Schiff Nutrition International, Inc. (WNI)

F1Q2011 Earnings Call Transcript

September 14, 2010 11:00 am ET

Executives

Kirsten Chapman – IR, Lippert/Heilshorn & Associates

Bruce Wood – President and CEO

Joe Baty – EVP and CFO

Analysts

Michael Gallo – C.L. King

Ian Corydon – B. Riley & Company

Damian Witkowski – Gabelli & Company

Steven Gregory – Mandalay Research

Presentation

Operator

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Good day, ladies and gentleman, and welcome to the Schiff Nutrition International fiscal 2011 first quarter conference call. My name is Michael, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Ms. Kirsten Chapman. You may proceed.

Kirs

ten Chapman

Thank you, Michael. Thank you all for joining us this morning for the Schiff Nutrition International fiscal 2011 first quarter results conference call. By now, you should have received a fax or email of the press release. But if you have not, please contact us at Lippert/Heilshorn & Associates at 415-433-3777, and we will forward a copy to you immediately.

As a reminder, this call may contain forward-looking statements. The risks of which are the same as those described in the Safe Harbor language in the press release and those details in the company's SEC filings. Actual results may differ materially from those described during the call.

With us from management today are Bruce Wood, president and chief executive officer; and, Joe Baty, executive vice president and chief financial officer. It's my pleasure to now introduce Bruce. Please go ahead.

Bruce Wood

Thank you, Kirsten. And good morning, and welcome to the first quarter call. We were encouraged with our strong brand of sales performance, which drove an overall 5.9% net sales increase on a quarter-over-quarter basis and more than offset the decline in our private label business.

With respect to the key profit measures, we maintained a solid 39.5% gross profit margin. And although our operating margin declined on a period-over-period basis, this was strictly a function of a significant increase in consumer advertising and other marketing support in the quarter. The increased marketing support was primarily directed at our Schiff MegaRed Krill Oil product, which continues to perform strongly having achieved virtually full national mass market retail distribution in the fourth quarter of fiscal '10.

In the first quarter, Schiff MegaRed benefited from national TV print and online advertising, FSI couponing, in-store sampling, PR support, and customer-specific promotions. In the first quarter, the overall mass market supplements category, as measured by IRI, maintained a mid to high single-digit growth rate. The fish oil segment continued to grow strongly, a positive factor for Schiff MegaRed.

At the same time, the joint care segment remains growth challenged and continues to be very pricing promotion driven. Within this environment, we continue to support our Move Free flagship brand and other Schiff-branded joint care products. Move Free first quarter marketing programs included print and online advertising, FSI coupon support, grassroots PR efforts, and customer-specific promotions. We also completed certain (inaudible) class specific adjustments and promotion and pricing tactics in order to improve our overall competitiveness on the value dimension.

Our joint care business overall registered a modest net sales decrease on a quarter-over-quarter basis as we face overall joint care segment weakness, coupled with some specific retailer inventory reductions. We believe we have the plans in place to maintain our joint care competitive position in the coming quarters.

On the new product front, our new Schiff Mega-D3 product reached the shelves of certain retailers in the first quarter, and customer specific promotions and an FSI coupon supporting the product were initiated. The marketing program behind Mega-D3 ramps up in our second quarter when we commence national TV advertising, in fact, starting next week. We expect to have more information on Mega-D3 sales performance on our second quarter call.

With respect to our private label business, the first quarter sales declined versus the prior year period, in part reflects our transition out of some business lost and into new business won. As noted in our last call, we have held our own, competitively speaking. But we do expect the private label business to continue to be volatile in the balance of the year. And we expect to experience continued margin pressure as competition remains intense. That said, we're confident in our ability to compete effectively in private label based on our reputation for high quality, excellent customer service, strong customer relationships, and our solid financial condition.

We're optimistic about our future prospects overall. And our commitment to delivering shareholder value is reflected in today's announcement of a $0.70 per share special dividend payable to shareholders of record as of close of business September 23rd, with proceeds to be distributed on October 26th. We are confident that the company will continue to generate positive operating cash flows in the future and that our post dividend cash position will provide the financial flexibility to fund growth initiatives, invest in our facilities, and explore acquisition opportunities.

Let me now turn the call over to Joe for his comments.

Joe Baty

Thank you, Bruce, and good morning to everyone. Earlier today, we announced our financial results for our fiscal 2011 first quarter. Fiscal 2011 first quarter net sales overall increased 5.9% to $51.4 million from fiscal 2010 first quarter net sales of $48.6 million. Net sales increased due to an 11.8% increase in first quarter-over-first quarter branded sales, primarily resulting from increased MegaRed business, including the benefit of expanded distribution during fiscal 2010. Aggregate branded sales amounted to $40.1 million and $35.8 million, respectively. Private label sales were $11.3 million for the current quarter, compared to $12.8 million for the prior year quarter.

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