Spectrum Brands Holdings Inc (SPB) 2005 Q4 法說會逐字稿

Good morning. My name is Dusty and I will be your conference facilitator. At this time, I'd like to welcome everyone to Spectrum Brands fourth 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.

Thank you. Good morning everyone welcome to our fourth-quarter conference call. With me this morning as always, David Jones, our Chairman and Chief Executive Officer; Randy Steward, our Chief Financial Officer. We have Bob Caulk, our CEO and President of our North American Business Unit with us and Nancy O'Donnell, our VP of Investor Relations.

We have our usual hour today to review our fourth quarter and full year financial results, provide an update on our integration process, talk about our outlook for fiscal 2006. We should have plenty of time after our prepared remarks to answer your question. Before we begin, I will ask Nancy to give you our forward-looking statement reminder.

Good morning, everybody. Our comments in this morning do include forward-looking statements. Forward-looking statements are based on management's current assumptions and projections and they contain an element of uncertainty. As such, actual results may differ materially. Fiscal (ph) uncertainties which could cause actual results to differ due to changes in the competitive markets in which we operate; changes in the economy in general; our ability to successfully achieve synergies and other cost savings as we expected them and various other factors. Due to these risks, Spectrum Brands encourages investors to refer to cautionary statements outlined in our most recent Form S04 in our annual report on Form (indiscernible).

We assume no obligation to update any forward-looking statements made today. We will also be referring to pro forma numbers during our prepared remarks. These pro forma numbers represent results of operations before restructuring and certain other costs. We have provided a reconciliation of pro forma numbers to GAAP financial results, both in our press release and on the Company's Web site. This pro forma information is prepared based on numerous assumptions and is provided as one means of analyzing long-term trends in our business.

In addition to this morning's press release, we have posted some supplemental historical pro forma information on our web site. This information, which Kent will explain a more detail, (technical difficulty) the access and the Web cast and presentation section of our investor relations page. Let me now turn the call over to Dave Jones.

Thanks, Nancy, and good morning everyone and welcome to our call today. 2005 has been a very exciting as well as a very challenging year for us. We have taken some dramatic steps to transform the Company and to create long-term shareholder value and we have had some difficulties and some short-term setbacks over the last few months.

In some ways, you could say it has been the best of times and it has been the worst of times. We started the year as Rayovac Corporation with about 1.4 billion in sales for batteries, lighting, shaving and grooming products around the world. And we end the year as Spectrum Brands with pro forma annualized revenue of $2.7 billion and three new growth businesses we are very excited about -- lawn and garden, insect control and pet supplies.

When we announced the United acquisition last January, investors recognized and appreciated the enormous potential of our combined entities as we do. And while we might be accused of having been overly optimistic early on, we stand firmly behind our belief that the diversification of our business was absolutely the right strategy for our company and the right strategy for our long-term shareholders as well. We are a much larger and stronger company today. We have diversified across seven major product categories, a much less risky proposition than our total dependence on batteries only two years ago. We have much stronger relationships with a number of key retail customers and we have an opportunity to take a very substantial amount of cost out of our operating structure as a result of acquisition synergies -- $100 million plus over the next three years. These synergies will result in increased margins, profits and cash flow.

We're very excited about the long-term future of Spectrum Brands and we're confident that our strategy is correct. However, we are facing challenges this year, some expected and some unexpected, and we've had to face up to the fact that we're in the midst of executing a long-term plan and it's going to take some plan to achieve all of our goals.

Ironically, while some of you have expressed concerns about the size of the acquisitions we have made this year or the ambitious integration plans we have laid out, the fact is we are actually -- we have actually remained substantially on track in these areas. The area where we stumbled this year has been largely in our legacy battery businesses. And while our battery results have been disappointing, it's worth noting that the issues we face there serve to validate the correctness of our diversification strategy.

I'll talk in a little more detail about our successes, about where we have fallen short of our expectations and about what we plan to do to mitigate the issues we face as I go through our detailed results for the quarter. But first, let me recap the big picture.

Q4 net sales were $604 million, a 60% increase compared with 377 million last year. On a GAAP basis, we reported a loss of $0.06 per share, which included $0.19 in onetime charges related to the acquisitions of United and Tetra and other global restructuring initiatives. Excluding those onetime charges, we generated pro forma EPS of $0.13, in-line with our previous guidance and First Call consensus estimates.

As an overall comment before I go through our sales results by segment, let me remind you that this year's fourth quarter comprised 89 days versus 95 days in fiscal 2004, a reduction in selling days of 6%.

We'll start with batteries. Global Rayovac and Varta battery lighting product sales declined 13% during the quarter. We struggled in Europe with a very challenging macroeconomic environment and in North America with the impact of our new marketing transition, high retail inventories and tough year-over-year comps due to high levels of hurricane-related sales activity in 2004.

Our fiscal 2005 full year battery sales were essentially flat worldwide.

Remington branded products continued their solid sales momentum with global growth of 3% in Q4 and a strong 7% growth for the full-year. September quarter is a seasonally slow quarter for Remington, but we are feeling quite optimistic about our shaving, grooming and personal care categories as we head into the upcoming key holiday selling season.

Our lawn and garden business had a terrific quarter to finish out our 2005 selling season. Q4 sales were up 7% when compared to United Industries standalone sales in the same period last year. We were particularly strong in fertilizers and growing media and gained share in a number of categories that our key retailers, including Spectricide branded products, as well as all of our nationally exclusive partnership brands. We ended the year with a 9% sales gain over last year's lawn and garden results, a successful year by anyone's standards and significantly higher than industry growth of approximately 3% for the season.

Before I move on, I know you will have questions on the impact of higher commodity prices, but let me talk about that for a moment. Like everyone else, we're experiencing a substantial increase in input cost, particularly the cost of urea, which is a major component of fertilizers. We recently announced price increases across a number of products in the lawn and garden category and we are finalizing discussions with our customers as we speak. At this point, about all I can say is that we're highly confident we're going to get support from our customers, meaning we will be able to mitigate a substantial portion of the cost structures we're facing. We plan to offset any remaining margin impact through synergy savings that we will harvest this year from our lawn and garden operating structure.

Now back to the revenue side of things. The Household Insect Control business fell short of plan this year due to weather-related declines across the entire category. Our Household Insect Control business was down about 10% in Q4 and down about 3% for the year. Industry sales were down about 7% for the year. Softness in this category did negatively impact our overall profitability this quarter since insect control is a higher than average margin business.

But the good news is we had a very strong year in terms of market share where we gained four share points with our very successful introduction of Cutter Advance with its unique Vicarian (ph) formulation. This was a huge win for us in this category in strong competition and should position us well when we enter the 2006 season.

Our Global Pet business, the combination of United Pet Group and Tetra, was up again some headwinds this quarter as the pet supplies category suffered from slowing sales. I am sure you have all seen the reports from some of the large specialty retailers who attributed Q4 slowness largely to sticker shock on the part of consumers related to post-Katrina gas prices. Our Global Pet Group saw the same trends with slower sales in July and August, improving somewhat in September.

Although the Aquatic side of our business was affected by the slowdown, the Companion Pet side remained healthy, generating very strong double-digit growth. However, this growth was only just enough to offset the weakness in Aquatics for a net sales gain of 1% for the quarter, generally in line with industry growth rates.

For the full-year, Global Pet turned in a very solid 6% sales increase versus 2004 results. We are watching this category carefully but we're cautiously optimistic that we will see Pet return to its historic growth rates in 2006. We remain very bullish on the long-term growth prospects of this category around the world.

Looking through our geographies next, our North American business generated revenue of $133 million, a 21% decline from last year's results. Overall, fiscal 2005 North American results declined 7% versus last year. Remington products' Q4 growth was 11% in North America. This reflects a strong contribution from Personal Care products, which continue to benefit from the rollout of the (indiscernible) in this market as well as our new All That lineup of women's personal care products recently launched in the U.S.

Our North American Rayovac Battery and Lighting business declined by 34% this quarter. As we pointed out in our earnings call last quarter and again in our preannouncement back in September, the transition to our new alkaline marketing strategy of product lineup is taking longer and been more costly than we initially predicted. We're seeing the impact of that transition as a painful but short-term drag on our topline and gross markets.

Adding to the challenge this quarter was the fact that some of our major retail customers were attempting to reduce inventory levels at the same time we were attempting to push out the old 50% more product and ship in the new. That caused some major interruptions in our sales cycle this quarter. However, consumer buying trends were not disrupted as our market share was essentially flat for the quarter and full-year.

Looking ahead, we believe that we were approximately 80% through our transition as we exited the current quarter and we will see some overhang during the fourth quarter -- fourth calendar quarter -- which will dampen our Q1 results. But we expect this transition to be 100% complete by the end of this quarter. Our Rayovac battery business should be in good shape at that point with a compelling value-based branded position, new improved product performance and new product packaging rolled out to all of our customers and overall inventory levels in line with retailer expectations.

We are seeing good point-of-sale results where our new product is in place and we're encouraged by the shelf space we've gained into major retailers. The 6.7% price increase we implemented in August has been accepted at all major accounts, and although only a modest contributor during the first quarter of 2006, will further enhance sales and margins with fully executed in January 2006.

So there's reason for our optimism that what we have been seeing is short-term in nature and that we will get this business back on track over the near term.

Europe/rest of world revenue was $154 million in Q4, down about 7%. For the full-year, this region generated revenue growth of 6%. Europe is a challenge for us right now. Retail sales growth has slowed in almost all major countries where Spectrum Brands is doing business. In Germany, our largest market, overall consumer retail sales declined by 3% during the quarter. This situation, combined with retailers continuing shift away from branded batteries towards private label, continues to drag down our European results. Varta Battery Lighting product line revenue was down 6% for the quarter, but up 4% during FY '05 on a full-year basis. Overall, market share was essentially flat.

In our European Shaving, Grooming and Personal Care businesses, we had reasonable mid-single digit growth in shaving and grooming, but it was not enough to offset the tough comps in Personal Care as we anniversaried last year's extremely successful wet to scrape (ph) launch in the UK. Overall, our Remington product line was down about 8% for the quarter, although on a full-year basis it was a very strong contributor with 14% growth.

Remington products are on the shelves at key retailers across a number of new markets on the continent for the upcoming Christmas season and we are optimistic about results for 2006. However, as a result of our pessimistic view of the overall European economy, we are taking a number of actions to rationalize our operating structure in Europe. We will take out at least $10 million in annualized cost when these actions are fully implemented.

Latin America was a welcome bright spot for us this quarter. Revenue grew 31% for the quarter and over 40% for the full fiscal year. Brazil continues to generate good growth and a robust economy throughout most of Latin America bolstered results across the region. The initial Remington rollout continues to go well and should begin to contribute more meaningfully in 2006.

At this point, I will ask Kent to update you on our integration progress and to give you some insights into the new pro forma information we provided in this morning's press release.

Thanks, Dave. First, I'd like to over some key financial contracts. The gross profit margin for the quarter was 36.3% as compared with 41.2% last year. There are a number of reasons influencing this decline. First, restructuring and related charges impacted gross profit margin by about 100 basis points compared to last year. Charges included $2.6 million in inventory revaluation charges related to the Tetra and Jungle acquisitions and $2.7 million of costs incurred with the closure of our zinc carbon manufacturing facility in Breitenbach, France. Without the restructuring charges, our gross profit would have been 37.2%.

