. Thanks a lot.

[Ralph Nicoletti:]

I think you have it right.

[Chris Ferrara:]

Thanks guys.

[Jim Marino:]

Okay Chris, take care.

[Operator:]

Your next question comes from the line of Wendy Nicholson. Your line is open.

[Wendy Nicholson:]

Hi.

[Jim Marino:]

Hi. Wendy.

[Wendy Nicholson:]

Hi. How are you?

[Jim Marino:]

I'm good. Yourself?

[Wendy Nicholson:]

I'm fine thank you. My first question has to do with advertising spending. With all the initiatives you have kind of the brands going more global, increased distribution and maybe with some incremental spending on Noxzema this year. Should we still look for advertising, even though it was kind of light in the first quarter, to be at the same sort of run rate that it was last year as a percentage of sales for the full year?

[Jim Marino:]

Well the way we're thinking about it is, it will certainly be a higher percentage of sales the remainder of the year than it was in the first quarter, and let me just give you some color on the first quarter. Last year, we spent a significant amount of money, medium money on VO5 styling, a year ago first quarter, so Q1 2008 we didn't do any of that this year. Instead what we did is we shifted the majority of those funds over to our international business to support those initiatives. When you translate that back because of currency, on a common currency it appears to have a bigger impact than it did. On a common currency basis, we're really talking about a couple of million dollars less spending this year than we had last year. So, you guys just got to be careful now with these currency translations. When we ramp-up spending outside the U.S., they get translated back at a lower level. I will tell you that with the initiatives that we have in place, we will certainly increase our spending and plan. I mean the first was planned as it came in, so there were no surprises to us. The subsequent quarters you will see spending ramped up a bit and certainly higher as a percentage of sales then what you saw in Q1. Now whether it's exactly like it has been in previous years and you know there have been some economies for us, so I can't tell you to the decimal point that it will be exactly the same, but I am not sure that it will be significantly different.

[Wendy Nicholson:]

Okay. And then, could you just comment on the lack of on share repurchases kind of to date, I know you spent the money on Noxzema and all of that. But, you're sitting on so much cash and it seems you have got so much flexibility, are you still actively looking at other acquisitions or would you expect to sort of reallocate that money to share repurchases in the coming quarters?

[Jim Marino:]

I think, you got a couple of things going on there Wendy. First of all, in this economic environment and everything that we see going on out there, we thought the most prudent course of action was to hold off on any share buybacks. Let's just sit tight for a while, let's see where all this leads. And quietly frankly, we like being in a strong cash position in general. So that's number one. Number two, you are absolutely right. There are several opportunities floating out there that we are looking at closely. Whether or not any of them turn into a transaction is anybody's guess at this point, but that's still number one priority for the cash, always has been, continues to be. And we are looking at that very seriously. So, when you take those two things together, it just didn't seem to make a lot of sense for us to go back into the market and buy back shares at this present time.

[Wendy Nicholson:]

And Noxzema is small enough and clean enough, if you will, from a sort of management bandwidth ability to take on a new project over the next timeframe. That's not an issue?

[Jim Marino:]

We don't think that's an issue at all, no. You are absolutely right. Noxzema is clean enough, small enough, if you will, where we can wrap our arms around and use quite frankly the infrastructure that we had and work through that. And that would not inhibit our ability to look at other opportunities.

[Wendy Nicholson:]

Got it, awesome. Thank you so much.

[Jim Marino:]

Anytime, Wendy. Take care. Hope to see you soon.

[Operator:]

Your next question comes from the line of Linda Bolton Weiser. Your line is open.

[Jim Marino:]

Hi, Linda.

[Linda Bolton Weiser:]

Hello, Jim. How are you doing?

[Jim Marino:]

I am doing real well. How are you?

[Linda Bolton Weiser:]

Good. Sorry, I missed the beginning of the call. Can you remind us on Jonesboro startup expenses? When does that start to become no longer a negative impact on margins?

[Jim Marino:]

I'll let Ralph speak to that.

[Ralph Nicoletti:]

Yes, Linda, at the end of the year, it will no longer have a negative effect on our SG&A side. It's already beginning to contribute to gross margins, but there are some costs that are still hitting the SG&A line. So as we move through the year, that will be gone by the fourth quarter. This quarter, there was some impact on our SG&A, but not that significant from Jonesboro. The other thing I just want to alert you to though, as we do move through the year, at the backend of the year, we're going to start to see some more expenses from our SAP implementation, which year-on-year had little to no effect this quarter. But that will ramp up a little bit more as we move to the back part.

[Linda Bolton Weiser:]

Okay, great. So, just to clarify, Jonesboro, the negative is in the SG&A, but it's actually up a little bit of a positive on gross margins even now?

[Ralph Nicoletti:]

That's correct.

[Linda Bolton Weiser:]

Okay, got you.

[Ralph Nicoletti:]

And we'll see that ramp up a little bit more as we move through the year.

[Linda Bolton Weiser:]

Okay. And then, do you have an operating cash flow number for the quarter.

[Ralph Nicoletti:]

Yes, this quarter, Linda, we were as expected, a negative $16.6 million on operating cash flow. And two drivers of that. One was we made significant tax payment to Sweden related to the tax items that we've had in our release. And also, we built some inventory during the quarter, which we expect to recover during the balance of the year. But we built some inventory

[Linda Bolton Weiser:]

Thank you. And just what is the quantification of the Swedish tax related item?

[Ralph Nicoletti:]

About $14 million.

[Linda Bolton Weiser:]

$14 million, okay. And then, I think I don't know if you mentioned this, but can you give us a more specific timing on when you would be doing the test launching of the Nexxus in some foreign markets?

[Jim Marino:]

We are actually, Linda, launching Nexxus as we speak, in Canada. So we should be in full distribution there by early next quarter and we will be launching later in the year in Chile obviously a smaller launch than what we have planned for Canada.

[Linda Bolton Weiser:]

And then, what about the restage in the U.S. market, what quarter would that be?

[Jim Marino:]

The restage of Nexxus?

[Linda Bolton Weiser:]

Yes.

[Jim Marino:]

That's going on as we speak. It's starting to flow into retail right now, certainly our new initiative is going into the new planograms and the restaged shampoo conditioner styling products is beginning to flow through. I think you can see some of it already on shelf.

[Linda Bolton Weiser:]

Okay. Is that actually increasing the number of SKUs at some retailers?

[Jim Marino:]

Absolutely, the combination of the restage and our Nexxus new release launch will give us more space at retail in 2009.

[Linda Bolton Weiser:]

Okay. Thank you very much.

[Jim Marino:]

Any time Linda. Take care.

[Operator:]

Your next question comes from the line of Connie Maneaty. Your line is open.

[Jim Marino:]

Hi Connie.

[Connie Maneaty:]

Hi good morning everyone. Do you see or what kind of impact would you expect to see on the styling category that Pantene is starting finally to focus on?

[Jim Marino:]

Difficult one to answer Connie. I really can't tell you whether or not Pantene is going to have a positive influence or a negative influence on the styling category. What I do know is that trust me it's the number one styling brand in the U.S. and growing and Pantene is declining. So, those are the only facts that I can offer up to you right now. Our styling business in the U.S. and around the world is very, very strong. As a category, although impacted by some softness, styling doesn't appear to be as impacted as shampoo conditioner, or primarily conditioner I guess is what I would say. So, we love our position in styling. We think we understand that category extremely well. And we have leadership positions in just about every market that we're in.

[Connie Maneaty:]

Okay. I came in late on this call too, so I apologize, but when are the planogram reset supposed to be done?

[Jim Marino:]

Some have already been done. Certainly, earlier in the case of our two major drug chains, I believe both of them have reset their planograms at this point and during the course of this quarter, you'll see the majority of planograms being reset. I would think by early April, just about everybody will be in their new planograms.

[Connie Maneaty:]

Okay. And I don't know if you described this before, but why would the opening price point hair care decline as much as it did? It just seems so counterintuitive?

[Jim Marino:]

Well, it does, but it's interesting. We're getting a little closer to the dynamic here. I think what you're seeing in hair care, certainly here in the U.S. is that although you have some consumers trading down, you also have some consumers who are trading up. So it's a combination of the two. So, when you look at those consumers who may be trading down, the way they trade down is they may buy in a different channel. They may wait until their favorite brand is on promotion or they may trade down to a mid-tier brand, but not all the way down to an opening price point brand. So, I think that's what you see going on. And likewise, some of that is offset by those consumers who have decided to literally trade up and treat themselves to a small indulgence in a very, very difficult economic environment. Does that help?

[Connie Maneaty:]

That does help. Did you happen to give the growth rate or would you give the growth rate for TRESemmé and Nexxus sales in the quarter?

[Jim Marino:]

We don't give specific growth rates. I think I did mention they were both up double digits.

[Connie Maneaty:]

Okay, great. Thank you very much.

[Jim Marino:]

Anytime, Connie.

[Operator:]

Your next question comes from the line of Jon Andersen. Your line is open.

[Jon Andersen:]

Good morning.

[Jim Marino:]

Hey, Jon, how are you?

[Jon Andersen:]

Good. And you?

[Jim Marino:]

We are very good. Thanks.

[Jon Andersen:]

Good. I was wondering if you could just give us a sense for the new markets. You have talked about Canada and Chile with Nexxus. Is there anything planned for TRESemmé in fiscal 2009 in terms of new market entry and when may that be?

[Jim Marino:]

Yes, there is a couple of smaller markets under horizon in 2009. We haven't yet disclosed which those are, but they are smaller in scale. So I wouldn't factor a whole lot into that. That would be my best direction. And we did talk about the Nexxus launches in Canada and Chile.

[Jon Andersen:]

Terrific. And then in terms of commodities, I thought that fiscal first quarter was going to be the peak of the expensing higher commodity costs. And it sounds like they impacted gross margin by about 250 basis points or similar level as your fiscal fourth quarter. But the commentary today seems to indicate that there'll be another quarter of above average pressure. How should we think about the lag time there and when do you think relief will materialize on that front?

[Jim Marino:]

Yes. Q2 will definitely be impacted by higher input cost. There is no question about that. We're looking at it to begin to subside late in Q2, early Q3 is our best guess right now. And it's a little bit of a moving target, but I think you'd be safe in thinking about it that way. I don't know. Ralph, do you have any color you want to add to that?

[Ralph Nicoletti:]

Jim mentioned John in his comments about rising tinplate and some chemical prices. Those have happened a little later in the calendar year. So you are seeing them flow into the first quarter and into the second quarter. So that's part of why that's firming up the second quarter a little bit more.

[Jon Andersen:]

Okay. Just last question. I see Unilever announced that they are acquiring TG. And I was just wondering if you had any thoughts on that and how that might impact you or whether that would have any impact on your business going forward?

[Jim Marino:]

None of our brands really compete with TG including Nexxus. TG is a combination of product sales and salon sales. I have no idea what Unilever's plan moving forward is on that business. And I know it had been for sale for quite some time, but we don't look at this as having any meaningful impact on our business now.

[Jon Andersen:]

Thanks a lot and nice quarter.

[Jim Marino:]

Thanks, Jon. Stay warm.

[Jon Andersen:]

You too.

[Operator:]

Your next question comes from the line of Andrew Sawyer. Your line is open.

[Andrew Sawyer:]

Hi, good morning guys.

[Jim Marino:]

Hey Andrew, how are you.

[Andrew Sawyer:]

I am pretty good. I just had a few quick one, since we are getting later on the call here. The first is, I was wondering if you could help us frame up, how you guys are thinking about A&P spending with some of the rates coming down and how that should influence your spending as a percent of sale. Have you got some of that drop through, would you increase your weight? So, how do you guys think about that decision?

