Spectrum Brands Holdings Inc (SPB) 2005 Q3 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Spectrum Brands third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. Thank you. Mr. Hussey, you may begin your conference.

Well good morning everyone. Thanks for participating in today's call. Joining me today as usual are Dave Jones, our Chairman and Chef Executive, Randy Steward, Chief Financial Officer, and Bob Caulk, President and CEO of our North American business unit. Dave and I will review the quarterly results, and offer an update of our integration initiatives for both United and Tetra. We'll then also discuss our outlook for fiscal 2006. That should leave time for your questions at the conclusion of the call. Before we begin I would remind you that we will be making forward-looking statements on today's call. These forward-looking statements are based on management's estimates presumptions and projections, as we see them today, and they contain an element of uncertainty. Actual results may differ materially from our projections. Risks and uncertainties which could cause actual results to differ, include changes in external competitive market factors, changes in our industry or the economy in general, our ability to successfully implement manufacturing and distribution cost efficiencies and improvements, and to generate synergies as expected from our recent acquisitions of United Industries and Tetra, and various other factors. For further details, please refer to the cautionary statements contained in Spectrum Brand Securities filing, including our most recent 10-Q, and our annual report on form 10-K. We assume no obligation to update any forward-looking statements made today. In addition, we will be discussing pro forma numbers today. These pro forma numbers represent operating results before restructuring and certain other costs. We will provide a reconciliation of pro forma numbers to our GAAP financial results in table 3 of today's press release. This information is prepared based on numerous assumptions, and is intended to provide more meaningful comparisons of current year's performance to last year. Now I'll turn it over to Dave for his comments.

Thanks Kent, and good morning, everybody. Let me start with a brief overview of the numbers. Net sales were $730 million, a 137% increase compared with the $308 million we reported last year. We reported GAAP earnings per share of $0.46, which included $0.30 in one-time charges related to the acquisitions of United and Tetra, and other globally restructuring initiatives. Excluding those one-time charges, we generated pro forma EPS of $0.76, slightly below our internal expectations in our previous guidance. Our 2005 numbers include the impact of the United acquisition for the full quarter, and Tetra for nine out of the thirteen weeks in the quarter. They also included a full quarter of Microlite results, compared with 2004 when Microlite was included for only one month. As I talk about growth rates for the major geographies and product categories, I will refer to growth rates that compare 2005 actual results to prior year results, adjusted to include United, Tetra and Microlite, for the comparable periods of 2004. That's how we look at our numbers internally and we believe it provides you with useful information about out business. So on a year-over-year comparable basis, net sales increased 7%. Excluding the impact of acquisitions and foreign exchange rates, sales growth from our Legacy businesses, Rayovac, Varta and Remington branded products, was a solid 3% for the quarter. Global battery sales grew modestly at around 2%. Alkaline battery growth was 6%, while specialty batteries were down about 3%. Remington branded products continued to show sales momentum in Q3, with global growth of 18%. Overall growth benefited from very strong North American results, particularly in men's shaving and grooming as a result of a successful father's day retail push. Our initial European continent and Latin American launches of Remington products are underway, although it's still early for any significant contribution. Our lawn and garden and household insect control businesses generated a combined net sales growth of 8% when compared to the same period last year, reflecting a solid spring selling season at retail, after a very slow start in March. Our global pet business, the combination of United Pet Group and Tetra, also grew at 8% year-over-year. We continue to be very enthusiastic about this business, and we're making good progress in laying out strategic initiatives and integration plans for these combined businesses.

Now looking to our geographies next. Our North American business generated revenue of $149 million. A strong 9% improvement over last year's results. Remington products showed outstanding growth of over 30%, Reflecting strong results across the men's product lineup from father's day, the strongest father's day in the company's history. Women's personal care products also did very well this quarter, particularly the Wet 2 Straight, styler and the new All That hair dryer. Remington results benefited as well from the inventory management actions we took back in the first quarter of this year. Our North American Rayovac business declined 2% this quarter. Specialty batteries were down about 7%, as retailers pulled back on 2004's heavy promotion of zinc carbon batteries. As you know, we've begun shipping product under a new Alkaline marketing strategy, the post 50% more strategy if you will. Our new strategy emphasizes a strong value message, same performance for less, with a money back guarantee. As we roll out the new program and balance out store inventories, we're seeing the impact of that transition as a short term drag on the top line, just as we did with the launch of 50% more back in 2004. This transition was the major reason our North American Alkaline sales were essentially flat year-over-year.