Secondly, we experienced margin pressure in almost all of our reporting segments as a result of rising raw materials and fuel costs. While our budget assumes some cost increases, commodity and fuel prices were significantly higher than our assumptions. This pressure accounted for roughly 100 basis points of our overall margin decline.

Third, the inclusion of results from United was moderately dilutive to the Company's margin rate this quarter. Sales of the United Industries products generate margins in the mid 30s, negative impact was partially offset by the margin contribution from the Tetra acquisition that carries margins in the 50% plus range.

Finally, the most significant drag on margins this quarter, approximately 150 basis points, was caused by issues in our North American battery business where margins were negatively impacted by closeouts and promotions of the old 50% more Rayovac alkaline battery inventory, low overall volume and some mix issues. This pressure should be lifted as that transition is completed. Our gross margin for the full-year was 37.5%, but 39.5% on a pro forma basis excluding purchase accounting and restructuring charges.

While we expect continued pressure from increased raw all materials in fiscal '06, benefits from our recent pricing initiatives and from integration synergies did help offset the negatives, resulting in a relatively flat projected gross margin for next year.

Q4 operating expenses came in at $185 million, 177 million if restructuring and related charges are excluded versus $109 million last year, or 105 million on a pro forma basis. Operating expenses as a percentage of sales actually improved this quarter as we're seeing the benefits of early synergies from the United integration, including elimination of redundancies at the corporate headquarters level, consolidation of our sales and marketing teams.

Operating income was $34 million compared to $47 million last year mainly as a result of lower sales and gross margin pressures from North American batteries. Pro forma operating income was $48 million, or 7.9% of sales, compared to $51 million and 13.6% last year.

On a segment basis, North American profitability was down from $45 million last year to $18 million this quarter. Again, the impact of our marketing transition significantly impacted both sales and margins in this segment.

Europe segment profit was down slightly to $21 million, $22 million last year, a modest improvement as a percentage of sales as the early impact of cost control measures helped to offset pressure from negative product mix change.

Latin American segment profits were up nicely at $5.4 million versus $2.8 million last year. This segment is performing extremely well this year. Brazil's performance continues to improve as a result of new marketing programs as well as several price increases implemented since we acquired Microlite. The region in general showed good growth fueled by a relatively healthy economic environment, at least in the major countries.

United Industries generated segment profit of $10.6 million, or 5% in a seasonally slow quarter. Margins were under pressure from rising raw material and energy and transportation costs and an unfavorable product mix skewed more towards the lower margin fertilizer and growing media products.

Lastly, Tetra generated segment profit of $7 million. That's $9.6 million before inventory revaluation charges, or 17.4% of sales. Tetra is a very strong profit generator and should contribute positively to improve overall margins over time.

To remind you that beginning next quarter -- that's Q1 of fiscal '06 -- we will no longer provide separate results for United and Tetra. United's Lawn and Garden and Household Insect Control businesses will be included in our North American business segment, mirroring the way we run those businesses, and United Pet Group and Tetra will be combined into a new Global Pet Group segment.

Turning back to the income statement, interest expense totaled $40 million this quarter. Debt at September 30th was $2.3 billion. We generated $65 million in cash flow for the quarter, $30 million of which was applied against our revolver and 26 million of which went towards the acquisition of Jungle Labs. The leverage ratio at the end of the quarter was 5.7 times as calculated under our credit agreement.

Over the last six months, we have hedge $780 million of our floating-rate debt for the next three years at 62% of our total floating-rate debt at a rate of approximately 6%. Our overall effective interest rate for fiscal '06 will be approximately 7%. (indiscernible) result of tax reduction strategies afforded us from our recent acquisitions, we're able to reduce our effective tax rate (indiscernible) approximately 34.5% in fiscal '05 and we're estimating an effective tax rate of 35% for fiscal '06.

Our net loss for the quarter was $2.9 million, compared to income of $18.2 million last year. However, on a pro forma basis excluding acquisition-related accounting and restructuring charges in both periods, net income was $6.6 million compared to $21.2 million last year. Fully-diluted loss per share was $0.06 compared to EPS of $0.52 in 2004. Pro forma diluted EPS was $0.13 compared to $0.60 last year, which was in-line with our previous guidance. Weighted average shares used in calculating EPS this quarter were 49 million compared to 35.2 million last year and our pro forma EPS calculation assumes weighted average shares 51.2 million.

Free cash flow in Q4 as I mentioned earlier was $65 million. After CapEx of $23 million for the quarter, cash restructuring costs of $5 million. Free cash flow for the full year was $164 million. Fiscal '06, expect cash flow to be in the same range as '05. We're also looking at the disposal of some non-strategic assets that could boost that number significantly. CapEx for fiscal '06 should be approximately $65 million.

Turning to our integration program, I'm pleased to report that we continue to make excellent progress. The most significant accomplishment to report this quarter was the successful conversion of the U.S. Home and Garden operations from the J.D. Edwards system to our SAP IT platform. Go live was accomplished on October 31 with no interruption of business services. Minor startup problems were quickly revolved and the system is currently being fine-tuned. This critical milestone was deliberately scheduled to permit us to use our mature and robust systems to support the Lawn and Garden business during the peak season commencing in January.

The next major IT milestone will be the conversion of the United Pet Group Aquatics business to our SAP platform scheduled for late November. All of our monitoring systems indicate this project is on track as well. The Global Pet integration side, facilities rationalization and product sourcing plans have been finalized. Initiatives are underway. Two small pet facilities were closed in 2005 and several more will close in 2006 as we consolidate to fewer more efficient operations. In addition, 14 DCs will ultimately be consolidated down to five in our global packaged goods network.

Good news on this front is that the projected cost savings relative to all of these initiatives are on track. In fact, our most recent rack-up of estimated synergies confirmed our projection of $100 million of annualized savings by fiscal '08. With planning and analysis phase coming to end and implementation underway, benefits to the business will begin to accelerate as we go through fiscal '06 and will total $35 million of incremental benefits by year end.

