Spectrum Brands Holdings Inc (SPB) 2006 Q1 法說會逐字稿

Good morning, my name is Marcia, and I'll be your conference operator today. At this time I would like to welcome everyone to the Spectrum Brands fist quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. I will now turn the conference over to Mr. Kent Hussey. Sir, you may begin.

Good morning, everybody. Thank you for joining us. I'm here today with Dave Jones, our Chairman and CEO, Randy Steward, our CFO, and Nancy O'Donnell, VP of Investor Relations. Before we begin, Nancy will read us our forward-looking statement.

Good morning, everybody. I want to remind you all that our comments this morning include forward-looking statements. These statements are based on management's best current assumptions and projections. As such, they contain an element of uncertainty and actual results may differ materially. Risks and uncertainties which could cause actual results to differ include changes in the competitive markets in which we operate, changes in the economy in general, and our ability to successfully achieve the synergies and other cost savings we projected, as well as various other factors. Due to these risks, Spectrum Brands encourages investors to refer to the cautionary statements outlined in our most recent form 10K. We assume no obligation to update any forward-looking statements that we make today.

We'll also be making reference to pro forma numbers during our remarks. These pro forma numbers represent results of operations before restructuring and certain other costs. We provide a reconciliation of pro forma numbers to GAAP financial results in our press release and on our website. This pro forma information is prepared based on numerous assumptions and is offered as a supplement to assist you in analyzing lon-term trends in our business. As referenced in this morning's press release, we have updated the supplemental historical adjusted information maintained on our website. This information represents management's best estimate of what 2005 financial results would have been if adjusted on a full year basis for all acquisitions and divestitures and related changes to our capital structure.

Updated those schedules to reflect the divestiture of the Nu-Gro professional and technology businesses which closed last week. This information can be accessed in the webcast and presentation section of our investor relations website. So with all of the details taken care of, let me turn it over now to Dave Jones.

Thanks, Nancy. Good morning, everyone. Thanks for joining us today. Earlier this morning, Spectrum Brands announced our first quarter results in line with expectations despite facing a number of challenges during the quarter. Q1 net sales were $620 million compared with 687 million last year using 2005 reported results adjusted to reflect a full year's impact on acquisitions and divestitures. On a GAAP basis, we reported earnings of $0.05 per share, which included $0.17 in one-time charges mostly related to the acquisitions of United and Tetra and other global restructuring initiatives. Excluding one-time charges, we generated pro forma EPS of $0.22 at the mid-range of our previous guidance and in line with First Call estimates. Before I go through my review of the numbers, I want to talk to you for a moment about some recent management changes.

As you saw from our press release a couple of weeks ago, Bob Caulk has decided to leave Spectrum Brands. We're indebted and grateful to Bob for his contributions over the past year. He has provided leadership during a time of revolutionary change for our Company and his knowledge of the business and the industry has been invaluable. However, we understand his personal career objectives and we wish him well. We're extremely excited to welcome Dave Lumley as the new President of North America. Dave will be responsible for sales, marketing, and the overall financial performance of this important business segment, which represents almost half of our total revenue base.

Dave joins us from Newell Rubbermaid where he was President of the North American Rubbermaid Home Products Division, Newell's largest division. He's had an illustrious 20 plus year career in senior management positions, with a number of consumer product companies, such as Experiment On Applied Sciences, Brunswick Bicycles, Outboard Marine, and Wilson Sporting Goods. He has broad experience in sales, marketing and operations and he has a record of innovative development of branded products. I've been working closely with Dave over the last several weeks as he has met with other senior executives, with our board and with our employees. And after observing him in these diverse settings, I'm even more convinced that Dave has the leadership skills, the experience, and the enthusiasm to make a positive difference and to reignite our North American organization. We're extremely excited to have him onboard.

Now let me get back to the quarter. I'll begin by looking at our North American segment results where we generated revenue of $245 million, a 12% decline from last year's adjusted results. The good news in our battery business is that we believe the significant issues we've been dealing with for the past two quarters are largely behind us now, namely the transition to our new alpha marketing program and resulting high retail inventory levels. The new alpha program is now firmly in place and retail inventory levels are in much better shape as we enter Q2. We believe our new positioning reinforces our proposition to the value oriented consumer. It allows us to maintain traditional price gaps with our competitors and gives us added flexibility to execute promotional programs to drive incremental sales. And so far there's a reason to believe that it's working. Although Rayovac, alpha and POS dollar sales declined slightly during the quarter, primarily as a result of promotional activity, Rayovac Pack sales actually increased by 6% and Pack share increased by a little over a point.

So our new message is resonating with consumers. As of January 1st, the pricing we introduced last year becomes fully effective across our entire retail customer base, which should benefit sales and margins for the remainder of the year. We're cautiously optimistic that we've turned the corner and can begin to grow our North American battery business again. However, generally in line with the negative year-over-year comps we had communicated to you earlier, sales of the Rayovac branded products in North America declined by 18% this quarter. While this is a significant sequential improvement over FY '05 Q4 results, we really don't expect to see real momentum occuring until later this year. We had mixed results from Remington in North America. On the positive side, we gained share with our grooming product portfolio. Women shaving had its highest market share in three years and our personal care business did extremely well this Christmas, with Wet 2 Straight and the new All That line. However, men's shaving was down in a year in which we did not have a major new product introduction and the competition did. As a result Remington sales declined by about 3% overall.

However, we did manage to improve the margin contribution from shaving and grooming by more than 200 basis points by doing a better job of managing operating costs and controlling inventory returns. The December quarter is a very slow quarter in our lawn and garden business. First quarter volume is usually less than 10% of annual sales, so we don't attempt to draw any conclusion from Q1 sales trends. However, we were encouraged to see that consumer purchases of Spectrum Brand products at retail were up 16% during the quarter. Revenues, however, were down year-over-year by about 10%. But again, that is off a very small base and was mostly a timing difference resulting from large customers that deferred purchases from the first quarter into the second. We enter the all important spring selling season in this category with price increases in place across most key product lines effective January 1st, increased distribution at certain key accounts and a lineup of compelling new product offerings that we're very excited about.

Now moving on to Europe and rest of world segment. Europe continues to present a challenge for us. Revenue was $183 million in Q1, down about 18%, including the impact of the dollar working against us. Absent the effect of FX, sales declined about 11%. Euro zone retail sales are still weak and economic conditions in the U.K., where we have a sizable business, have deteriorated this quarter as well. In addition, the December 2004 quarter included the phenomenal success of the Wet 2 Straight product launch in the U.K., which inspired year-over-year growth of 68% last year in Remington personal care. That's a very tough comp to anniversary and we didn't have a breakthrough new product offering to match last year's incredible success. In the battery category, the shift from branded products towards private label continues. We're seeing aggressive price pressures from retailers on the private label side.

As a result, we're actually walking away from business with some retailers, at the opening price point segment, who are more interested in absolute price point without regard to product quality, merchandising and supply chain capability. That's not our business model and we really can't make money in this very low price point only segment. We estimate that on a full year basis, we're eliminating 25 million euros or $30 million in total at today's exchange rates of low margin business in these entry level private label segments in the European/rest of world region. As a part of this strategy, we've also significantly reduced our support of in-country battery sales in China to include only the largest most profitable accounts in order to divert lower cost batteries to support our businesses in Latin America and Europe, while improving our overall competitiveness and enhancing our margin structures.