[Jim Marino:]

It's difficult to answer that one specifically. But you are correct, we do think that there are going to be some efficiencies as we move through the year with respect to media, we are working on that very, very closely. Where that all flops, because at this point we can't tell you, we don't know there is going to be x amount of savings and where that savings is going to come from and which type of media et cetera, et cetera. So, it's difficult to try to project that out. I think the way we think about it is, we need to do what's right for the brands. We certainly have a plan for each of our brands with respect to media spending and the kind of GRPs and TRPs that we think is appropriate for each brand and sometimes in a quarter, if things are doing well, we may uptick that a tad, but not to any significant amount that's going throw off anybody's projections. But hopefully, I mean quite frankly the networks have headed all their own way for a long, long time. I mean it's been a great business, you charge more for less every year. And I think finally due to this economic environment, things may start to soften up a bit. So we're hoping that we can gain some efficiency through all that but net, net is a kind of shift percentage of spending versus net sales. If it does, I don't think it'll be a big shift.

[Andrew Sawyer:]

Okay. And then, just quickly on the club stores. Is the stuff you're talking about with Nexxus in the growth, is that in and out type of product, is that more permanent listings?

[Jim Marino:]

No those are permanent listings on Nexxus. So, what happened in Q1? We had a great promotional program going on and that really helped generate significant uptick in consumer consumption though that channel, but those are permanent listings in club with Nexxus.

[Andrew Sawyer:]

In your earlier comment, are you not seeing more trade down in Nexxus club growth in your VO5, like when you think about the consumer trading down?

[Jim Marino:]

Yes I mean, I guess that would be appropriate to my comments. I mean, so if you are awaited for a consumer to trade down is to shift channels and you can still buy your brand at a different channel for maybe relatively lower price, so absolutely that's another way to look at it.

[Andrew Sawyer:]

And then, just quickly on organic sales growth this quarter, did you guys get any sense that there are retailers preordering in front of the trust that may increase as on January 1?

[Jim Marino:]

If there was, it was very, very minor.

[Andrew Sawyer:]

Well thank you very much guys.

[Jim Marino:]

Hey anytime Andrew.

[Operator:]

Your next question comes from the line of Jason Rogers. Your line is open.

[Jason Rodgers:]

Hello and congratulations on the good result.

[Jim Marino:]

Thank you.

[Jason Rodgers:]

I wonder if you could comment, if you've seen any changes that are from Wal-Mart on their commitment to VO5?

[Jim Marino:]

I don't believe we've had a change in their commitment to VO5. I would characterize it as being status quo over the last year or two. Like everybody else, Wal-Mart would much prefer to sell higher priced brands than opening price point brands in this category. So, from that aspect, there'll be more after to promote some of the other brands in the category than there would be opening price point. But that's something that's been in play at Wal-Mart for the last several years. So I don't think there has been a big shift.

[Jason Rodgers:]

Okay. And you mentioned the share repurchases is kind of held off on those in the past few quarters. And I was wondering is that is still your attitude currently.

[Jim Marino:]

Yes, I think as we talked about earlier, the economic climate coupled with some acquisitions that we're exploring have caused us to kind of take a time out, if you will, with respect to share repurchase. And let's see how all this other stuff plays out first.

[Ralph Nicoletti:]

I'd like to see the financial markets get a little more stabilized as well.

[Jason Rodgers:]

Okay. And looking at your current cash investments, where is that held and what is it invested in?

[Ralph Nicoletti:]

In terms of what's it invested in, it's largely in government and Treasury type securities that are ready access. So very, very safe that's where our priority is. Unfortunately, for that, you have to take a significant trade-off in yield. So they are not yielding that much as you saw our interest income for the quarter, lower than where it was either last quarter or prior year. Most of our cash is held outside the U.S. We have plenty of cash to operate around the world, both in the U.S. and outside the U.S.

[Jason Rodgers:]

And then looking at the auction rate securities, just wondering if you have an update on the status of those?