Now lastly, I would like to direct your attention to Table 5 in today's press release. The presentation of our fiscal '05 results intended to give you an understanding of what the financial results of our company would have been had all of our acquisitions and related capital structure changes that occurred during 2005 been reflected in our results for the full-year. We have also prepared each quarter of fiscal '05 using these same assumptions. However in the interest of brevity, we have posted those quarterly schedules on our Web site rather than inundate you with too much detail in the press release.

We think this information will be helpful to analysts and investors gaining a better understanding of our business and modeling our business for fiscal '06. This information should also be used in assessing the Company's performance going forward. This presentation we have assumed all 2005 acquisitions -- that is United, Tetra, Firstrax and Jungle Labs -- were all required as of the first day of fiscal 2005. Shares issues or debt assumed as consideration for the acquisitions are reflected as of the same day. Net sales and profit contribution from each entity have been included for a full year. Interest expense has been adjusted, tax expense has been recalculated using our actual effective tax rate. Share dilution has been recalculated for each quarter and for the year. We have also excluded onetime costs that are not reflective of our ongoing business. These onetime costs include actual reported restructuring and related costs associated with the integration of our 2005 acquisitions. They also include nonrecurring costs that were recorded on the books of United or Tetra pre our acquisition of those companies.

For example, legal and accounting costs incurred by United related to its acquisitions, United Pet Group and NuGro. Another example, yield costs incurred by United prior to its acquisition by Spectrum Brands. Also, certain restructuring costs incurred by United as it began to rationalize its acquisitions and so on.

All of these onetime costs have been previously identified and disclosed in our 8-Ks and other filings made by Spectrum Brands this year. However, in order to provide additional clarity and visibility, taking the steps of compiling them for you in one place and laying them out side-by-side with a full year pro forma results. We believe this information provides insights into our business critical to your understanding of our fiscal 2005 results as well as our new 2006 guidance.

As all of you know, the Lawn and Garden business generates most of its revenue and all its pretax profits in the peak second and third fiscal quarters. So the timing of our United acquisition in February of this year allowed us to pick up the strongest and most profitable quarters and excluded the dilutive effect of its first fiscal quarter.

Including results from all acquisitions for a full year, as you can see, would have if resulted in revenues of $2.7 billion and fully diluted earnings per share of $1.67. When you review the quarterly schedules posted on our Web page, you will see that Q1 fully diluted EPS would have been $0.32. The pro forma number we reported last year was $0.78. On a full year basis, the acquisitions were slightly accretive for synergies, consistent with our original expectations.

These adjusted numbers provide a much better predictor of the seasonality of our ongoing businesses, which I know is important to your quarterly models for next year. They also provide a baseline for calculating a meaningful growth rate in 2006 and beyond. We invite you spend some time understanding these schedules. There is a lot of information here. We will certainly make ourselves available to you to go through them in as much detail as you would like. We will also provide additional information at a future date to assist you in recasting our fiscal '05 information into our new business unit segment structure.

At this point, I will turn the call back to Dave.

Let me wrap up my comments with a view to next year, and then we will open it up to your questions. As I look back over the quarter, I see a lot of accomplishments, and frankly, I see a lot of unfinished business. I would characterize major the challenges we face as being threefold.

Number one, we've got to get the 50% more transition behind us and regain momentum in our North American alkaline battery business. Number two, we need to right-size our business in Europe to maintain number battery margins and utilize our infrastructure in that region to build sales growth in other product categories. Number three, we have to accelerate our efforts to achieve targeted integration synergies so that we can offset cost pressures with minimal impact on our long-term goals for improved margins and increased earnings and cash flow.

I believe that we're well down the path to achieving all of these three goals. We made good progress during the fourth quarter and we will further that progress over the next couple of quarters, but the payback will be seen primarily in the second half of 2006. As topline growth strengthens, measurable synergies begin to kick in a significant way. We believe that our global pricing initiatives will generate $30 million when fully implemented in '06. Integration savings during FY '06 will be $35 million, and additional restructuring activities could yield another $20 million on an annualized basis. Total, these initiatives should more than offset approximately 40 to $45 million in inflationary factors affecting our business worldwide.

However, we must be realistic about our ability to quickly achieve these goals. We recognize that it will take some time to regain momentum in our battery business and we will want to be cautious about predicting a quick turnaround in European consumer spending. Furthermore, our integration plan dictates that the synergies will be back-end loaded this year, so we believe it's prudent to revise our first-half expectations on the side of conservatism.

Therefore, we're introducing new 2006 EPS guidance of 2.10 to 2.20 and first quarter guidance of $0.20 to $0.25. Although lower than previous guidance forecast, this represents true year-over-year growth in our business of between 26 and 32% when compared to 2005, adjusted for full-year acquisition results.

Please be mindful that the cost savings initiatives and synergy benefits will be heavily loaded toward the second half of the year. Revenue projections call for FY '06 net sales in the range of $2.8 billion, reflecting overall topline organic growth of 3 to 5%. This projection reflects no growth in our Global Battery and Lighting business and mid-single digit growth in our Remington, Lawn and Garden, Insect Control and Specialty Pet businesses.

In conclusion, we are happy with the strategic moves that we made during FY '05 to further globalize and diversify Spectrum Brands into other high-growth consumer product categories. We're very pleased with the significant integration efforts underway to organize these companies into a single, cohesive global operating structure and we look forward to the marketplace and cost synergies that will come our way in a future as a result of these initiatives.

However, we're very unhappy with our overall financial performance over the last couple of quarters. We have identified the issues that created this subpar performance and are implementing initiatives to overcome these obstacles. Let me summarize these for you.