While this strategy will reduce our overall battery revenues, it should improve our profit margins and better utilize our worldwide manufacturing distribution and supply chain infrastructure to support higher profit segments of our battery business around the world. Additionally, to drive top-line branded growth in Europe, we've relaunched the entire VARTA Outland portfolio. And that's been going very well. We introduced a new high performance offering at a higher price with better margins and an additional opening price point branded SKU. As a result, VARTA brand volume is up 10%, which translates to a share gain of about 1 point. At the same time, our private label share is down about a point as we begin phasing out of some low margin contracts that I mentioned. Net/net we've maintained share and improved our product mix, but it was not enough to offset the macro trends and the overall sluggishness in the market during the quarter.

VARTA and Rayovac branded product revenues were down 10% this quarter on a constant currency basis. In shaving, grooming, and personal care we had success with the Remington rollout across continental Europe, where we increased sales by 36% during the quarter. However, as I mentioned, last year's terrific personal care performance in the U.K. was tough to anniversary. Overall our Remington business declined by 13% this quarter on a constant currency basis. However, we remain encouraged about the long-term prospects of our Remington line of shaving and personal care products in the European marketplace and view this quarter's results more of a year-over-year comparison issue isolated to the U.K. marketplace. We are implementing a number of cost management initiatives to streamline our European business model to make it much more efficient and appropriate for the lower growth environment that exists in this region. Kent will update you on our progress in this regard as part of his remarks.

Overall, as we look forward to the rest of FY '06, we have two primary focuses in our European business. First, protect margins in our battery business through optimized branded market segmentation, a planned mix shift towards VARTA branded product and aggressive cost management. And two, leveraging our cost structure by achieving significant distribution gains in Europe with a compelling lineup of new Remington product introductions scheduled for later this year. Turning to Latin America, our Latin American business segment showed good growth this quarter of 14%, bolstered by a positive currency and a robust introduction of Remington products in the region. Although still small, we're feeling very good about the opportunity for continued growth in our shaving, grooming, and personal care products in the region. We're also studying opportunities to introduce lawn and garden and specialty pet products selectively in Latin America, to continue to leverage our cost base there.

Additionally, we're implementing selective price increases in our alkaline and zinc carbon battery businesses in this region, where we enjoy overall number one market share positions. Our Global Pet performance, a new business unit created by the merger of UPG and Tetra, was in line with industry trends this quarter. Total sales declined by 2%, but excluding negative FX impact, the business was essentially flat. Companion pet supplies was very strong, generating 8% growth, but the aquatic side of our business continued to be weak, with a sales decline of 5%. These results reflect overall category trends where consumers are still being a little cautious about spending, particularly in aquatics. We could use a Nemo type, two-type move to spark renewed interest in aquatics at key retailers around the world. We're also looking at selected pricing opportunities in several pet categories targeted for later this year to offset raw material inflation creeping into this business segment.

We're optimistic that our Global Pet segment will return to its historic 5 to 6% overall growth trends by the end of 2006, dependent in large part on the overall strength of global consumer spending. First quarter sales trends did improve sequentially, with December results showing good year-over-year growth. Consumer data indicates that Spectrum Brands continues to gain and maintain share in most important pet supply categories. And lastly, the biggest growth driver in the pet category is the introduction of exciting new products and we are rolling out new product launches in every category and every region in the world during the coming months.

Overall, I would say our first quarter results were okay, certainly not great, but generally in line with plans laid out on our last earnings call. We did make progress on a number of fronts that should begin to pay off in the months ahead. We put some major hurdles behind us and we're looking forward to better results later this year. Let me now turn the call over to Kent at this point to review the financials and provide some insights on our integration process. Kent.

Thanks, Dave. Gross profit margin for the quarter was 39.2%, that's a sequential 290 point improvement from Q4 of fiscal '05, but down as compared with the 40.4% reported last year on a GAAP basis. Gross margin is roughly flat with 2005 results adjusted for acquisitions, demonstrating that the largest impact on margins was the seasonal impact on our business of the lawn and garden segment's lower margins during the December quarter. Restructuring and related charges negatively impacted 2006 gross profit margin by about 30 basis points. These charges included $1.3 million in costs associated with the ongoing integration of United, as well as initiatives taken in Europe to resize our organization and reduce our cost structure. Inventory revaluation charges of $200,000 related to the Jungle acquisition were also included. Net raw material cost inflation had a negative impact on gross margins of about 20 basis points. Zinc continues to be our largest commodity exposure, with current pricing at record highs of over $2300 per metric ton, up from approximately $1200 late last summer.

Another concern is in the area of plastics, where we are seeing pricing pressure on bottles and plastic packaging. On a positive note, natural gas has fallen to pre-Katrina levels and we're hopeful that between current and planned hedges on urea, we'll be able to limit the year-over-year increases from this commodity to within budgeted levels. Finally, an absorbed overhead resulting from lower production volumes across several of our manufacturing plants impacted gross margin by about 60 basis points. Offsetting these negative factors were ongoing manufacturing cost improvement initiatives, as well as benefits from integration activities. Looking to the rest of the year, commodity exposure continues as a major challenge. Our projections assume that price increases and planned synergies will offset raw material cost increases. But this assumes some relief from the current spike in zinc prices.

As you may be aware, we normally hedge forward our planned zinc purchases on a rolling basis. This year as zinc crossed $1500 a metric ton, we elected to delay further hedging until zinc returned to expected more normal fair value. Unfortunately, speculation that levels never experienced before in commodities markets has pushed zinc to successive record levels over the past month. Taking steps to protect ourselves from further increases, the current cost represent a risk to our forecast. Q1 operating expenses came in at $191 million, or $186 million excluding restructuring and related charges, verses $138 million last year, mainly as a result of the acquisitions. Pro forma operating income was $59 million or 9.5% of sales, compared to $61 million and 12.4% last year. The seasonality of the acquired lawn and garden business was the primary reason for the lower operating margins.

On a segment basis, North American profitability was down from $41 million last year to $25 million this quarter due to the lower sales volume, primarily in the battery category, plus the inclusion of the lawn and garden business that incurs a loss during this period due to very low sales volume. In Europe segment profit declined to $30 million from $36 million, also mainly due to lower sales volume of consumer batteries. Europe was also impacted by our inability to anniversary the hugely successful high margin Wet 2 Straight product this year. The early impact of the cost control measures we're taking in Europe was not yet sufficient to offset pressure from negative product mix changes, higher raw materials, and unfavorable FX. Latin America segment profit showed good improvement at $6.6 million verses $5.8 million last year. This region continues to perform well for us with growth in both batteries and shaving, grooming, and personal care.