Looking out to the fourth quarter. Already a difficult year-over-year comp, due to hurricane related sales last year. We expect to see a significant year-over-year sales decline in this business segment, until the new Alkaline product has been fully distributed at retail, and the old product sold out. Even though fourth quarter sales will be down due to this transition, our business should be in very good shape heading into the important holiday season, with new improved product performance, improved packaging and much stronger brand positioning rolled out to all of our important retail customers. Additionally we executed a 6.7% average price increase in our battery business, effective August the 1st, which should enhance our margins when fully realized in calendar 2006. Europe, rest the world revenue was $137 million, basically flat versus last year's results. Absent FX impact revenue declined about 4%. Europe is a challenge for us right now. The overall battery industry saw unit growth of 4% and a quarter, but with the continuing shift toward private label, particularly in Germany, value sales declined. Looking forward, we see no signs as yet that the economic situation in Europe is recovering, and with the projected strengthening of the U.S. dollar against the Euro, we're projecting little to no sales growth in our European battery business next year. Our European shaving and grooming and personal care business struggled a bit this quarter as well, after posting very large gains over the past few quarters. Category sales in women's personal care which has been a big growth driver for us for the past year slowed, and our personal care business declined along with it, although we did continue to gain share. Last year's launch of Wet 2 Straight in the UK was an incredible success, in harda[ph] anniversary this year. Our launch of Remington products on the continent is progressing well, and we expect to have strong product offerings on the shells in selected regions were the upcoming Christmas season.

Latin America revenue grew over 40% for the quarter. $35 million last year to $50 million this quarter. As a result of continued favorable performance from our Brazilian business, and a relatively robust economy through much of the region. Absent the effect of the Microlite acquisition, revenue grew 15%. We've launched a limited number of Remington skews in selected regions, and actually reached net sales of $1 million this quarter in Latin America, a promising start for this product line. We're also studying the opportunity to introduce selective lawn and garden, insect control and pet supplies products in Latin America, probably sometime late in fiscal '06. In our United lawn and garden and insect control business, we were very pleased to see top line growth of 8% during the quarter. Our Spectrum branded products fared very well at retail during a mediocre to average spring gardening season. We maintained or grew share in most product categories, but product to customer mix shifts caused pressure on margins. We also saw higher transportation and raw material costs during the quarter, and ran into some efficiency challenges related to United's ERT systems, which meant more margin pressure. The issues will be addressed with our conversion to SAP this fall, but we expect other cost issues to continue to challenge us for the next few quarters. We are however in the early stages of executing price increases across several important lawn and garden categories to cover some of these cost increases.

And finally, specially pet supplies,including United pet group, and nine weeks of Tetra results grew a strong 8%, versus comparable last year results. As you know, we closed our acquisition of Tetra, the global loader in aquatic supplies earlier this quarter. Kent and I and other members of our global pet supply management team have spent considerable time in Germany meeting with our new Tetra colleagues to lay out strategic initiatives and detailed global integration plans for this business. We continue to be very enthusiastic about the pet category and its overall growth potential. Now let me turn it over to Kent to provide you with an update on our integration process, as well as some further insights into the third quarter numbers.

Thanks, Dave. Gross profit margin for the quarter was 37.9%, compared to 43.7% last year. There are a number of factors influencing the decline. First; restructuring and related charges impacted gross profit margin by about 200 basis points compared to last year. These charges included $7.3 million in inventory revaluation charges related, so the United and Tetra acquisitions, and $7.8 million in costs incurred with the closer of our zinc carbon manufacturing facility in Brietenbach, France. Without the restructuring charges, our gross profit would have been 39.9% for the quarter, as compared to 43.7% last year. Second; the sales composition of the Company is dramatically changed as a result of the United industries and Tetra acquisitions of this year. Sales of United industry's products, which generate margins in the high 30s, totaled $355 million, or 49% of our total revenue for the quarter, weighing down the overall corporate average. The Tetra acquisition, which carries margins in the 50% plus range, contributed only 5% of sales, as we only captured 9 weeks of sales post close. Third; cost pressures driven by rapidly rising fuel, transportation and raw material costs, impacted all of our operating units. Our ongoing cost reduction efforts are offsetting some, but not all of these increases in the short term. Fourth; we experienced an unfavorable product mix in your North American, European and United segments. In North America, shipments of lower margin c and d size batteries were up in anticipation of the hurricane season. In addition, margins were temporarily impacted by closeouts or promotions of our old style inventory of Rayovac Alkaline batteries, as we move away from the 50% more marketing program.