One -- dramatic increases in input costs for many raw material groups; specialty metals, such as zinc and manganese, plastics, fuel and natural gas-related products, like urea. We estimate that the total incremental costs we'll occur in '06 is approximately 40 to $45 million. We're taking aggressive pricing actions where necessary to offset these inflationary material pressures. We believe that pricing will realize a total of $30 million in '06.

Restructuring initiatives in North American and the European businesses will yield an additional $20 million in savings. An acceleration on the integration synergies that Ken talked about gives us further upside potential.

Number two, our North American battery performance. Our new alkaline product line and marketing campaign is working and the pain is almost over. It may not seem that way to you now, but when this important product transition is completed in the next couple of months, our battery business will be much healthier with a better future outlook than we have had for sometime in this business.

Number three -- slow, anemic consumer spending growth in Europe. Unfortunately, this macroeconomic trend will be with us for sometime. We're taking initial steps to right-size our very significant European operations to more closely match our long-term prospects while not jeopardizing our potential success in rolling out Remington product categories throughout Europe. This will result in at least $10 million in annualized savings when fully implemented during FY '06.

I know these issues have been painful for our long-term investors, just as they have been painful for the management team at Spectrum Brands. We missed earnings guidance last quarter and we've had to reduce our short-term FY '06 forecast to reflect the realities our business is facing. However, our marketshares are at or near their historic highs in most categories. Our relationships with our key global retailers have never been better and our long-term future is bright.

During FY '06, you will see our management team focused on addressing the operational issues facing our company, pleading the integration of our new businesses and focused on generating strong cash flow. We will not make any significant acquisitions during the next year, although you may see us do one or two small tuck-in acquisitions if the opportunity is both strategic and accretive. We are confident that we can and will right the ship and we will see our business grow once we get through the next quarter. We remain convinced that our vision and strategy are correct, even if we have been blown slightly off course. We know that we must rebuild our credibility and trust with the investment community as a result of our recent performance. We believe that for those investors with patience, we will once again deliver industry-leading performance when these short-term issues are behind us.

We will now take a few questions. Operator?

(Operator Instructions) Bill Chappell.

Good morning. A couple of questions on the guidance. First, clearly, this is the third time you've revised numbers lower. I'm just trying to understand your confidence (ph) on a go forward basis and what you see. And also, what maybe has changed over the past two months. Clearly, you knew what the pro formas were, so I'm just trying to understand what really was the major driver in lowering the guidance. The second question also being on what you're looking at 3% topline growth for next year. I thought you had said you were going to do 3% of price increases. So is that just assuming flat volume?

Let me and the second first. Bill, if you look at our -- we've said we'll would generate $30 million of price, and that's across the business. It's almost 3 billion in sales. So assume pricing is 1%. And then we said 3 to 5% in growth in total, so that would imply outside of pricing 2 to 4% growth. And I've outlined the categories driven by no growth planning in batteries and mid-single digit growth in other category.

The first part of your question, what has occurred in the last two months, I think we have a much clearer appreciation and look at all of the input costs that are facing our business, including in our newly-acquired businesses. It has taken us some time to get our hands around what all those factors are. And quite frankly, a lot of the input costs have risen fairly significantly over that two-month period, particularly in categories that are affected by natural gas and affected by fuel. And we have had to take a look at that globally because this just isn't a U.S. issue, it's an issue that exists in all of our businesses around the world. So it has taken a some time to get our hands around that, which we have.

The other factor is that we do our annual planning process during the September-October timeframe for our new year, and so we have extremely detailed business reviews around the world with all of our business units. And so we have now their input, obviously very important, and all of the factors they are seeing in their various businesses, 120 companies, multiple product lines and categories.

So we have a much clearer picture and the guidance we have given is the reality of all of those inputs that we've been given. And we think our guidance is as good as we can give it. We think it's as accurate as we know how to give it now and it reflects all of those factors everywhere around the world.

As a follow-up, I was actually pleasantly surprised by the garden business and the strength there. As you look to next year, are you getting increased listings, or maybe more market share?

Bob, do you want to talk specifically about that category?

We have two pieces of what we call our Home and Garden business. Lawn and Garden is the outdoor products and the repellents and so forth, insecticides are indoor. Our listings are done and the Lawn and Garden piece. We still have some open listings to go in the household piece, including repellents, I'd say we are very optimistic. We think that the listings that we know about, the additional distribution, store growth at the home center, all are going to support a plan that Dave talked about, which was mid-single digit and maybe slightly higher growth in the Lawn and Garden business, so we're very comfortable with that.

Great, thanks.

Lori Scherwin.

Dave, you talked about being optimistic about Remington in the U.S. into Christmas, and that just seems to be at odds with your other commentary about seeing a weak consumer which we're also seeing across a number of other categories in this space. What is making you so confident about Christmas, if the consumer continues to weaken? And I guess are you preparing for sell-in versus potential for weakness in take-away trends in December?

Let me just I'll break first down the U.S., which we have a big Remington obviously. We are encouraged as we go into this Christmas because we have better SKU count in the stores, so -- and the assortment that's in our major retailers, we have better SKU and better space than we had last year during the same period. We also have better promotional schedules and we have a better willingness by retailers to put traditional support behind the category.

So in year-over-year comparison terms going into Christmas, we think the industry generally and us specifically are in better shape. What consumers are going to do is sort of a wild-card. But that's only one of many factors that go into predicting how we think the business is going to go.

With regard to inventory management, last year, we were unhappy with the final outcome of Christmas, as was the industry, and we all had too much inventory and for the next three quarters it came back to us in various forms and it depressed our margins and our competitor margins as well. We're trying to be much more cautious this Christmas and we're going to err on the side of having too less inventory rather than having too much inventory and that is an our planning assumptions for Q1.