And lastly, Global Pet generated segment profits of $20 million, representing 15% of sales verses13.5% of sales last year on an apples-to-apples basis. Profitability in this segment should continue to grow throughout the year as synergies are realized. First quarter interest expense totalled $41 million, up from $17 million last year, as a result of the acquisition related debt. Free cash flow was a negative $8 million and that's after CapEx of $11 million and cash restructuring cost of $8 million during the quarter. Debt at quarter end was basically unchanged at $2.3 billion. As you know, we devote substantial dollars in Q1 and Q2 towards building inventory for the upcoming lawn and garden season. Second quarter's free cash flow will be flat to slightly negative after including the proceeds from the Nu-Gro sale. We begin to generate significant cash in the second half of the year, estimated at $160 million for the full year and that's on an operating basis. Our leverage ratio at the end of Q1 was 6 times as measured under our credit agreement.

During December, we renegotiated certain debt covenants in our senior credit facility, reflecting the final results for fiscal 2005 and our current projections for fiscal 2006. Our leverage ratio test was increased to a maximum of 6.6 times through Q3 of fiscal 2006, when it drops to 5.5 times through Q3 of fiscal '07. As a result of this seasonal borrowing in support of working capital requirements for our lawn and garden business and the loss of credit for prospective synergy savings one year post the acquisition of United Industries, we anticipate approaching the maximum leverage ratio covenant at the end of Q2. However, projected operating cash flow and related debt repayments, coupled with improving profitability, should enable us to reduce our leverage ratio rapidly in the back half of the year, ending the year at approximately 5.2 times, well within the Q4 maximum of 5.5 times. Also as part of the credit agreement amendment, our interest coverage ratio was decreased to a minimum of 2 times through Q3 of fiscal '06, when it increases to 2.25 times. As a consequence of these changes to the credit agreement, pricing on our domestic and Canadian term loans, which approximates 60% of our total term loans, was increased by 25 basis points.

With these changes and the interest rate hedges we've put in place on about two thirds of our outstanding floating rate debt, we expect an overall effective interest rate for fiscal '06 of approximately 7%. As you've probably already seen, yesterday Moody's announced changes in the Company's credit ratings. Changes were: our corporate family rating was downgraded to B2 from B1; our 7.375 and 8.5 senior subordinated notes were downgraded to CAA1 from B3; however, our senior secured credit facilities were left unchanged at B1. Please see their press release for further information on their analysis of the Company. The effective tax rate this quarter was approximately 35%, consistent with our full year expectations. Depreciation and amortization expense was $18 million and CapEx was $11 million. Our projections for full year CapEx of $65 million is unchanged. Weighted average shares used in calculating EPS this quarter were 50.6 million shares as compared to 35.5 million shares last year.

Now turning to an update on our integration and cost-cutting programs. First a quick update on our progress in Europe. Told you on our last call we were making changes to the cost structure in Europe with the goal of realizing approximately $10 million on an annual basis. We've made good progress toward that goal by focusing on managing our organization on a more regional basis, rather than a country by country basis, and by consolidating certain support functions, like finance, HR, IT, and supply chain, on a regional or subregional basis. Cost savings will come throughout the organization, including labor and related costs and operating expenses for sales and marketing as well as the support functions. We now project savings of about 15 million euros or $18 million when complete next year, with about one-third of our targeted savings falling to the bottom-line this fiscal year. Most of the one-time costs will also be incurred this year and are in our latest forecast. Let me turn to our major integration activities for United Industries and Tetra. We continue to advance on these major initiatives, both on our schedule and on budget.

We've made excellent progress in the integration of UPG and Tetra. Two small manufacturing plants were closed in fiscal '05. During 2006, we will close three large pet plants by consolidating into other existing facilities and sourcing both domestically and in China where financially attractive. Our plans for distribution rationalization contemplate the reduction of 14 DCs to just five highly efficient mega-facilities by fiscal '07. All sites for the optimized distribution network have been identified and are either under construction or in lease negotiation. We're opening new expended distribution centers in Georgia, St. Louis, and California over the next 6 months, which will allow us to close down existing inefficient facilities. We're also in the process of closing the St. Louis headquarters building, consolidating all remaining St Louis base sales and marketing employees into an existing smaller facility. We decided to maintain key marketing functions in St. Louis in order to retain the critical lawn and garden DNA.

Marketing of the former United Industries headquarters building is underway, with a goal of subleasing this facility during this fiscal year. On the IT front, the conversion of the U.S. home and garden business to our SAP platform was successfully completed in October. Conversion of the UPG aquatics business, based in Moorpark, California was finalized a month later. Next up will be the Canadian consumer lawn and garden business and the second pet conversion, the companion pet supply segment. Both of these were kicked off in January and will be completed in early 2006. Work has also started in Europe bringing Tetra's IT work in-house to run on our European data center. Tetra currently runs SAP but buys IT support from an outside third party supplier.

In the lawn and garden business we completed two small acquisitions that will allow us to further vertically integrate in both the fertilizer and enhanced soils categories. These acquisitions will give us complete control over the operation of what were essentially captive suppliers and allow us to capture the margin on the value-added by these companies. 100% of our energy is now focussed on the execution of the lawn and garden season. Integration of the lawn and garden business into our North American business unit is complete from an organizational perspective and further cost savings initiatives will resume after the season. Projected cost savings relative to all of these initiatives remain on track to reach our goal of $100 million in annualized savings. Benefits to the business will accelerate through fiscal '06, totaling $35 million of incremental benefits by year-end, largely weighted towards the back half of the year. We're very pleased with progress so far and the outlook for completion of our fully integrated North American and Global Pet business units. At this point I'll turn the call back to Dave for his final remarks.

Thanks, Kent. Let me just take a few minutes to summarize the opportunities and challenges we see in our business and then we'll turn to your questions. We're exiting this quarter with several nagging issues behind us and a number of positive trends to build on. One, the long and much discussed transition away from 50% more in alkaline batteries is now behind us. We're now going to market across North America with the clean, consistent powerful value marketing message behind our Rayovac brand. All major customers have our new alkaline lineup in their stores. Although it has been very painful to execute, we believe our new line is much more competitive and will create a stronger offering for retailers and consumers in the future. Two, we're fully realize pricing increases across a number of categories that total nearly $30 million on an annual basis, including North American batteries and most lawn and garden categories. Most of these increases took effect on January 1st.

Additionally, we are evaluating pricing opportunities in our pet supplies business, where we have leadership in many categories, as well as in Latin America, where we have an overall number one market share position in our Rayovac and VARTA battery and lighting businesses. Three, we have an aggressive but achievable goal to realize integration savings of $35 million in FY '06 and are on track to meet this objective with much more to come in FY '07. Four, we're in the process of restructuring our European business during FY '06 and we'll realize 15 million Euros in savings in FY '07. We will provide more details of this initiative next quarter when planning is completed and all statutory communications are accomplished. However, this initiative will create a much more streamlined and efficient regional structure, sized appropriately given the overall European consumer outlook, and resource focussed on our growth business segments.