In lawn and garden, the poor weather and generally slow start to the season,reduced sales of higher margin controls product. More of Uniteds growth came in the fertilizer and soils categories, which generate lower than average margins. Europe was impacted by the low to no growth economic environment, and high unemployment. Unemployment in Germany, our largest market, and the largest European economy is approaching 12% of post World War II high. This has led to less overall consumption, increased promotional activity, and continuing growth of less expensive private label products, all impacting margins. Product mix and cost increases described above had the most significant impact on margins. We believe most of the product mix issues are temporary, however the trends in Europe are longer term in nature, and represent structural issues for our European business. For the current full fiscal year, we're projecting a gross profit margin, exclude acquisition accounting and restructuring charges of 40 to 41%. And looking ahead to fiscal 2006, we see a continuation of fuel transportation materials cost escalation around the world, as well as a stagnant economy in Europe. On the positive side, the recent product mix issues will be behind us, and the benefits of our integration program and ongoing operations cost improvement programs should offset recent cost pressures. As a result, we're projecting gross profit margins of 40 to 41%, again next year. Operating expenses increased to $203 million during the quarter, and the increase was entirely attributable to the United industries and Tetra acquisitions, including approximately $7 million of our restructuring charges, primarily related to the United integration. On a pro forma basis, total operating expenses were down significantly on a percentage basis to 26.8% of sales, versus 31% of sales last year. Synergy savings and G&A were offset by higher distribution expenses. As Dave mentioned, we were impacted by fuel service charges and inefficiencies in our distribution system in our lawn and garden business, due mainly to system's inadequacies. We expect to significantly improve our lawn and garden distribution efficiencies next year, after migrating from JD Edwards to our mature SAP IT platform later this year.

Operating income was $73.4 million, compared to $37.5 million last year, mainly as a result of the acquisitions. Pro forma operating income was $95.8 million, or 13.1% of sales, compared to $39.2 million, and 12.7% last year. That's an increase of 40 basis points. The volume in leverage of the largest lawn and garden quarter of the year was a major contributor to the higher operating margin. Interest expense tolled $38.6 million, up from $15.6 million last year, as a result of the increased debt used to fund our recent acquisitions. Debt at the quarter end totaled $2.3 million, composed of $350 million of 8.5% tenure bonds, $700 million of 7.38 tenure bonds, $650 million of dollar denominated term and reinvolving debt, $480 million equivalent of Euro-denominated term debt, and $70 million of Canadian term debt. We have now hedged $450 million of our dollar denominated debt, at an average rate of approximately 6% for the next three years. If LIBOR rates were to remain unchanged through the next year, our average effective interest rate on debt would be approximately 6%. Our leverage ratio at the end of the quarter was 5.3 times, as calculated under our credit agreement. Based on implementation of tax reduction strategies, afforded us as a result of our recent acquisitions, our tax rate for the full year should be approximately 36%. On a preliminary basis, we're estimating an effective tax rate of 36% for 2006 as well, as we continue to obtain tax reduction benefits. Net income was $23.7 million, compared to $12.8 million last year. And on a pro forma basis, excluding acquisition related accounting and restructuring charges in both periods, net income was $38.7 million, compared to $13.9 million last year. Fully diluted earnings per share was $0.46 per share, compared to $0.36 per share in 2004, and pro forma diluted EPS excluding non recurring charges was $0.76, compared to $0.39 last year. The weighted average shares used in calculating EPS this quarter, were $51.1 million shares, as compared to $35.4 million shares last year. Free cash-flow in the third quarter was $108 million after CapEx of $20 million. And cash-flow for the full year should be approximately $180 million after CapEx and cash restructuring charges. Our CapEx forecast for this year is unchanged at $65 million, and that's after including the Tetra acquisition.

Turning to our integration programs. As we reported last quarter, we've set up parallel integrations over North America home and garden and global pet businesses to allow us to accelerate the integration. Planning for the integration of the United industries home and garden business into the Spectrum Brands and North America business unit, are global operations functions and corporate functions, has been completed, and implementation is well underway. As part of this organization of Spectrum Brands and United industries, sales management, field sales operations and marketing teams, including our customer teams located in Atlanta, Bentonville and Charlotte, has been merged into a single North American sales and marketing organization Reporting the Spectrums brands North American management teams located in Madison, Wisconsin. Canadian consumer product sales and marketing teams have been merged as well, and report to a single country manager based in Toronto. Uniteds finance, information services, customer service, and other administrative functions have been combined with existing counter part organizations in Madison. And legal and certain corporate accounting functions have been combined directly into Spectrum Brands global headquarters in Atlanta. The transfer of positions from St. Louis to Madison will take place over the next four to five months, and be complete by the start of calendar 2006. functional groups continuing to operate in St. Louis include US home and garden marketing, research and development, and regulatory compliance, as well as certain manufacturing and distribution functions. However, ultimate reporting responsibility for these groups will still reside in Madison. Planning for the integration of the United pet group, and Tetra, into a new global pet group and into the Spectrum Brands global operations platform is continuing, and should be complete this summer. Two fully staffed Spectrum IT teams are working in parallel on SAT conversions for both North America Home and Garden and Global Pet. As previously reported, the first major project will be to move US Lawn and Garden from J.D. Edwards to SAP this fall. Conversion of other business segments will follow throughout 2006, and this effort should be completed by mid calendar 2007. Facilities rationalization and consolidation will take place in North America, with a significant reduction in the number of both manufacturing and distribution locations. These conversions will be paced by the IT conversions. Our ultimate vision is a simplified highly efficient manufacturing and distribution network, spanning both the U.S. and Canada. We've completed a bottoms-up projections of savings and costs associated with these integration programs, and are pleased to report that our original cost synergy target of $90 million for United Industries and Tetra combined, will be surpassed. Our current estimate stands at $100 million of savings when fully implemented in operational in fiscal 2008. Savings will total $8 million this year, $35 million in fiscal 2006, $80 million in fiscal 2007 when all of the projects will be completed, and then achieve $100 million of annualized savings the following year. Total one-time charges to achieve these savings are projected at $35 million, with out-of-pocket cash cost estimated at approximately $50 million. Cash costs are greater than the restructuring charges, because certain items won't be accounted for in purchase accounting. Charges in 2006 are projected at approximately $24 million, with cash costs of $30 million. We're extremely pleased with the progress on these large integration projects to date. While we're still at an early stage of implementation, our outlook for the final business platform is even more exciting than originally envisioned. When completed, these integrations will once again validate our strategy to leverage our IT and distribution platform and our core competencies, to create a low-cost, highly efficient consumer products delivery platform and business model. Now back to Dave.

Thanks, Kent. So overall, it was a mixed quarter. We had strong revenue growth and improved operating margins, and we've made significant progress on many integration initiatives. We've begun to reorganize our business to benefit from all the many integration activities underway, as well as synergy opportunities that will be created in the future. However, we face challenges on the cost side of our business, and we are in the midst of a major brand positioning initiative that will take us a few months to complete. And Europe as I mentioned, continues to be a challenge for us. So looking ahead, now that we are well under the fiscal fourth quarter and have several months experience with our new businesses, we're tightening our guidance for fiscal 2005 to a range of 240 to 243 at the low end of our previous range. We've also spent a good bit of time on our budgeting process for fiscal 2006. While there are many exciting opportunities for various businesses, as we lay out the opportunities and challenges that we face over the next year, we believe it prudent to be more conservative, and expect overall earnings growth of 13 to 17% next year, compared to projected FY '05 results. We believe this revised growth rate while still at the top end of the range of consumer product companies, that reflects the current global economic environment. The European economy is very challenging at present, and we feel or see little reason to believe that there's a quick fix there. We expect continued cost pressures in a number of areas, raw materials including urea, zinc, nickel, steel, plastics and resin based products, and fuel and transportation costs. In addition, we expect negative year-over-year FX translation next year, due to a strengthening dollar. In this environment and at this early point in the year, our guidance would now be for EPS of 270 to 285 for fiscal 2006. Let me point out that our 2005 result did not include United in Q1, which would have been significantly dilutive, because of the seasonality of that business. So when comparing apples to apples, our target of 270 to 285 actually represents true growth of our business considerably higher than the 13 to 17%. So in the current environment, we felt pretty good about our projections relative to our peers. Overall, organic revenue growth is projected to be in the 3 to 5% range for fiscal 2006. The result of low 1 to 2% growth projection in our Rayovac and Varta battery and lighting businesses, mid single digit growth in our Remington shaving, grooming and personal care businesses, and mid to high single digit growth from our new lawn and garden and specialty pet supply businesses. Please be mindful that these projected category growth rates represent long-term trend, and will vary significantly from quarter to quarter as a result of various marketing strategies and other initiatives used to drive our business. This was evident in our North American Remington business earlier this year, as we took several necessary steps to strengthen our business, reduce inventory, and change our product lineup, in preparation for the critical father's day season. We were also in our North American Rayovac battery business during the current quarter, as we prepare for the introduction of our new and improved Alkaline product line.

So again, while growth rates may vary from quarter to quarter, our expectations are for long-term growth rates as I've laid them out for you. As Kent mentioned, we now expect cost savings as a result of our integration plans to be in the neighborhood of $35 million in fiscal 2006, versus the $25 million originally forecasted. Most of the impact of these changes will fall toward the back half of the fiscal year. As a result at this point, we now believe that Q1 '06 EPS will be in the neighborhood of $0.50 to$0.55. Revenue projections call for full year FY '06 net sales in the range of $2.8 billion, reflecting overall top line organic growth of 3 to 5%. Despite of some challenges in our business, including an anemic economy in Europe, slow projected growth in the global battery industry, and an increasing raw materials environment, we remain bullish about our overall long-term growth prospects. We now have significantly diversified the Company into several high growth categories, with opportunities for further expansion around the world. We have identified significant synergy opportunities as a result of these recently acquired businesses, that will provide earnings momentum over the next few years, and we've created a much larger Company, with a much more diversified global portfolio brands and categories that should serve us well in the future. As a result, we're a significantly stronger Company, with much greater ability to overcome issues in specific product categories or geographic regions of the world. And this is the ultimate benefit of diversification. Now I'll take a few questions. There may be a slight delay as we're conducting this call from our European head quarters in Sulzbach, Germany. Operator?

Your first question comes from Ann Gillen with Lehman Brothers.

Good morning or afternoon. Could you give us some more information on what's happening in batteries? Specifically, what are the inventory days at trade that you have to work through from the old packaging, and are you promoting to get rid of them. And more color around why you won't see the full effect of the price benefit until '06.