In Europe, we just rolled the Remington product out into a lot of accounts on the continent and this has been recent in the last call it 60, 90 days and so we're encouraged because we're going to a lot more points of distribution during the Christmas selling season.

And are you still expecting the weakness to persist in the UK?

Yes, it's going to persist in the UK for at least the next quarter, because last year, we launched a wet to scrape product, revolutionary product, at extremely high price points with unbelievable success. And although we have new products in that pipeline and in the UK specifically this Christmas, there's just nothing that we have that's going to compare to what occurred last year. (MULTIPLE SPEAKERS) but the rest of the continent, we are predicting to (indiscernible) Christmas.

Okay, and that's just because of the distribution?

Yes, it's principally because of distribution. We just have a lot more points of distribution for shaving, grooming, personal care products on the continent of Europe.

Two other questions. First, I was hoping you could flesh out some of this realignment in Europe. Is this a reduction in sales force, is it a changing distribution? And then a second question is just on some of the price increases you have taken in Lawn. Have your competitors followed, or are they also taking price increases?

Bob, you want to talk to the second, and then I'll go to Europe?

Sure. The quick answer is, yes, there have been competitive increases in the key categories and we had been very careful because we have a value price business proposition to work very closely with our customers to ensure that we still have the right retail pricing differences by product line. And so the whole industry has had to go up, particularly in fertilizer, which is the double-whammy of oil and natural gas costs.

And Lori on the first, I'm going to avoid details here because a lot of it's still in the planning stages. And as you may be aware, any sort of changes in the workforce, et cetera, in Europe require notice periods and discussions with various governments and workers councils (ph), et cetera. Other than I would just say that we have an extremely effective operating structure in Europe. It's probably high cost when you compare it to some of our competitors and key categories and it's based on the premise that we have our own people, not just salespeople, but we have our own full functional organizations that exist in almost every country on the ground in Europe. And there are some shared services approaches that we believe are appropriate where that we can get efficiencies by doing them more on a pan-European basis. And there will be more to come. It's just a little bit too premature for me to let the genie out of the bottle there.

Okay, fair enough. But how you currently operating with the new sell-in of Remington across the continent? Are you using the same Varta salespeople?

Yes. We're using the same Varta salespeople, but in every key country or location in Europe, we have Remington marketing people, focused category marketing people on Remington products helping support that sales effort.

Okay, thank you.

(indiscernible)

Good morning. On the alkaline battery business in the U.S., have you seen any change in shipment patterns? And how comfortable are you that inventory at retail is at the appropriate level?

Well, we have -- I think our confidence level lies -- we have our hands around inventory levels at every major retailer in painstaking detail. And I would just say that when we begin to see this issue emerge, call it four or five months ago as we were implementing this new marketing and product lineup into the marketplace, and then we were getting from several key retailers an input because of their nervousness or desire to reduce inventories and working capital in several key categories, that they were going to take down the standing inventory levels in the battery category. So that's sort of two issues compounded into one.

We began very aggressively reducing inventory levels and moving into this new product lineup. And we think as of the end of September, about 80% of where we need to be to totally solve all of the issues surrounding it, we were finished. So that would imply that we have about 20% more to go. That will all be done in the quarter that we're in right now. (multiple speakers)

But your second part of it in terms of, which is more a measurement of health of the industry and health of our category, our product in particular, our marketshares have not significantly changed. So the takeaway is not -- we had a battery industry in North America down 34% for the quarter, but the industry was down about 7% and our market share didn't fundamentally change for the quarter. So our sell-through had been fine and it has actually been more than fine in our new product as it has launched on the shelf. We've just had to work through a fairly serious issue of getting to this new lineup.

But have your shipment patterns improved at all since the September quarter so far in October?

I'd just say that, look at it in terms of, we have these issues, four-fifths of the issues completed. So by the time we come out of this quarter -- the aim of our business there is to be totally transitioned at the end of this quarter all new products on the shelf, all 50% more completely out of the stores and every retailer being at the inventory level that they want to be at when they closed their fiscal year at the end of January.

On the gross margin front, when do you think gross margin on a year-over-year basis and a pro forma basis will be relatively stable? Would it be the March quarter or June quarter? Or thereafter?

Well, we certainly see the stabilization occurring in the second quarter, and then as Dave mentioned, with the integrations occurring, certainly you see some good expansion of the gross margins of the back half of the year.

Think of it as depressed gross margins in Q1, improving gross margins in Q2, and then accelerating gross margins (indiscernible) with all of the synergies.

On raw material costs, transportation costs, are you locked and loaded? If raw material costs, transportation costs move around, will you have to adjust your estimates, or are you locked on them?

We're definitely not locked or forward hedged in all of our commodities. There's some that we do have forward buying hedging in place. A lot of our urea now we have a locked down because we wanted to eliminate that as a variable. Not all of it, but it's our prediction of where natural gas is likely to turn. Fuel is the wild-card because it's very difficult to create a hedge in fuel and pass all of the accounting tests for that hedge. And so we're definitely not hedged in fuel.

The good news is that we saw a fuel run-up significantly, if you have been watching this, to over $3 dollars a gallon, and now fuel has begun to move down. And while diesel fuel hasn't move down as proportionally, we sort of feel like we hit the top and we're starting to move down. Now maybe we will end up hopefully being conservative in our analysis before fuel should be for the full year, so it's a mixture and it's based on our judgment of what commodities, where they are in the cycle, where we should be hedged and where we choose not to hedge right now.

Zinc as an example, is at an eight-year high or a 15-year high -- I just know it's high. And in our views, it's the wrong time to put a hedge in place. So we're taking that pain right now. And we will hedge it when it's at a better level than what it's trading at right now.

And then lastly, any outlook on cash restructuring spending in '06 and working capital in '06?

We have I think about $24 million of cash restructuring charges planned. '06 is a year of a lot of activity for us, in terms of restructuring activities in North America.