Five, we expect to generate free cash flow in the neighborhood of $160 million this year, all of which will go to reduce outstanding debt and lower interest expense. In addition, we generated $83 million in net cash proceeds from the divestiture of our Nu-Gro professional products business. That transaction closed just last week and the proceeds were applied against our outstanding debt. In total, we will pay debt down nearly $250 million in FY '06, significantly de-levering our business by year-end. We will generate approximately $3.20 per share in free cash flow during FY '06, which will be used to significantly delever our business from current levels. While we're not satisfied with current leverage in our business, we're completely focussed on measurably de-levering our business this fiscal year.

And last, we gained market share during the first quarter in a number of key categories, including hearing aid batteries, lighting products, women's shavers, men and women's personal grooming, personal care products, fertilizers, growing media, controls, household insecticides and personal repellants. This is a fantastic endorsement of our products by the consumer. It gives us every reason for optimism that we can leverage these gains to fuel growth while working to extend that success across all product categories. So there are a number of things working in our favor that we can build on. We also still face some significant challenges. First, we operate in a number of very competitive categories against some of the best consumer product companies in the world. And we can't afford to skip a beat in the execution of our plan. This will never change.

Two, in certain regions and product categories we must reverse recent top-line trends in order to meet our overall objectives, particularly in the North American and European battery categories. While not yet totally evident in our financial performance, we have taken significant steps to fix our businesses in this historically important and profitable category. While our global battery revenue growth prospects will be tempered by our focus on profitable business segments, our margins will be enhanced and a infrastructure efficiency improved as a result of these initiatives. Three, we face significant raw material cost pressures, particularly with zinc pricing, and it will be difficult to offset these cost increases if we do not see some relief from current pricing levels during 2006. So far this year we have seen over $50 million in annual increases and input costs and are hopeful that these cost trends will begin to moderate over the next few months.

So after weighing all the strengths and weaknesses, opportunities and threats that we face, we are reaffirming our guidance for FY '06 pro forma EPS of 2.10 to 2.20, representing an increase of between 33 and 39% over FY '05 pro forma results. However, I must tell you that with commodity prices where they are today, I feel more comfortable toward the low end of that range. We also want to return to our historical policy of providing full year guidance only. But in looking at current quarterly expectations out on the street, I want to caution you that the majority of the significant year-over-year EPS growth we're expecting this year falls in the fourth quarter. In fact, we will probably not see year-over-year EPS growth on an apples-to-apples basis until the third quarter of this year, significantly accelerating in the fourth quarter due to all the initiatives we've reviewed with you today and on prior calls.

So to assist your modeling accuracy and knowing the general confusion surrounding the dramatic amount of change introduced in our business over the past year as a result of recent acquisitions and divestitures, we're providing what we hope will be our last quarterly earnings guidance and will in the future provide only full year updates. Our guidance in Q2 EPS, our guidance is Q2 EPS of $0.35 to $0.40, and Q3 EPS of $0.85 to $0.90. All in all, we remain confident in our long-term strategy and excited about the potential of our business. However, we still have some short-term issues to overcome and initiatives to complete before our efforts begin to measurably show in our financial results. Once accomplished, we believe that in spite of the short-term pain that we've all experienced, Spectrum Brands will be a much stronger, more valuable asset as a result of creating a larger, more diversified global consumer products Company. With that I'll turn it over to the operator and we'll take a few questions. Operator.

Thank you, sir. At this time I would like to remind everyone if you would like to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Dara Mohsenian with J.P. Morgan.

Good morning.

Good morning.

Are there any battery business -- what does retail take away look like at any retailers or stores where you didn't have significant inventory or promotional issues in Q1 or at least in January? Specifically what I'm wondering is if the change in marketing strategy has resonated with consumers right away or if it will take time to get the new battery message across?

I think it's a little bit of both. In accounts where we early on got the transition completed we've seen good sell through of the new program. Particularly as it relates to -- we measured it in different ways, dollar sales, unit sales, packaging sales, et cetera, because package configurations change dramatically. And package sales we've seen an uptick in improvement in those accounts where the transition was largely complete during the quarter. So, our view is it's working, but we'll see more evidence of that this quarter now that, for the first time, we actually have a clean retail landscape to be able to measure against.

Okay. And your gross margin performance is pretty solid in the quarter on a pro forma basis, considering the big revenue drop. What helped protect gross margins this quarter and is that sustainable going forward and should we expect a big ramp up with the pricing and synergies?

I think a lot of things. In spite of having softness in revenue and, as Kent said, that created some pressure on the margin line from a factory absorption standpoint, we were able to offset that with cost reductions that are permanent, with synergies that are beginning to flow from the acquisitions, which are permanent, and with favorable mix. We really had a very good quarter from a mix standpoint. For the most part, those are all permanent structural changes in our business model. And gross margins in total were pretty much on where we felt they would be.

Okay. And can you just give us how much synergies benefited the bottom-line in the quarter and then, out of the inventory increase, how much of that was due to acquisitions and are you inventories high at this point given the top-line weakness this quarter?

Yes, for the quarter synergies had an impact of about $5 million. And the increase in inventory, 100% of that increase is due to acquisitions.

Okay. So you're comfortable with your inventory levels here?

We always think we've got room for improvement, but we've taken first steps. I think we've got improvement that will help us get to our operating cash flow results for the full year.

Okay. Thanks.

Yes.

Your next question comes from the line of Bill Schmitz with Deutsche Bank.

Thanks, good morning.

Hey, Bill.

The revised guidance for the fourth quarter, do you think that's going to be driven by synergies, more by revenue growth or accelerated pullback in raw material prices, if you had to pick one, or is it a combination of the three?

Actually, I don't think it's a pullback in raw material prices. We're hopeful, but that hope, we wouldn't plan on that hope. It's more the realization of a lot of synergies that -- you've heard now for almost a year, let's talk about all the planning relative to the integration of United and Tetra and the $100 million that will eventually flow our way. And we've seen a little bit of that flow our way, but you'll see a lot of that flow our way towards the end of the year, because a lot of the plant rationalization and distribution rationalization initiatives and sourcing, Far East sourcing initiatives really don't get traction until the back half of the year. That's the single biggest reason to be optimistic about the fourth quarter.

And then secondly, we do think that top-line growth will be stronger. And as we've been able to fix, and show evidence of fixing, our battery businesses, both here and in Europe with all the changes that we've talked about, we'll see those results. It will be easier to see those results in fourth quarter. And then finally, we have a lot of new products and new product launches, particularly with Remington and also in some lawn and garden categories that we'll see, that should accelerate our business. And it's a little too premature for us to talk about what we are doing with Remington, but we do have some exciting things that I don't want to give too much of a heads up to the competition.

Okay, great. Then one quick question. In terms of the segment data, are you guys going to provide us the restatements with the new segments? Right now it's a little bit confusing in terms of how we should model going forward.

You will see that posted on our web page within a day or two.

Okay, good.

We will have the breakdown of sales and the segment EBIT, so you will be able to track that as we go throughout the year.

Okay, and he'll do it historically, as well?

Yes.

Okay, that's very helpful. Thank your very much.

Your next question comes from the line of Bill Chappell with SunTrust.

Good morning. On the quarterly revenue, I guess looking at the push-out of one customer in the garden business. Scotts the other day said it was about a $10 million push-out of revenue from the December quarter to the March quarter. Is that a similar amount for you?