Right. Well, in terms of the transition, we're going to a completely new lineup, so it's not like we're replacing like size product with like size product. And this is very similar to what we had to do in 2004 when we went to 50% more. So as an example, we no longer have a six-pack, or we no longer have a 12-pack. We've gone back to 4-packs. Same pack sizes Duracell and Energizer and Apac, et cetera. And as a result, we have to move all of the old inventory out of the planigram[ph] space to somewhere else in the store. Secondary display, dump bends, and we are heavily promoting that product. And you saw that in the results in our market results and mixed results in our battery business in North America this quarter. We think it's going to take another quarter to get through that process. And in terms of the price increase, which is an effective 6.7% price increase. By the time that that new product flushes in and all across our entire retail set, it's going to be sort of more in the January time frame when our P&L will actually see the full result of that. So again, that's a transitional thing. We will see some of that result a little bit of it in this quarter. More in the Christmas quarter, but won't see the full effect until next year.

Okay, and just one follow-up. Has today's results given you any pause about forward strategy in terms of rollup and acquisitions? Dave, it seems like a lot of moving parts that you have to settle down.

Ann, it hasn't affected our long-term desire to further diversify the Company. Okay? I think the things that have bothered us this quarter or that have surprised us, are related to material cost increases that have gotten progressively worse as the quarter's gone on. Particularly transportation costs in the St. Louis lawn and garden business, which represented almost half of our business this quarter. I mean, our incremental transportation costs were enormous. As well as inefficiencies, trying to get all of the revenue out of that business through an inadequate JD Edwards system, and we had to supplement that by brute force, and that cost us a lot of money. In addition to that, I think the things that surprised us were mix. We had negative surprises and product in the mix. We had it in lawn and garden business, whether we had an outstanding fertilizer and soil season could not have been better, but our household insects controls, because of hot weather particularly in the Midwest before the rain, that business is not near where our projections were, and unfortunately the market in that business are in the 50s or even higher. So we have mixed shift that surprised us there. And in Europe, we're feeling the effects, and i think it's probably like a lot of other consumer product companies. But we went for a long time because of all the synergies that we were deriving out of the Varta Rayovac integration, and then Remington and the Remington growth, we weren't really experiencing what other companies were, and now we're experiencing it and the economies are not in good shape here. Even piece spending may show flat to down slightly, consumer spending is off significantly, and so we're feeling the effects of that. And the ultimate thing is that consumers, because of all this are trading down, if you will, so private labels are growing much faster and did in this quarter in Europe than we anticipated and that was surprising as well. So mix shift, you know caught us by surprise, material costs, but the positive in all of that, and there's always a silver linings, is that revenue growth was very strong, and we're not disappointed what their overall revenue growth, particularly in our new business categories. And so that supports the theory that our diversification away from slower growth business into much higher growth businesses, like lawn and garden and like pat[ph]. It's a justifiable strategy, and one that we'll continue to employ over the long-term, all be it, it may take us a little longer to make a next big move, if you will. You know, we are still interested in the pet supply business. It's performing exceptionally well. You didn't hear me mention anything negative or bothersome or our surprising about pet, because everything was positive. And so that's an area that we continue to look at because the rollup opportunities - small rollup opportunities are significant in that category.

Thanks.

Your next question comes from Lori Scherwin, Goldman Sachs and Company.

Yeah, hi.

Hi, Lori.

Dave, you give IPS guidance in '06, but I didn't hear you address your specific long-term EPS growth. Do you still think that 20% is the right number? You know obviously after next year, which will be lower, but especially in light of the fact that you just took down your long-term sales growth target?

That's a good question, and I sort of have a negative attitude today, which is unusual for me. But I think next year we've given guidance, and we do feel comfortable at least now given what we know about everything that that guidance would suggest around 15% growth. I gave you a range of 13 to 17% growth. And I think given what I see now, that that's the number that I would use for even longer term growth, and that will change. And as some of these factors get better, I think we'll come back to you and may change that, but I would take down your view as a long-term, three or five year growth from a 20% EPS grower to one in the mid-teens.

Okay, and if we could just go back to Ann's questions on the transitions issues for US battery. I just remember back at the end of '03 when you rolled out the new 50% more tax. It ended up-taking a lot longer, and was a lot costlier to roll it out than you had original expected. How confident that this time it's only going to take one quarter? And you can work through the inventory that quickly?

I feel comfortable with the cost. I think we've pegged the cost. We know where all of our inventories are and what's required. We negotiated programs with all the retailers, so there's really no suspense left there. So the cost I feel comfortable with. Can three months take four months, four and a half months? The answer is yes. So I'm less comfortable there, but I do feel comfortable though that by the time Thanksgiving rolls around, and if you look at the seasonality of the battery business, it really starts the Friday after Thanksgiving and for the next five weeks is off the charts. I do think we'll be completely through the transition then. So there's that little risk that it would not end at the end of September, that it would take through October for that to flush out, but that's sort of the risk, the way I could gauge that.

