Spectrum Brands Holdings Inc (SPB) 2006 Q2 法說會逐字稿

Good morning. My name is Dennis and I will be your conference operator today. [OPERATOR INSTRUCTIONS] At this time I like to welcome everyone to the Spectrum Brands second quarter earnings call. I will now turn the call over to Ms. Nancy O'Donnell. Please go ahead, ma'am.

Thank you, operator. Good morning, everybody. