Prestige CEO Mannelly Sees Change In Retail "Headwinds" Giving Brands More Shelf Space

In a year-and-a-half of heading Prestige Brands Holdings, Matthew Mannelly has been a change agent for the consumer health products firm.

After a strategic split with CEO Mark Pettie, Prestige's board named Mannelly chief executive in September 2009, hoping the veteran of consumer brands such as Nike, Gatorade and Cannondale bicycles would return Prestige to strong organic sales growth (Also see "Prestige Brands Replaces CEO Due To Differences With Board" - Pink Sheet, 7 Sep, 2009.).

Mannelly immediately implemented an enhanced focus on consumer health by paring Prestige's personal care portfolio and seeking OTC brands for acquisition. The company scooped up Blacksmith Brands, including PediaCare and Luden's, in late 2010, and soon after purchased the Dramamine brand from Johnson & Johnson (Also see "Prestige Brands Makes "Seismic Shift" To OTC With Blacksmith Acquisition" - Pink Sheet, 27 Sep, 2010.).

Prestige Brands President and CEO Matthew Mannelly

Concentrating more resources behind Prestige's core OTCs – Chloraseptic, Clear Eyes, Little Remedies, Compound W and The Doctor's NightGuard – is aiding the Irvington, N.Y., company's organic growth as well; revenue from the five core brands grew 14% in the most recent quarter.

Mannelly spoke to "The Tan Sheet" about the strategies he has implemented at Prestige, the retail and acquisition outlooks for OTC brands and the still-unclear market fallout from J&J's 2010 recalls.

Excerpts from the March 17 interview follow.

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"The Tan Sheet": Can you sum up the attitude changes you've put in place toward Prestige's brands since becoming CEO?

Matthew Mannelly: One, we're committed to organic growth long term. And … we're going to focus on core OTC growth in the near term. So we're focusing on that. We're focusing on building those brands and we're focused on supporting those brands from a marketing standpoint. So we've increased our marketing spend on those core brands quite a bit in the last year, and intend to continue to do so to build those core brands long term.

That's the first thing that, I think, is different. Second, as you know, we also said we're going to be very active in the [mergers and acquisitions] market. We refinanced almost a year ago now, and we have been very active. In the past 90-100 days or so, we've made two major acquisitions to the tune of almost $300 million. So we want to build the brands we've got, we want to acquire brands, and we've said those acquisitions are going to be in the OTC world. We've even said we're going to continue to do that, we're not stopping. The acquisitions we've made are terrific acquisitions, but they're not the destination in and of itself; they're just a stop along the way, after building our organic growth.

And then the third thing is, we're going to optimize the portfolio over time. So again, an example of that is, when I came here, about 11% of our revenue was personal care. And today three-tenths of 1% of our revenue is personal care. So you can see that we've changed out the portfolio a little bit as well, and I think you always have to be looking at your portfolio and deciding, what's the best portfolio for the long term?

Tan: What makes OTC a more attractive market than personal care right now?

Mannelly: First of all, we have a lot of knowledge and history in that area. So we've got a real competency there. We like the demographic trends. We like the fact that it's a fairly fragmented industry because there are so many subcategories within OTC. From a gross margin standpoint, it's an attractive industry; you can invest in it and still make money. And like I've said, from a category growth standpoint, it's pretty steady growth. So for all those reasons, we like the OTC business.

Tan: You recently told market analysts that retailer stock-keeping unit rationalization and private label competition are no longer keeping you up at night because you are focused on integrating Blacksmith Brands and Dramamine. Could you talk about what's changed regarding those two issues?

Mannelly: I've got to be careful what I say there. It's not that it's not keeping me up, because SKU rationalization and private label is still an issue for us and for brands like us – not just us but our competition.

"Look at what's happening with Walmart and different companies – they're saying, 'You know what, we probably cut too much. We need to bring some [brands] back.'"

My only point was twofold: One, the headwinds from SKU rationalization and private label, about a year ago at this time, were really strong. There was a lot going on in the industry with regards to SKU rationalization, especially (Also see "Retailers Rationalize Products That Cannot "Earn Their Keep"" - Pink Sheet, 14 Jun, 2010.). Well, now look at what's happening with Walmart and different companies – they're saying, 'You know what, we probably cut too much. We need to bring some back.' So the headwinds aren't near[ly] as strong today as they were. That's not to say they've gone away, because they're still there.

A year ago or nine months ago or six months ago, every time the vice president of sales walked into my office, he told me about what brand had just lost SKUs, whether it's ours or the competition, at a major retailer, because it was happening weekly. And that's not happening [anymore], but that doesn’t mean it's an issue that's gone away … it's just not as big an issue as it was a year ago.

Tan: Would you say that is because there has been some economic recovery?

Mannelly: Well, I think it's because the economy's come back a bit, and I think also the retailers realize maybe they went a little bit too far.

Tan: Are there any brands, core or otherwise, that are not growing as well as you'd like to see?

Mannelly: I think within our OTC portfolio, we're extremely happy right now with the growth. … If you look at all of our core OTC brands, we have a lot of brands that are doing well in OTC. … Our household trends are not what we would like them to be; it's a very tough category and tough place to be right now. [Editor's note: Prestige's house & home brands include Comet, Spic and Span, Chore Boy and Cinch.]