Okay, and if that's all going to be in place by the holidays, I'm just wondering, what's your commitment level to sticking with the price increase in U.S. batteries, especially coming in at a time in the holidays when it's typically more promotional? Are you going after share or are you going after profitability? Obviously you'd like both, but --

There is no share grab strategy on our part. We think we will have a much more effective product offering and value positioning, strong values, same performance for less, if you followed us for a long time, we did that with Michael Jordan a few years ago, it was a great program. We think that positioning will be very strong, and it's a much better than our, if you will, price positioning with 50% more. But other than that, there's not a -- this is not a program designed to gain share. In fact, our share has been relatively flat here for a couple of years, and that's not causing us any problems. And relative to your specific question about the price increase, the price increase is done. And the price increase is done by our competitors. And so I view that there is no risk to us or the industry in terms of price increase. Therefore, there's no reason or any desire by anybody to back off that.

And just lastly, can you just give us the current price gap between Rayovac and Duracell and Energizer, and then what it will be if anything different after you roll out your new strategy?

The new strategy is going to be about 25% price gap on average Lori, and if you go back historically, and you can go back for at least ten years historically, that's been at or near that price gap average in our North American business. That price gap got a little bit higher during 50% more, and 25 became 30 to 33% price gap, depending on the size, and so the price gap is not going to be quite as large as it was.

Great, thank you.

Your next question comes from Bill Schmitz.

Hi, good afternoon.

Hey, Bill.

Hey, you know with all these kind of moving parts now, has there been any talk of maybe a restructuring charge to kind of do all the stuff a once as convert the P ove E, closing more facilities. I imagine there's an overlap from St. Louis to Georgia. Is there anything thought about doing some like that? Maybe like a more major restructuring kind of program?

Bill, I think we have, as Kent laid it out. But I think we have an extremely detailed restructuring plan that is - the planning is not nearly complete, okay. And so I think our costs that Kent laid out are appropriate and they're within a very reasonable range, and we don't really see at some need for some future -- or larger restructuring global initiative, because we've done it ,and we've done it along the way, and we really think -- and we've got a lot of synergies coming, and we really think we've got all that planning done well, and as I'm sure you probably know from a financial reporting stand point, we can't book a -- the full thing , a large charge, rather than take it in and incur in a quarter as incurred.

Okay, gotcha.

Bill, the numbers that I referred to in my comments are a bottom's up estimate. We're talking about, one-time charges of $35 million to do all the integration. That's based on a lot of detailed planning with about $25 million of that coming next year . And that will be related to downsizing the size of the work force, and to specific plant facility closures. So we've got a lot of detail behind those numbers.

Thanks very much. And I hate to keep beating this sort of battery price issue, but if Duracell Energizer at $3.99 now, kind of line price, it was a promotions, obviously for AA and AAA. Does that mean that your new price is like 2.99?

Yes, if your examples were right, it depends on the count, et cetera, etc. That would be the right way to look at it.

Right, because if you look at it $3.99 was supposed to be kind of like EDLP. when Duracell did the price deal realignment. It looks like you're t actually taking a much higher price increase, which obviously is very healthy for the category, because you're not only taking the 6.7% it sounds like, but you're also shrinking that price gap from anywhere between 30 and 35 to 25. Is that right, or is my math wrong?

That's right, and when this is executed, it will enhance our gross margins in that product segment.

Thanks very much.

Thanks.

Your next question comes from Chris Ferrara, Merrill Lynch.

Hi, I want to talk about the cost side a little bit. Could you just give a break-out between how you got hit on freight, versus materials, and then further up the freight. How much of that related to inefficiencies versus just higher rates in general?

I Don't think we have that detail with us today Chris, but I can fell you that the majority of the freight and transportation in briefs, was in the lawn and garden business. As you know, a lot of their product is large bags of fertilizer and enrich soils that get shipped in tractor trailer loads directly to the home centers and retail outlets. And so fuel surcharges and other transportation cost increases were pretty severe in that business this quarter. Again, the large part of the season was in those kinds of products. And in terms of raw material costs I don't think we have the specific breakout of how much, but as Dave mentioned, if you go to almost any commodity that you look at that is involved in the kinds of products we sell, you've seen increases over the last two years of you know, 30, 40, 50% in the commodity markets.

And we have been up to now as Chris I'm sure you're aware of last year and now this year, because of this aggressive cost reduction initiative that's a constant thing that we have, I've been able to offset all of those things last year, but they just continue to pile up. You can take nickel or zinc or copper or ridium or plastic, and during this quarter, they all increased yet again, and the only major commodity that decreased during the quarter was steel. And maybe that's a good sign, and I think there actually is a sign that there's more capacity on the market needed in steel. But those have all surprised us and they surprised our forward projections on what was going to happen in those commodities, and they just sort of piled up, and the net effect was in raw materials. We had several millions dollars of surprise negative in fuel we had several millions of dollars worth of supplies negative. And then sort of inefficiencies trying to get that much volume, because we did had an extremely good volume season out of our lawn and garden business. We had to put a lot of people, brut force to get that stuff out, and we spent a few million dollars doing that too. So you add it up and a few million becomes more than a few million.