[Ralph Nicoletti:]

Nothing significant to report. The auctions some do go through are CUSIPs have not been part of any of those successful auctions, although now with the settlements that have occurred from some of the states, individuals and charities have largely been taken out of those and corporations like ourselves are actually more ahead in line for some of that we are financing that is currently going on. So, right now, it doesn't cause us any concern certainly from a liquidity standpoint, and we'd expect to see those recover over the coming year here.

[Jason Rodgers:]

And finally, you haven't provided a year-ago balance sheet, have you, just to get an apples-to-apples comparison?

[Ralph Nicoletti:]

No, in our release, we have the September 30th period.

[Jason Rodgers:]

Right. Yes, I was just wondering about the year-ago figure?

[Ralph Nicoletti:]

It hasn't been restated for SEDAR out yet.

[Jason Rodgers:]

Okay. All right. Thank you very much.

[Jim Marino:]

All right.

[Operator:]

(Operator instructions). And your next question comes from the line of Jason Gere. Your line is open.

[Jason Gere:]

Okay. Thanks. I guess my fingers aren't fast enough these days.

[Jim Marino:]

Jason. How are you doing?

[Jason Gere:]

Good, hanging in there. Just a couple of questions. One, I was just wondering if you could talk about that the basket of commodities where you are seeing the price increases, the tinplates, the chemicals. What percentage of your total cost of goods does that represent just to bring us to some context? Is it very small, because I also was a little bit surprised to hear about the cost inflation continuing, I guess, into the March quarter at that similar pace than maybe what we saw in December or maybe a little bit less?

[Ralph Nicoletti:]

Jason, I don't have the exact percentages. I would say they are not that significant as a percent of the total. However, the increases are very high, particularly on tinplate. Tinplate effects a lot of our styling products, the chemicals run through most of all our products and don't forget as those impacts occur particularly even in this quarter, there is a lag effect. So, a lot of the variances that occur from those purchases still will bleed into the second quarter. So that's why we are seeing that continue a little beyond Q1.

[Jason Gere:]

And I also was late to the call. I apologize. I know you don't give quarterly guidance. But with a very tough year-over-year comparison, I think gross margins 240 dips last year with these pressures, you are seeing some benefits there. Are you anticipating the gross margins would be weaker again year-over-year in the March quarter, but for the full year still up in that 50 to 100 basis point range?

[Jim Marino:]

Well I think we said all along that for the year, we thought we can maintain to have a small positive impact to gross margins when everything is taken into consideration here. I don't think we've backed away from that. I think, we still feel that to be prudent, the second quarter as we've said, will be negatively impacted by input cost but we would expect that Q3 and Q4 will recoup most, if not all of that negativity that we experience in the first half of the year. This has been a crazy environment for all of us. So, we look at this weekly and things could change. And so, I just don't want you to think that everything is cast and branch here, but I think overall when you take all the puts and takes into consideration, the year should fall out about where we thought it would.

[Jason Gere:]

Okay. And then, so that being said just on to the other point on the opening price point with VO5, I guess, I think it was the previous, the other Jason asked the question about, what your--?

[Jim Marino:]

There are too many Jason's.

[Jason Gere:]

I know. And just in terms from that perspective, I have seen a lot of swab on the shelf and I was just wondering over the last few months, I was wondering is that just replacing Sunsilk products or how are you managing that there and I guess to other distributors as well?

[Jim Marino:]

Well, we're obviously not managing swabs, so that's somebody else's problem. But, if you remember what I said, and that was that opening price point in the 12 weeks that ended December 21, I believe was off about 25%. We were actually up, you know who the other player is. So, I can tell you what's happened to their business. All-in-all with respect to VO5, again with the gives and takes our distribution levels will be about the same this year versus last year, but consumers aren't trading all the way down to $0.99. That's where they are going. They are going from 499 to 399, or they are going from their favorite 399 brand and waiting for it to be on sale for 299, or they are taking their 499 brand and going to a different outlet and buying it for 449. I mean that's what we see. $0.99 shampoo is a very small percentage of our total business plan. And so, I think we are where we are. I'm glad we're there, because there are still consumers who are looking for opening price point. But in the grand scheme of things, even in this very-very difficult economic environment, we're not seeing a rash of consumers moving down to $0.99 shampoo conditioner.