I don't have the exact number, but my sense is it would be a little bit less from us in terms of actual dollars. Scott's has a bigger business model than we do in lawn and garden. But in terms of a percentage of our revenue, it would be very similar to what they've seen and what they've preannounced at the end of December. There's a couple of big customers that, because of their own inventory management initiatives, have pushed some business that historically would have been shipped in the December quarter into this quarter.

I guess a better way to look at it is for the December revenue it was below what we were looking for, but I don't know what it compared to what you were looking for. Can you give us how you looked at the quarter and how it came in from that standpoint?

It came in below. Again, this is our first year owning the business and we took historical numbers that United had generated in the October through December quarter, and all other categories, and we used that as the baseline for our forecasting. And as I said in my prepared scripts, we came in about 10% below last year, albeit it's a small quarter.

Sure.

It's about where we missed in terms of our projections.

I guess looking also at the pet business, it seems like that bounced back a little bit from the prior quarter. Are you seeing any, as we go sequential months, some improvement of that business? Or does it look like as we go into January it's still in a lull?

Actually, we feel pretty good about January, I won't do much forward-looking here, but talking about the last quarter. We ended last year where that July and August weren't very good, in particularly in aquatics. September recovered slightly, but it still wasn't very good. And October was even worse. And it picked up in November. Was pretty much near our planning assumptions for November and then significantly above our planning assumptions for December. So, the business came back in December and it seems to be holding there right now. We're encouraged by month to month trend analysis. We're extremely encouraged about companion pet, where that business is just doing sensational, up 8% this quarter over last year.

And the aquatics business is what needs some tail wind. We need to get through promotion and new products. We need to get some more excitement back into aquatics. And we really view that as our task. We are the world leader in aquatics and in those categories. And it's our job to get more ideas and more new products and more programs out to these key retailers. And we're very aggressive. John Howell and his team are very aggressively focussed and working on that right now.

Great. One last question. Looking out on zinc prices, is there a level that would be optimal in terms of your budget for this year?

Low.

Or less than today.

If you look at historic zinc prices, where we are right now makes no sense, Bill. The only thing that's really occuring that's structural is there is more demand from China. Zinc's a big source of studs for building and anybody that's been to China, see the building that's going on. That is driving demand. Other than that, there's a lot of that pricing that is pure speculation and hedge fund speculation in that marketplace right now. So, we do think over time that it will moderate, although we expect that we're going to be facing this zinc issue for the remainder of '06. It's just something that we're going to have to deal with and we are going to have to go to other areas of our business to offset this unplanned expense.

Okay, great. Thank you.

Thanks, Bill.

Your next question comes from the line of Carue Mortonson with CIBC World Markets.

Thank you, good morning. Just for clarification, in terms of the expanded plans for cost reductions in Europe, I believe last quarter we had talked about additional restructuring activities in North America and Europe yielding another 20 million on an analyzed basis together. I thought I heard $18 million for Europe. Is there an update on terms of the total cost savings here going forward on an analyzed basis?

I don't have an exact number, but I'll give you a directional perspective. We've increased the $10 million to 15 million euros, which at translation translates to $18 million today. That may change in the future. And then in North America, we had assumed about $10 million worth of restructuring initiatives. And my sense is that that number is probably up closer to $15 million range than $10 million range now. So it's somewhere 10 to$15 million. But I don't have an update in North America to go through with you right now. And a lot of that is offsetting some of the cost pressures that Kent alluded to, most notably zinc. Where we haven't been able to -- because we didn't hedge six or nine months ago, zinc. We've not been able to offset that. We've had to restructure more deeply.

And in terms of the zinc, I had been under the impression that urea had been your largest raw material exposure, but now with zinc, how much zinc do you guys use on an analyzed basis?

20,000 metric tons.

20,000 metric tons. And in terms of overall product cost in batteries, it represents, zinc represents roughly about 5% of the product cost. While it's not -- I think the good news is it's not a huge component of product cost, but the bad news is it is significant. And in terms just to answer on urea, three and six months ago, we really were looking at a near doomsday scenario in terms of urea. We were pretty naked six months ago, no significant hedges in place, Katrina hit, natural gas went through the roof and a lot of projections were the same for things like urea. We've seen that moderate. We did over the last six months significantly put hedges in place that protected most of our production through the winter. And we had a belief at that time that prices were going to moderate and that as we got into late winter that they were going to come down. Now, we've benefited by it being a relatively mild winter across the country in total. And so that's helped us. So we're favorable to where we were to projected on urea on the last call and hopefully some of that favorability will continue and will help to offset some of the zinc issue that we have.

Okay. In terms of the price increases on the fertilizer side of the business. I wasn't sure if I missed it. Did you give the percentage of the increase that you've realized?

No. But I will tell you that our increases range from, in some categories, in -- and when I say this, I'm using lawn and garden in it's broadest context. It includes insect control and our repellant business, et cetera., that in some categories we chose not to increase prices, for competitive reasons. But in many categories we did. And our price increases would have ranged from 2% in some categories up to 10% that we're able to achieve in other categories for a net price, if you look across our entire lawn and garden portfolio, about a 4% effective price increase on average, that's assuming we're right on mix. All of that effective January 1st. So if you look at it versus expectations, we came pretty close to our expectations. We probably achieved 80 to 90% of what we ultimately believed that we would accomplish in terms of pricing initiative in North America.

Okay. And just in terms of Remington, I was under the impression that last year basically was a weak year for the Christmas season. You had some low-end fighter products. And going into this season you had new packaging, new SKUs, gains of shelf space at Wal-Mart. How much of this was really driven by that one product introduction from your competitors or did you lose market share kind of across the board in Remington for North America?

The answer's it was the prime contributor. In our women's shaving, in our grooming and in our personal care businesses, we saw significant improvement in those businesses year-over-year. And the only category in the Remington product portfolio that we saw decline was in men shaving. That was because that Norelco introduced a very good new product. And really in the competitive set, while we all introduced new products, they were the only one that introduced a significantly different featured new product. And they put enormous advertising, as compared to what they had historically done, behind that product launch. And they drove their share up, roughly 3 to 4 share points for the quarter measuring period at the expense of ourselves and Braun. So that was really the significant move that occurred in Remington for the quarter. As I said, it was a more profitable business for us by the quarter because we managed a lot of things, shipping to control inventory returns, and a lot of other things that allowed us to really to change the margin dynamics of that business.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Alice Longley with Buckingham Research.

Good morning. I'm trying to figure out what to do with my sales line for the March and June quarters. In U.S. batteries, if inventories are tight and you're getting pricing, should I assume your sales here are up mid-single digits in the March quarter?

I think our analysis, I don't have it in front of me, but I would just sort of generally tell you, Alice, that we view the March quarter as probably going to be flatish sales in North America. And then beginning to build in the June and September quarters as traction takes hold. And there are a whole lot of other moving parts.

March quarter is the lowest quarter of the year for battery sales, anyway.

And when you say flat in North America or flatish, as you said, are you referring just to the batteries?

Yes, I'm referring to batteries and I'm referring to alkaline batteries.

Okay. And are the price increases being partly offset by a shift to the large size tags as sort of an adverse mix a little bit?