You forecast going forward based I guess on incorporate higher materials as well as the North American battery price increase, which I can describe as done no risk to it. Is that right?

Well, just start with materials, we've done an analysis of what we think material costs will be this quarter. That baked into our guidance, and we've done a fairly extensive analysis with the planners and buyers on what's likely to occur incrementally next year in terms of some of these commodities, and that's baked into our forecast as well. And it's one of the drivers we had on our preliminary forecasting that we gave you guys in January of $2.85 to $3, and if you were -for '06. And if you were to say what are the most significant reasons, now we're saying 2.85 instead of that is these raw material increases plus the realization that Europe is not growing as fast as what we had hoped, and that the economies are actually in worse shape than they were nine months ago when we were trying to predict that.

When you say the price increase is done and there's no risk to it, does that include any potential risk that you might see ramped up promotion, so not necessarily that business to stick with the people to spend it back? Is that a possibility? And then also, where to you look -- how do you look as far as doors go, in distribution. Bowing the complete implementation of your packaging. Are we net up or net down?

Well, in second we're sort of flat to net up. We've made some distribution increases and improvements over the last quarter or two , and I can't tell you which quarter and -- in food, where we've been underdeveloped. But it's sort of flat to net up in terms of distribution doors and in terms of promotional activity, I think promotions, the promotions are set pretty much for, it's nearing the fall right now. Promotions are set for us. They're set for the industry. There's some change that could occur, but I think it's fairly minimal, and I would just say that the promotional environment for batteries we would project to be pretty rational. There's been good solid market share performance by all participants now of what will change in the last couple of years. And I think people feel comfortable with that part of the equation and the promotional environment has been pretty reasonable, and then evident by all of the participants taking the -- their price increases up, which would suggest that everybody's looking for more profit rather than less. I think all those things line up pretty well in terms of as we eventually go into the fall.

All right.

Your next question comes from Joe Altobello, CIBC World Markets.

Thanks, Good morning.

Hi Joe.

First question on free cash-flow for '06. I'm not sure what you guys gave out what your target is for next year.

Yes we're estimating about $150 million.

And that includes above the structuring - cost of the restructuring cost?

Yes.

In terms of the UPG products flowing through the Tetra distribution channels overseas. When should we start to see the benefits of that?

Early benefits next year. The the lawn and garden integration planning is complete, I think Kent alluded to that. It's complete and done and being executed. And by planned, the pet world-wide integration plan was planned to run a couple of months in terms of planning behind that activity. That will be finished here over the next 30 to 60 days, And then we'll go about the execution of it, that includes plant rationalization, distribution rationalization, et cetera et cetera. So you are early stage will see some of that next year, and then you'll really see the effects. In the following year, and I think that's further evidence what Kent gave you as best we see it. Those savings that are coming through, $8 million this year and growing to 35 next year. And 35 in the next year, our projections are going to $80 million, and that's really where you're going to see the result and benefit from a lot of this stuff that going on here now.

Okay and then final on lawn and garden. Did you guys take any pricing on fertilizers this year?

Bob, Do you want to talk specifically about lawn and garden?

Yes. Thanks Dave. The answer is yes. We did take pricing.We've taking pricing in each of the last two years in both the U.S. and Canada, and so have been - we've been reasonably effective at offsetting the urea cost increases, and our projection is for that to be stable. But we are seeing cost increases across the board in other petroleum based products. Bottles and so on and so forth. Dave's already mentioned freight and oil surcharges. Those are costs that we haven't been able to offset.

And how much was the price increase, and did the retailers pass that through, or did they essentially eat it?

The price increased varied by retailer, and it was mixed in terms of them passing it through. Mostly, they did not pass it along

Okay great. Thank you.

Your next question comes from Alice Longley, Fulcrum.

Hi, good morning.

Hey, Allis.

I have a couple of questions. I just want to make sure I'm doing this right, backing things out right. I'm trying to figure out how batteries, Remington, the preexisting businesses did alone. You gave us $96 million as your operating profits, excluding one-time items. And you gave us Tetra and United operating profits, excluding one-time items, both of which were better than I thought they would be actually. And that backs out, I think to batteries, slash Remington profits to say $31.5 million, excluding one time items. And I think your profits last year comparably were 39, which means a 20% drop. Am I doing this right? And if I am, that's a big drop. Can you explain why that would happen when the sales were not that bad?

Well, it's what we're showing in the press releases. North America was $32 million last year, and segment profitability and they're $31.4.

But this year you've got United in there. I'm trying to do it by business section.