And then on the working capital side, yes, we do continue to see improvement in working capital in '06, specifically in the inventory area as we continue to integrate the business.

So, could it be a source of cash or neutral or --?

(inaudible)

Thank you very much.

Chris Ferrara.

I wanted to go back to Europe. And talking about the downsizing, does this relate to stuff that you would be doing anyway just in interest of becoming more efficient, or doesn't really more relate to disappointing sales and potentially a lack of realization of what you thought your potential was maybe a couple of quarters ago?

I think it's somewhere in between, Chris. It's the realization that we did not predict a couple quarters ago or a year ago that we would see a European economy that at the consumer spending level was negative in our key countries. Two of the three biggest markets in Europe are Germany and France, which we have a significant amount of business and operations in, and both of those countries have historically high unemployment, historically high savings rates and the net result, they have negative consumer spending. We would not have predicted that. We hope that is not a long-term trend, but it's certainly a trend right now. And rather than get behind the curve, our analysis says, we need to structure our overhead and our total cost to serve that market in a way that more reflects the realities of the marketplace total GDP right now.

And the benefit is, if the European economy starts to grow, then we'll have a much more efficient operation. The reality is, if it does not grow, we are doing things to protect the profitability and margin structure of that business in a way that we hope doesn't reduce our ability to be effective in the future as we launch Remington or other products. Because one of the huge upside opportunities for us in Europe is this continued expansion of Remington products there.

And can you also talk about the Personal Care side of it? I know the comp was pretty tough, but Personal Care in Europe, how bad was it down? And I apologize if you already said it. How much of that is a comp? Can you talk about the dynamics of it? Did you see a lot of space loss after an initial very good (indiscernible)?

Total Remington products, Chris, and I don't have breakdowns by sub-categories with me, but total Remington products were down 8% for the quarter. This is a low quarter of activity, so 8%, you can't make much of this quarter no matter what because it's the seasonal low quarter for Remington. More importantly, look at the trend that occurred in Europe for the year. Europe was up 14% for the year. And that is a better trend to take a look at.

But if you dive down below all of that, in the UK, which is a very large Remington market for us, we had the most sensational product launch in Remington's entire history last year in the UK and it accelerated women's personal care sales. That particular subcategory in the UK, unbelievably like doubled. It was a huge number. And so, although we have a similar launch schedule this year of another product type, there is no way that we can duplicate that in terms of revenue or profitability. And although the rest of Europe, all of the other markets are growing significantly, in last quarter and in this quarter because of that single launch, you're going to get a weird comparison.

I'm just trying to get a sense for whether you're holding onto those sales that you doubled last year.

You know, Personal Care is a fashion category, particularly in the UK, and it is year to year, it's who has the best and greatest product. Our marketshares are very strong in the UK and they're very strong in every category in the UK.

And I think where holding share of the issue there, Chris, is that the UK assumption is down fairly dramatically, so there's been a real slowing in the UK market as well. Dave talked about France and Germany, but UK has gotten very weak here in the last six months as well, overall consumption.

A longer-term question on pets. What percentage of that business needs to be outsourced? And am I right in that you are behind the peer group in outsourcing to lower cost geographies at this point, and is that somewhere where you need a lot of improvement from here?

I think we're not behind the curve, and in fact I think all of the participants in pet supplies, all of the major participants, are in a very similar situation in terms of where their manufacturing is around the world, where their cost structure might be, where their inefficiencies might be. And I think we are leading edge in terms of as we integrate these businesses together and as we rationalize plants here in the U.S. and how a naturally significant portion is going to move offshore in the lower cost areas. I think we're way ahead of the curve, not behind it at all.

Thank you.

Connie Maneaty.

Good morning. Does the outlook for next year include options expense?

Yes, Connie. We eliminated options here at the Company I think three years ago, and our effort there was to get ahead of the curve. We saw the bus coming. We've switched over to restricted stock and since then, we have written all of the stock compensation in the Company against the P&L. So we have a little tail that's a penny or less, in terms of -- less than a penny, in terms of any future option expense issues against the P&L.

Okay, great. What is your current outlook for how many turns you will take out of leverage going forward? Right, leverage.

It would be about three quarters of a turnout.

That's in fiscal '06, and beyond?

That's just '06. We're at 5.7, we should be five or slightly below at the end of the fiscal '06. And I think we're actually as a result of the improving size of the earnings of the Company and the additional cash flow generation, about one turn at fiscal '07.

Okay. So the gross margin going forward, I just want to get a little bit more direction on what you said. It will decline in Q1 and improve in Q2, but does improved mean up or down versus prior year pro forma?

Up.

Up?

Yes.

Okay.

Connie, there's a lot of things. We obviously talk synergies and restructuring, but there's also pricing. A lot of the pricing that we have in place or contemplate putting into place are going to be effective January 1st pricing.

What is the order of magnitude decline in the Q1 gross margin?

It's not significant because of some of the pricing initiatives we've been able to put in place, so maybe it's (indiscernible) 50 basis points.

Okay. So the worst of the gross margin hits then are definitely behind you?

Yes. The gross margin hits, if you look at execution or operational issues, it's centered a lot around the battery transition which had an enormous impact -- Kent said 150 basis points for the total corporation just in Q4 for working through that. And so there's a little tail there in this quarter, but that's the biggest executional issue that has to work its way out.

As far as you can tell on the quarterly flow of earnings, it's real clear that the second half shows most of the improvement. But in the second quarter versus pro forma, are earnings flat, up or down?

Should be up slightly.

Call it flat to maybe up slightly, Connie. And then you're right. The last two quarters are projected to be significant growth for all of the factors that we talked about.

Okay. Now in the battery business, we understand that Energizer lost some pegs (ph) on Wal-Mart's quads (ph), which you got, but Energizer thinks they're getting them back in January. What is your perspective on the allocations in shelf space these days?