Yes. Price increases, which there were some -- I've read things from various analysts over the last three months as to the industry is it really getting price increase. And I will tell you that the industry has gotten price increase, all participants, everywhere at retail. And so pricing has stuck and it stuck exactly what everybody said last, late last summer which was sort of that 6 - 6.5% range. But what's eating up some of the revenue or the profitability is shift to larger pack sizes, which as you know, our competitors really have begun to move towards. Historic, that's been a strategy of Spectrum, or Rayovac our predecessor, and everybody's jumped on that boat here over the last year.

When you gave us your share, I think you said your share was up 1 percentage point in the quarter. Was that all -- was that including Wal-Mart and Target and all retailers, or was that Nielsen or IRI Data?

That would have been our view-it share which, as you know, it's an imperfect universe out there. We use Wal-Mart panel data, that's all that's available. We use Nielsen data, not IRI, and then we try to forecast share changes and a lot of accounts that don't report. So that's the same thing that I think all of us are faced with, particularly in that category.

But that's your best guess as to what happened to your share including all retailers?

My best guess in terms of our share in North America is that in dollar terms we lost about a half of a share point. That is our estimate, okay.

Okay.

But in unit terms, we more often now, instead of looking at unit terms, we look at pack configurations, because it's really a more important measurement for us. Yes, we're up about 1 share point when viewed that way, selling unit or pack sizes. So we do think that what we've moved towards is working that the value conscious shopper is being migrated towards our new messaging and our new pack configurations. But there's a lot of moving parts there, Alice, as you have noted. Yes. And our sense is, at least for our business, that it's going to take another quarter or so for us to be able to show evidence that there are strategies working well and that everything is in place to make it work effectively for us.

You've seen the data that you've tried to put together, how fast did the battery market overall grow or decline in the December quarter in North America?

Decline slightly. Declined slightly in dollar terms.

Category down like less than a point?

Yes, category down in that range. Okay. And I don't have the unit data, but my suspicion is that the unit data was flat to up and it's more of an issue. Okay, Kent's just showing it to me that we're showing the dollars down about 0.7 of a point. And packs are probably up slightly. Or units are probably up slightly.

Do you have a similar number that you've cobbled together for Europe? How fast is that market growing or not?

We use Nielsen data for Europe. And alkaline continues to grow modestly in terms of dollars and units, more units than dollars, and it's all driven by private label growth at the expense of brands.

Okay.

That's because in Europe they are still seeing this conversion from zinc carbon to alkaline and now, with very low cost, private label alkaline, it's rapidly eroding the remainder of the zinc carbon business in Europe.

In Europe the zinc carbon business is going away fast. In former western Europe it's really almost done to the extent it is here in the U.S. now and it's because of private label alkaline has become the replacement for traditional zinc. In former eastern European countries that's not quite the same and zinc carbon is still a pretty good size business there.

What percentage of your mix in Europe is now private label, now that you've changed your -- ?

It's been historically 50/50, Alice. It's 50/50 now just in round terms in units, but that will change. That will change going forward because we are really embarking on a strategy to try to maximize profitability and to focus on brand, where VARTA has got a very strong brand positioning in Europe. And at the very low end, where our margins were extremely low, that our view is that we have filled up or we're taking available capacity around the world as you go to other places. And so, we've really in the last quarter we have removed ourself from four major private label low-priced contracts that we've historically had. So in going forward you're going to see that mix change.

Okay, thank you very much.

Thanks Alice.

Your next question comes from the line of Constance Maneaty with Prudential.

Good morning, I also have some follow-up questions on Europe. I don't quite understand your strategy there anymore. While the market was moving towards private label, you were moving towards private label and that seems to be the part of the category that's growing. Now that that's not quite so profitable, you're focusing on branded, which isn't growing quite as much. I just don't get what the strategy is going to be. I also don't understand what the pricing strategy is in Europe. It just feels so irrational to have so many tiers.

You've asked me several components so let me try to answer. Okay. The in Europe it is a very structured marketplace by country and segmented. There is a super -- where it didn't work in North America, but works there. There's a super premium segment we participate there, as does our competitors. Then there's a regular alkaline price segment. And then there's an opening price, this is all branded, opening price point branded segment. And we are beefing up our offerings in that branded segment. We've actually added another branded segmentation that I alluded to, probably confused you, in my notes. In private label, in most accounts now, there's at least three private label price points. In CareFore there's an opening private label, a second private label, different brand, different controlled brand, and a third private label brand, okay. We have historically supplied all of those to CareFore. I'll just use that as an example.

The opening, the first private label brand, we've walked away from that business because it is so low in price point, and our margin is so anemic, that our view is that we're wasting capacity to play where we weren't making any profit to begin with. And so we are continuing to participate in private label where there is margin available. We are the biggest private labeler in Europe. We will continue to be the biggest private labeler in Europe. But at that very opening price point, we're trying to shift some of the volume that we would normally supply there to branded products. And what we don't supply to ship that product other places in the world that can better use it. So there's about $25 million worth of total business that is at that very low, extremely low profit category that we've historically had, Connie, both in Europe and in China, that we're simply saying it doesn't make any sense given our size, given our diversification and given the fact that we have large battery businesses everywhere in the world and we need to manage our supply chain.

I'll give you another example. We're out of AAA capacity. We're bringing some online in China later this year, but we have no more capacity in the world in AAA. And in fact, we're considering going out and buying 100 million batteries from one of our competitors to satisfy our need. Well, I think our view, we've sort of come back full circle on that, is we don't need to be giving batteries away. AAA batteries, in my example that I just used, we need to get out of that business. We need to rationalize our facilities. We need to run them at 90-100% of capacity. But we need a more rational approach to profitability, particularly in Europe.

Yes. Connie, another way you could look at it, is private label is kind of in Europe emerged into two basic categories, a quality private label battery that has reasonably good performance and quality. And then something that's a down and dirty, low performance, low quality, absolutely just lowest price point product. And that's the business that we're walking away from.

You said that in Europe your sales were roughly 50/50 between private label and branded. What's the -- ?

In unit terms, Connie

In unit terms. What's the marketplace split between private label and branded and how has that changed over the last year or so?

I think it's 42%, last numbers I saw 42% private label in total. The structural change that's occurred in the last year is in central Europe. Call it the last year to 18 months, where a deep retail discounters, like Aldi and Lidl, it's their home base. That has changed the marketplace in central Europe by almost 15 market share points. Central Europe was the last to go in Europe, that and the U.K., to a strong private label presence. And now we've seen a significant shift in the central European region towards private label. 15 share points in two years shift from branded to private label.

Wow. Okay. 15 share points. You also mentioned in your comments that you were reducing in-country battery support in China. What does that mean?

Well, when we acquired NingBo, how long has that been? Two years. Our strategy was acquire a very low-cost battery manufacturer, improve the quality, build up the volume, use it as an export center around -- for other markets in the world. That was our strategy. And in acquiring that Company, we acquired a small in-country retail sales organization that was losing significant amount of money. So we have most recently downsized that organization, in-country organization, and we have gone away from trying to be a supporter in all major cities in China of a alkaline in-country program to only selling to major retailers and major chains, key account selling in China. And as a result, we have walked away from a big piece of that business. But in our analysis of it, we weren't only not -- it wasn't just a low margin business, it was a negative margin business for us. And it was being masked by other things.