[Jason Gere:]

Okay. And that's good to hear. Great, thanks. Congratulations.

[Jim Marino:]

Thanks, Jason.

[Operator:]

Your next question comes from the line of Chris Ferrara. Your line is open.

[Chris Ferrara:]

Sorry, I'm back again.

[Jim Marino:]

That's all right, Chris, anytime when we get something you're worth two calls.

[Chris Ferrara:]

Okay. Maybe this is right, I'm sorry, but did you quantify the effective FX transaction as positive that hit this quarter?

[Ralph Nicoletti:]

We didn't quantify it specifically, no. And we didn't look to do that just typically. But it helped to offset some of the translation effect that we had.

[Jim Marino:]

I guess the other way I would think about it, Chris, is if we wouldn't have had it, we still would have had a very robust quarter.

[Chris Ferrara:]

Okay. How do I think about your manufacturing layout, I guess, in the UK? Do you manufacture in the UK for most of your UK business or you're actually importing from a higher cost country into the UK and…

[Ralph Nicoletti:]

Most of our production is in the UK. We have a plant in Wales, and that provides product for most to all of our business throughout Europe.

[Chris Ferrara:]

Got it, perfect. And then just one final one and you may have said this already, was there any pipeline fill in the quarter for the new product launches, anything of note that we should know about?

[Jim Marino:]

There was a little bit that went out for those customers who were resetting their planograms early. And I quite honestly haven't gone back to compare that to prior years to see if there was anything significant. And my bet is that it wasn't, that it was similar to the kinds of things we experienced on a year-to-year basis when we tried to have some early shifts for those customers who have early resets. So, I don't think it plays a huge role in the quarter.

[Chris Ferrara:]

Got it. Thanks again, guys.

[Jim Marino:]

Anytime. Thanks, Chris.

[Operator:]

Your next question comes from the line of Connie Maneaty. Your line is open.

[Connie Maneaty:]

Hi. I just had a last question on SAP, since you mentioned that that the expense related to it would increase in the back part of the year. Can you quantify that and also tell us how far along in its implementation you are?

[Ralph Nicoletti:]

In terms of the implementation, we are nearing going live in our first market, which is the UK. So there is a lot of preparation work going on right now for that. So, we're near-term going to be doing that. We don't quantify specifically the costs in the future on SAP, but we do anticipate them increasing, because we'll be preparing for one of our larger markets, assuming the initial market goes the way we had it planned.

[Connie Maneaty:]

And when do you think you'll go live in the U.S.?

[Ralph Nicoletti:]

Don't have that pinned down completely. It will not be this fiscal year though.

[Jim Marino:]

And a lot of that obviously depends on how smooth the transition goes in UK.

[Connie Maneaty:]

Okay. Thank you.

[Ralph Nicoletti:]

Okay.

[Jim Marino:]

Sure.

[Operator:]

Mr. Marino, since there aren't any more questions in the queue, please continue with any closing remarks.

[Jim Marino:]

Well, I'd like to thank you all once again for your time this morning. As I am sure, you can imagine we are extremely pleased with our first quarter results. I think it's a testament to our company that we were able to deliver such strong results in these very, very difficult times. We don't know where this market is going to go, but what we do know is that we have a lot of momentum, a lot of great brands and that we will continue to capture share. As always, if you have any additional questions, please feel free to give us a call. We pride ourselves in being accessible to you folks. So don't hesitate in contacting us. Again, thank you very much for your time this morning, and we hope to talk to you all soon.

[Operator:]

Thank you. Mr. Marino. I'd like to mention that a replay of this call will be available for 30 days beginning this afternoon. The calling numbers are 800-642-1687 or 706-645-9291. Please enter ID code, 79930498. This concludes the conference call. Thank you and have a good day.