Bob may want to talk to this more specifically, but generally we avoid and have for years now talking about specific (indiscernible). I would just say that, in terms of a trend, that we have had good and solid shelf space and maybe some expanding (indiscernible) and we feel good about that. Bob, anything to add generally?

Just quickly, Dave, we were very pleased with the significant amount of increased shelf space that we got for this and next quarter, which probably helped us flow through some of the inventory, the post 50% more, the 50% more and so forth. What we see going forward is still in dialogue with Wal-Mart. If there's any losses that might be in some of the things that are less -- that are not turning as well as they should or are less profitable for us. So I'm not terribly concerned if there's any changes that we're going to get hurt on anything that is core or that we make good margins on.

One final question. This whole business about reducing inventory levels at the trade, I hope I am not putting you too much on the spot here, but Energizer and Duracell say they didn't see the kind of pressure that you talk about in terms of trade reductions, in terms of number of weeks coming out of the system. So is it possible that there was just way too much inventory of Rayovac batteries in general, and why would that be?

I think the answer is yes. There was disproportionate issue to Rayovac and disproportionate to some of the specific accounts that we're looking at it because it represents a higher percentage of our sales in those counts than does either at Duracell or Energizer who have much higher numeric distribution in the U.S. versus Rayovac where we're concentrated, significantly concentrated in fewer accounts. Ad the second portion of that is it just became extremely exacerbated by the fact, when you put a brand-new product line in place, there's nowhere for that old stuff to hide. It has to be moved out and it has to all go and that just put incremental pressure on us. So if our competitors are saying, we have a little pain but not as much as Rayovac, I think that's probably true for all of the factors I just mentioned.

Would there have been any kind of deals that you gave to some of your accounts that would have led, even before you announced the change in pack size (ph), were there sorts of deals that you were giving some of the accounts that led to them carrying unusual amounts of inventory?

I don't think that was a significant factor. I think it was (indiscernible).

Great. Thank you very much.

Jason Gere.

Two quick questions. Actually, the first question is for Bob. Firstly, you guys today talked about accelerating the integration, the savings coming through. I guess can you talk about the level of comfort you have with the management staff beneath you to handle this process? Also, looking at the United Industry margins in the quarter, should we assume that all of that was commodity cost, or was there any higher integration costs that kind of came through in the quarter?

The margin issue relates both to commodity cost and mix. As I said, our insecticides and repellents didn't do as well this quarter, which are higher margin products, then some of our soils, growing media and fertilizer. And so there's mix and there's commodity costs which impacted the margins.

As far as the management team and the integration, I am very comfortable with the management team. As I told our Board yesterday, that's an aspect of this integration that I thought could have been an issue, and I think that has been done extremely well. We're now one sales and marketing organization throughout North America. We have one face to the customer insofar as support is concerned for the customer and so I'm comfortable with. Kent referenced the thing that makes any operating guy lose sleep at night, which is a systems conversion, and so far we're 10 days to two weeks into the SAP systems conversion. And while it's the low point of the season for home and garden, which was done intentionally, we are seeing nothing other than the minor issues that you typically have here. And so we feel we are going to be well-prepared with that systems conversion for next year. So the systems are good, the management team in North America can handle it and I am pleased with that. I would have been nervous about it three or four months ago if you had asked me that question.

The guidance I guess of $2.10 to $2.20, does that bake in any higher integration costs? Because I know that the SAP implementation is a tough process for anybody to handle. And certainly you guys have laid out a nice path to do it. But I was just wondering if you can elaborate a little bit more on that?

There's really no change. We expected that we would move and migrate to SAP in a logical fashion, that we would have the normal issues that generally center around the bad data going in creates bad data coming out. And we have seen some of that in terms of the system itself and its ability to operate that business, people's knowledge build up. All of that has gone the way we would have expected it to go, and we did not expect any significant hiccups.

Okay and I guess another question, just kind of adding onto Connie's question about debt paydown. Certainly it seems to be the primary source of your 160 million of free cash flow. But what is your stance right now on stock buyback, considering that the stock has pulled back probably about 50% from the highs?

Although some investors would love us to pull the trigger on the stock buyback because it would be extremely accretive as a strategy, it's not -- the importance for us is focusing on deleveraging. Generating cash flow and taking that cash flow and paying down debt and reducing our leverage significantly -- that is the prime and principal focus. And we think executing short-term a stock buyback gets right in the way of what our objective is there. So long strategy short-term, we will revisit that when there is a better time to revisit it.

And just a last question. You mentioned about some non-strategic assets being sold possibly in '06. You may not be able give a lot of color on it, but is that coming from the old Rayovac, or is that coming from United Industries or Tetra, meaning that there were some parts of the business that you think don't really fit in?

We cannot really respond to that (indiscernible). I would just tell you that we are in consumer business. Extreme focus is selling to retailers around the world that sell to consumers (indiscernible) categories. And along the way, both our business as well as our acquired businesses, we end up with little pieces of things that don't really fit that model. And we are taking a hard look at whether some of those should go by the wayside as a further way of generating a significant cash flow (indiscernible).

Okay, great. Thanks for answering my question.

Let me just close off by, and I think (technical difficulty) we did run a little bit late today, but I think it was time well spent. Thank you all for your continued interest in the Company.

We will perform much better in the future and we really believe that we have all of the building blocks in place from a planning standpoint, many of them executed. But as we go into '06 and as we move towards the back half of '06, we think a lot of what we talked about today will be in our rearview mirror. And so we are extremely focused on operating performance in the business, at producing better results. We're not happy with what has occurred over the last couple of quarters here and we intend to change that and do it as quickly as possible. So thanks for your interest and have a great day.

Thank you for participating in today's Spectrum Brands fourth quarter earnings conference call. You may now disconnect at this time.