So we've made a decision, a conscious decision, to focus only on major retailers in China, both in-country retailers as well as the CareFores and Wal-Marts of the world, who have major growth initiatives there. And we have changed our sales organization so we only have, what we would call here, a national account or key account managers selling to them. And we've eliminated all of this regional infrastructure that we had in place that we were losing money in. And so when you combine that with these initiatives that we're taking in Europe, there's about $30 million worth of sales historic year-over-year that are not going to be in place next year. And of that $30 million in sales, there's virtually no contribution margin that was coming our way as a result of that.

What's the split of this 30 million between Europe and China?

It's probably about two-thirds Europe and a third China.

Now, as I recall when you bought NingBo, I think its sales in China were something on the order of 35 million. Is that right?

That was total revenue, Connie.

It's including export revenue.

They did a lot of, call it, OEM type sales to a couple of major customers in the region, so the in-country sales was relatively small compared to that.

So what are sales now in China, or of NingBo?

In-country or export?

Total NingBo.

Export now is to ourselves. It's inter-Company sales. Again, we don't have the exact numbers, but my recollection is that we had sales revenue of somewhere between 10 and $20 million in-country when we acquired the company that were not related party sales. And now it will be less than 10. It will probably be somewhere in the 5 to 10 range. So we're taking out, call it a half or two-thirds of the sales that we acquired. But those sales had no real profit contribution associated with them.

How is the alkaline market developing in China? The last time I looked alkaline was like 3% of general batteries. What is it now?

It's growing, it is a very small market now and it's really small portable electronic devices. Used to be cell phones that drove the market. That shift completely. Now it's into other smaller devices, but it's growing rapidly, albeit from a very small base. It probably still represents no more than 5% of all battery sales in China, but at very low profit margins, or you could almost say at no profit margins, it's occuring now. It is a potential long-term market, but it's one that's going to take a fair amount of time before there is any profit generation.

Is the Chinese market developing in a branded way or a private label way?

It's developing -- well I think the answer is probably both. Duracell and Energizer both have a business presence branded in China. But the biggest players in China are people that -- GP, which is somebody you may or may not know, that's a bigger name over there in that region of the world. [Peradior] and brands like that.

And just one final question. I think you said it would take the better part of fiscal '06 for Rayovac branded batteries to grow in the U.S. again. Why is that?

I think I said it would be the latter part of '06. I don't remember my exact words, but it will be the latter part of '06. Frankly, we all want to see how our battery business performs this quarter when we have all of the new programs out. That's why we're not forecasting growth in that until we see [perical] evidence that we've got the programs right, we've got the strategy right, we've got the promotions around it correct. And I think it is a better bet to assume that we're going to see measurable growth towards the latter part of this year.

Okay. Thank you very much.

Thanks, Connie.

Your next question comes from the line of Joe Altobello with CIBC World Markets.

Thanks, good morning, guys. First on the SG&A number. It actually looked pretty impressive, I think year-over-year on a pro forma basis it was down about 25 million. I would guess about 5 of that was the savings you talked about from the integration. But what was the other 20 million? Is there a one-time lip there or is that a pretty good run rate?

It's kind of across the board. We really, again, seeing some weakness in the business. We controlled selling in all SG&A categories in all regions of the world. We had our belts pretty tight this quarter.

Okay. And then second, on the free cash flow number you gave, 160, that's pretty much in line with what you gave last quarter. In terms of the components of that, the working capital contribution, is that still about 40 million?

Yes. We're estimating in the 40 to $50 million range for the full year.

And the cash restructuring cost for the year?

I believe that's kind of in the 15 - $18 million range. And as Kent said, the capital expenditures for the year would be about 65 million.

Got it. And lastly, Bob's departure, does that slow down at all the integration of North America or your plans there at all?

No, I mean, no the answer is no. Bob was a valuable contributor, we had a lot of discussions with Bob through the year, obviously. So this is not -- it's certainly no surprise and it's been a plan. We began searching for his replacement, nationwide search, several months ago. And so it's a planned orderly transition. And Bob was very helpful and instrumental in getting some of the St. Louis resources resized and integrated over into Madison and to help take a very large complicated business and get it structured properly. And so he did great job for us.

Dave is a fantastic executive and we are all -- could not be more proud to have him on board. And he has a track record that is stellar in terms of dealing with companies like ours, companies where that we've got pricing issues and we've got commodity pricing issues and we're trying to create branded strategies and new product development. And he really has a lot of experience in value brands. If you look at his bicycle experience, where he created the biggest, in unit terms, bicycle company in America, Mongoose. If you look at Wilson -- and at Wal-Mart. If you look at Wilson Sporting Goods, the same, and if you look at his relationships with Wal-Mart, Target, Sears, Home Depot, Lowe's, they go back many years across many different products and product categories. We think he's a perfect match for the future. While we believe that Bob was perfect for us over the last year, we think Dave represents that for us in the future.

One other note is that we do have a complete infrastructure, teams of people and some full-time people assigned to doing the integration. While Bob was a participant in the process on our steering committee, all of the integration is happening with at lot of other people focussed on it. And we are not going to miss a beat on the integration.

Okay, great, thank you.

Thanks, Joe.

Your next question comes from the line of Reza Vahabzadeh with Lehman Brothers.

Good morning.

Good morning.

On the cost increase front, did the first quarter represent a full run rate of the cost increases that you talked about for the whole year? Or is that less than the full run rate?

You're talking about input costs?

Yes.

Well, in terms of forecast, first quarter represented most of what our view is in terms of forecasted changes in commodity prices. The only real wild card is what Kent talked about specifically,and that's zinc.

Okay.

So zinc represents an exposure for us. And everything else we think we have planned out pretty well versus our planning assumptions.

Did natural gas decline early enough for you to benefit from it in the key shipment periods, March to May in the urea?

Yes.

It did?

Yes.

Okay. And then on the cost savings front, you've always mentioned it's primarily second half oriented. Is the timing still essentially second half, there's no change between, say, the third and fourth quarter of a cost savings -- ?

There's no real change from our assumptions that go back for several months because most of those savings come as a result of changes in our distribution system and changes in our manufacturing rationalization. And so those are tied to plant closings or tied to shutting down old distribution centers and merging them into common large mega-centers, those types of things. So there's very little effect that we're able to do in terms of pulling up or changing those assumptions of synergies.

Dave, you mentioned in a press release, you were not pleased, the Company is not pleased with revenue trends. What can be done going forward to change those trends in this fiscal year, if at all?