No, our business segments reporting for fiscal '05 remain North America, which is our Legacy business, Europe, Latin America. And then we segregate out United separately, and Tetra separately, so you can track those in comparison with last year. The North America is apples to apples comparison, '04 to '05. It's on table 2 of our press release.

So, but we still got batteries. How do you account for the profits from batteries offshore?

When you say offshore, that's included in our European segment.

Europe would be an apples to apples comparison of the --

As is Latin America.

Of the Varta and Remington business year-over-year.

The acquisitions report show them separately.

I see what your saying. Okay. And then I want to try to allocate corporate but I'll call you separately on that. Can you tell us how much the battery market, how quickly the battery market was growing in North America over the quarter at retail. And I guess just for Alkalines, and then how much you were growing and some comment on share? Because I think you indicated you were growing slower than the market in teh previous quarter.

The market grew slightly. As you know, market shares near -- it's very difficult. Our projection is 1 to 2% growth during the quarter occurred. Okay? And then our growth was slight to down slightly in terms of our shipments in, okay. If you look at market share, and this would be market Nielson market share including a Wal-Mart panel data, our share was up slightly for the quarter. Up slightly, it was up like 3-10ths in dollar terms for the quarter. So call it flat. Our share was flat. Our shipments were down slightly versus that, and I think it's- that more a reflection of transition. You know, retailers are not going to load up on old stuff when they know a new line is coming. More the focus is getting rid of it, and so that affected our ship-in revenue growth, if you will, during the quarter and it's going to affect it this quarter as I said as well. And then sort of the benefactor of that will be the following quarter, when we more than likely won't have enough product on the shelves and we'll probably benefit from that. That's the plan.

Excuse me. At this time we have five minutes remaining.

Operator how many more questions do we have?

We have six in queue.

Well, I think we have time for one or two more then, and then we'll probably need to close the call out.

Okay. Your next question comes from Joe Norton, Banc of America. Banc of America.

Good morning. Thanks.

Hey, Joe.

Just going back to the battery transition and also recalling back to the last time that you did one of those. I know a lot of those costs were considered to be extraordinary items, and so I just wanted to be clear on does this new guidance that we got today, does that assume that all the battery transition costs and lower sales or whatever are going to be part of that or are those excluded from that?

They're all part of our from projections for P&L and EPS guidance for the next quarters.

It will go through its normal course business, Joe.

Okay. And then can you tell us anything about cash-flow during the quarter or free cash flow and then update what's the full-year outlook would be for '05?

Yes. We had an excellent cash-flow quarter. We ended up a little over 100 million in free cash- flow. 108 specifically. So some of the shortfall that - the first six months we got good working capital improvement this quarter. We're estimating for the full year of approximately 180 million, which is consistent with what our guidance was previously.

Okay. And then maybe just a little bit more of kind of a philosophical question around the sort of the new outlook that you've given us. I guess probably what everyone wonders is do you feel that at this point this is sufficiently conservative? I mean, lots of things happen in the last few months, but arguably when you talk to other lawn and garden companies, a lot of these things were anticipated, so I just wonder at this point, does this new outlook, you know sufficiently take into account things that could happen or likely will happen in over the next three or four quarters?

Joe, we believe they do. Are we guilty of not buying a new business and not fully understanding every trend in the business, or anticipating it as quickly as we do Legacy businesses that we've been involved with for the past few years, I think that's a reasonable criticism. But the fact is that we've got a strong management team that we acquired with United. Bob Cox now leading all of our North American efforts, and nobody knows that business more than Bob does. And we think we've accurately calculated all of that. And then we've gone through an extremely detailed operational review and a look at all raw materials, which is something that we normally don't do but once a year. We've done that early to get our hands around where we think trends are next year and so we think it represents -- which is our job to represent to you all where we believe the business will be. But having said that, we're not happy that we didn't make everybody's expectations here this quarter. I mean, to be fair, that's an important thing for us, and we're not happy that it occurred. But we do think the guidance is proper and prudent for the next year, and even though that we revised our guidance to the low end, 240 to 243 for the year, be mindful that even at 240 it represents 31% growth over last year. So maybe we got a little bit ahead of ourselves. We've gotten some head wind that we didn't anticipate, but we're working our way through that. We're mindful of it, and I think we've got a good forecast for next year.

Excuse me. At this time we have one minute left.

Okay. Listen, let me close, because I know many of you have to jump on another call here in one minute. Thanks for your time. Again, we're optimistic about our long-term prospects in the -- at Spectrum. We believe that our strategy and diversification is working. We know it's working, as evidenced by what's occurring in our new businesses. We bought them for higher growth. We knew that battery growth was going to slow. We tried to get ahead of the curve there. And so we think that's all working well and effectively and you know, our long-term prospects we continue to be as bullish as we've been All be it, we're not happy with our short term results, and some things caught us by surprise, and we will try to work harder to assure that that doesn't happen in the future. So thanks again for your time. Hope you guys have a great day.

This concludes today's Spectrum Brands third quarter earnings conference call. You may now disconnect.