Schiff Nutrition International's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Schiff Nutrition International (WNI)

Q3 2012 Earnings Call

March 22, 2012 11:00 am ET

Executives

Rebecca Herrick - Assistant Vice President of San Francisco Office

Tarang P. Amin - Chief Executive Officer, President, Director and Member of Executive Committee

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

Analysts

Damian Witkowski - Gabelli & Company, Inc.

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

Unknown Analyst

Madeline Miller - D.A. Davidson & Co., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Schiff Nutrition Fiscal 2012 Third Quarter Results Conference Call. My name is Chanel, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, to Ms. Becky Herrick. Please proceed.

Rebecca Herrick

Thank you, operator, and thank you, all, for joining us this morning for the Schiff Nutrition Fiscal 2012 Third Quarter Results Conference Call.

By now, you should have received a copy of the press release. But if you have not, please contact LHA at (415) 433-3777, and we will forward a copy to you.

As a reminder, this call contains forward-looking statements that are based on management's beliefs and assumptions, expectations, estimates and projections. These statements are subject to known and unknown risks and uncertainties, and therefore, actual results may differ materially. Important factors that may cause actual results to differ from those expressed or implied by such forward-looking statements are detailed in today's press release and the company's SEC filings.

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

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

Tarang P. Amin

Thank you, Becky, and good morning, everyone. We're pleased with our fiscal 2012 third quarter results.

Net sales grew 25% over the same period last year, driven by a 53% increase in branded sales. Importantly, all key brands grew with contributions from our probiotic business acquired in June, new product introductions and benefits from a significant increase in advertising. Historically, the third quarter is our strongest quarter, given key customer merchandising events in January, and our results are further aided by this year by the strong investment we continue to make in our strategy to build premium brands and lead innovations.

Gross margins increased to 46% from 36% a year ago, reflecting the sales shift from private label to our branded business. Based on our third quarter performance, we're adjusting our fiscal 2012 outlook, including increasing net sales, gross margins and operating expenses.

Here's an update on our 5 key strategies for growth. Our first strategy is to build premium brands. We posted growth across all key brands this quarter reflecting progress from our brand-building efforts. In the beginning of the fiscal year, we discussed our intent to increase selling and marketing expense as a way to drive our premium brands.

During the fiscal third quarter, selling and marketing expense as a percent of net sales was 24% versus 14% last year. We've put this increased investment toward Schiff Move Free, Schiff MegaRed, Schiff Sustenex and Digestive Advantage. All our brands responded well to these efforts. A great example is Schiff MegaRed, which continued its rapid growth even at a 60% price premium relative to fish oil. Our MegaRed efforts also included gaining over 75,000 likes on Facebook and product sampling on the Dr. Oz show. We plan to continue this investment to increase awareness and trial of our premium brands.

Our second strategy is to lead innovation. Earlier this fiscal year, we launched new items, including Schiff Move Free Ultra, which offers consumers joint relief in one small pill and MegaRed Extra Strength, which offers 500 milligrams of MSC certified krill oil. Both products contributed to the overall strong brand results. In fact, in part due to the traction of Move Free Ultra, our overall joint business grew 25% in the third quarter versus last year. We remain committed to leading innovation in our categories.

During the quarter, we tested MegaRed Joint, which uses a proprietary formula of our MSC certified krill oil and Asasantin to promote joint health. We also developed several promising new items on Move Free. In the fourth quarter, we'll be testing a new Move Free item, which maintains and repairs cartilage, and Move Free Lean, which provides joint relief and support to leaner bodies. We're also working on several promising innovations involving our proprietary BC30 probiotics technology.

The third strategy is to expand the channel and geographic footprint of our company. Our primary focus remains on building sales by strengthening our long-standing relationships with leading retailers, such as Wal-Mart, Costco, Sam's and Walgreens. In the third quarter, we executed our sales strategy well, resulting in strong consumption in each of our core customers.

We also hired a vice president for our Wal-Mart and Sam's team to further advance our business with these important customers. Additionally, we continue to enable online sales for more of our products. While still very small, we like the ability to directly engage consumers through the digital channel.

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