It all lies with batteries. I think we're not unhappy with overall long-term trends in our business, in our pet business, in our lawn and garden business. We ended up in our pet business our market shares are solid. In our lawn and garden business we gained market share. In our Remington business in total, it continues to grow, albeit we've seen a little bit of ups and downs. But in overall long-term trends it continues to grow. And it really lies in our battery business and in a lot of what we talked about today. We've got to get our battery business in North America growing again. We think we had the program out in the marketplace, we'll see. And in Europe, we've got to deal with the factors that exist in Europe relative to the economy. And a lot of that is not dealing with how to grow our battery business in Europe, it's dealing with how to structure our battery business in Europe, and the overhead cost and burden associated with it, so that we control our bottom-line and protect our bottom-line profitability.

Right. The inventory overhang issue in North America retail channel that you touched on last quarter, you said it is largely over now. When you say largely over, can you elaborate on that?

We started two quarters ago, we talked about on the September call that we had, or mid-summer call, that we had an inventory overhang at retail that was complicated by the fact that we were trying to change to a brand new program and so we were having trouble getting rid of the old stuff and it just sort of piled up on us. And we said on our call for the September quarter, that we had sort of, I think I may have said 75 or 80% of that behind us.

Right.

And that we would use -- through this quarter we thought we would get it all flushed out, which we think we have done for the most part. Where we had inventory of old stuff clogging up our ability to get new stuff on the shelves, because it is a [enteredive] process.

Right.

We think we have that virtually behind us and so as we enter this quarter, and I think it applies for our competitors as well, we all feel like we've got inventory levels about where they need to be.

Okay. As far as the price increase in batteries, you mentioned there might be some offset from pack size changes for the industry. Would that pack size change affect you, as well, because you're already in the large packs?

It affects everyone. But I would tell you that over the last year, we've been far less aggressive than our competitors have been on moving to larger and larger pack sizes, for a lot of reasons, including we had this 50% more program that limited our ability to do certain things. And so there's been a fairly good size shift to large pack sizes that's been led, most in the last year, by our two competitors in the category. And historically that's been our space that's we've operated in. And so we've been at somewhat of a disadvantage because of the program that we had out there. Now that we are in our new program, we have much better ability to participate in those areas, much like we did in the past.

When do we know if the new price gap for batteries, how many data points? How many months of data points do you need to know that the new price gap in batteries is appropriate, not just competitively, but also to keep sell through at adequate levels? Does it take a couple months?

Yes, I think the next time we meet we'll have three months of data.

Okay.

That's clean data and we'll be able to be better -- obviously, we'll be able to better give you a point of view on how we feel that's all working.

And then lastly, will this second quarter, Randy, reflect a full quarter of price increases at the full run rate?

Yes.

Thank you. Thank you much.

Okay. I think we've gone over -- let's take one more question and then -- operator, let's take one more question and then we need to cut it off.

Thank you, sir, your final question comes from the line of Peter Barry with Bear Stearns.

Dave, thank you for taking my call.

Hi, Peter. How are you?

I'm well. How are you?

I'm great, thanks.

Kent, could I -- obviously, it sounds like you're reasonably pleased with the progress integration has made thus far. If the integration process is ever complete, when do you think we might be able to look back at it and say job well done?

Well, if you look at what we did, Peter, we split into two separate major integrations initiatives. We are integrating the United Industries lawn and garden business into our North American business unit. And I can tell you sitting here today, that while there's a little more work to be done, that is essentially complete. We are operating as one business unit in North America organizationally, from a supply chain point of view, from a global operations point of view, and a systems point of view now. That was the final step. So we're all in one business unit. Again, more opportunities, but that one is behind us and it's working very well. I think you'll see that as we go through the lawn and garden season. The other major integration is Global Pet, which is the integration of United Pet Group and Tetra. As you know, Tetra came several months after United. And so because they don't have the same seasonality, we had more time to plan that out. And that's, call it, several months behind the North American business unit.

And pet, as you know, United Pet Group, was actually a roll up of a number of small businesses, so there's a lot more integration activity in both the supply chain, in manufacturing, and distribution. So we talk about a lot of synergies to come, most of that is in the Global Pet integration. All those initiatives are completely mapped out. A lot of things are happening now to make that happen. All of the planning is done and, as we said, as we go through the next six to nine months, you'll begin to see dramatically the impact of implementing all of the things that have now been mapped out. By the end of calendar 2006, essentially the two integrations will be complete and there'll be some more benefits coming primarily in the purchasing side, maybe a little bit more in the supply chain side. But the work will be essentially over by the end of this year.

Dave, do you foresee the need for any additional divestitures as a part of the restructuring, whether it be North America or Europe?

No. If they were, Peter, they'd be extremely small. The divestiture that we did, we identified early on in our due diligence as it was unlikely that we would want to keep that business because it wasn't a consumer business and it's really consumer's what we know. And the more we delved into it, it was a very good business, but it's one that we didn't understand. Dealing with fertilizer molecules and technology sales, in many cases, to our competitors just didn't make a whole lot of sense to us or, frankly, to our competitors. So we viewed somebody else could better handle that business. And as long as we had a long-term supply agreement and an agreement to be able to have access to the technology that was developed there, we had our cake and ate it too. So that was sort of a no-brainer for us to do.

And we needed to get some leverage down and some debt off our books, and that was a good way to do it. But I really don't think you'll see divestitures occur and, frankly, I don't think you'll see acquisitions occur during this fiscal year. We are supremely focussed on getting our leverage down to a more manageable level. And then once we've done that, we'll talk to you about what else is on our mind. But it is not going to be for awhile.

Randy, apropos of that, the revenues associated with the Canadian fertilizer are now treated as discontinued operations, correct?

Correct.

How large a revenue stream was that?

Annualized about $80 million.

And Dave, let me close with a question for you. Knowing what you now know and what you've learned over the last six to nine months, are you any less enthusiastic about either of the two major categories that you've now assumed, which appear to be the growth drivers at Spectrum Brands?

Peter, I remain convinced that our strategy of diversification and in particular moving into the two categories that we did, lawn and garden, where the competitive set is good, the growth rates are reasonable, and pet, where the competitive set is more than good and the growth rates are potentially more than reasonable, are going to be the drivers of their business in the future and a value creation. And only two years ago 90% of our sales were -- between 90 and 100% of our sales were in batteries. And batteries is a tougher competitive set, it has proven, as we predicted, to show less growth than historically around the world. And I think our moves were proper and I remain very bullish on a long-term prospects. We've had a lot to do. We've changed, fundamentally changed the structure of our Company. Half the people in this Company are new within a year, half the managers are new within a year. And so there's been a dramatic amount of change that we've had to deal with. And we've dealt with most of it good, some of it we've had our little hiccups. But at the end of the day, once we get through it, we're going to have a more valuable Company that has a higher growth rate potential and a better future than the one that we had.

Just one final housekeeping question for Kent. I gather you will no longer provide us with detailed revenues by historic category, is that correct? No, no, more a geographical breakdown?

-- we're reporting by our new four business segments, Peter. And we'll give some visibility, but we're going to really focus on those four business segments.

Thank you all.

Okay, thanks all and I guess I would conclude by thanking you for spending an hour and 32 minutes with us today, which represents the longest call we've every done. But, obviously, it was needed and I appreciate your time and your continued interest in our Company. Thanks and have a great day. Operator?

Thank you, sir. This concludes today's Spectrum Brands first quarter earnings conference call. You may now disconnect.