Tan: In terms of private label, Perrigo has talked a great deal about how they've benefited from J&J's recalls of Tylenol and other pediatric OTCs ( (Also see "Perrigo Sales Reach Record Highs Despite Manufacturing Restrictions" - Pink Sheet, 7 Feb, 2011.) ). How have Prestige's brands performed in the wake of those recalls?

Mannelly: For the last quarter, which was through December – that was our third quarter – because of everything that was going on in the category, with the recall and everything, the [overall pediatric cough/cold] category was down for the quarter about 11.6%. Little Remedies consumption for the category … was up 43%. PediaCare was up 243%.

So, your comment that private label is benefiting –absolutely, they are. We're benefiting also.

Tan: You launched the Little Fevers liquid acetaminophen product quickly to fill the space vacated by Tylenol ( (Also see "Prestige Adds Little Fevers To Children's Liquid Pain Relief Competition" - Pink Sheet, 9 Aug, 2010.) ). Do you foresee consumers who switched to that product sticking with it, once Tylenol fully returns to shelves?

Mannelly: I've said this to a number of people – I've said it internally, I've said it to the board, I've said it to the analysts on Wall Street. I don't have a crystal ball, I can't answer that. I can give different analogies. That race has not been run yet, that book hasn't been written. We've never seen this happen before. So I don't think any company that has skin in the game right now can tell you that they know definitively what's going to happen.

Now, that said, as a betting man, I'm betting that we're going to benefit from it or else we wouldn’t have bought the PediaCare business. So we bought the PediaCare business, we've invested significantly with the intent that we think we're going to become a winner long term.

Tan: With a well-known brand such as Dramamine that has perhaps languished in recent years, how do you innovate and add value?

Mannelly: We add value two ways. Number one, we're going to market and spend behind it, which hasn't been happening. By the way, J&J's a terrific company and they've got great brands, and Dramamine is a great brand. But when you're a huge company like J&J, you can only invest so far down the list. And Dramamine didn't make the cut; they had other terrific brands that they were invested in and they were reaping the benefits of it.

So one, we're going to invest in it, because it's going to be a key brand for us. And second of all, we're going to look at new products and innovation, delivery vehicles, etc., of how we can bring news to that franchise, which hasn't had news in a long time. And we're just embarking on that as we speak.

Tan: Rumor has it that Pfizer is looking to unload its consumer portfolio ( (Also see "Pfizer's OTC, Nutritional Businesses Could Be Looking For A New Home" - Pink Sheet, 21 Mar, 2011.) ). Does Pfizer have anything Prestige would be interested in?

Mannelly: There's a lot of rumors on the marketplace that some of the big pharma companies are thinking about focusing their portfolios (Also see "GSK Divests Non-Core OTCs To Focus On "Priority Brands," Emerging Markets" - Pink Sheet, 7 Feb, 2011.). We are open and we are exploring opportunities with all those companies to see where there would be a good fit in terms of brands in the portfolio.

Tan: How would you characterize the market for buyers right now?

Mannelly: I think I'd characterize it the same way a lot of other people have characterized it, and that is, I think there are going to be more opportunities in consumer health care and OTC in the next 24-36 months than there have been probably in the last 24-36. I think a lot of people believe that.

"We're going to look at new [Dramamine] products and innovation, delivery vehicles, etc., of how we can bring news to that franchise, which hasn't had news in a long time."

Tan: Before Prestige acquired Blacksmith, PediaCare products were recalled because they were made at one of J&J's troubled McNeil Consumer Healthcare facilities ( (Also see "J&J Quality Issues, Hill Concerns Spill Over To Blacksmith's PediaCare" - Pink Sheet, 7 Jun, 2010.) ). Given that Prestige outsources all its manufacturing, what are your strategies for overseeing your contract manufacturers?

Mannelly: We have a [quality assurance] department that was set up here a few years ago. We're very active, very diligent. I don't think we have any contract manufacturers right now that I can think of off the top of my head, significant ones, that have really had any 483s [from FDA] in the last six to 12 months. So we're out there working with them, either monitoring or working with them on a daily basis.

And we talk a lot here about the number one objective of manufacturing, and as a result, our outsourcing group, since we don't manufacture anything ourselves, is to deliver quality product on time. Those words are important. … On time is important, but it's got to be quality product. And we can't ever lose sight of that.

Tan: The consumer health products industry has lobbied against the provision of health care reform that made OTC purchases ineligible for coverage under pre-tax health savings accounts ( (Also see "Bills Would Overturn Rx Requirement For OTC Purchases From FSAs" - Pink Sheet, 7 Feb, 2011.) ). Do you foresee that affecting your business?

Mannelly: That's a good question. Something like that, I don't think that's going to have a significant impact on our business.

Tan: You worked previously with Prestige's new chief financial officer, Ron Lombardi, at Cannondale Sports Group , which you helped get acquired ( (Also see "People In Brief" - Pink Sheet, 13 Dec, 2010.), People In Brief). Some analysts believe you may have Prestige on a similar track. Is being acquired something that is on the table?

Mannelly: No. That's not why Ron was brought in and that's not why I was brought in. If you look at my background, I'm a consumer products guy and I build brands. And that's what we're here to do is build brands. And Ron wasn't brought in for that, Ron was brought in because he's a world-class CFO and he's going to help us make more money … and also help us strategically in terms of where we want to go as a company.

By Dan Schiff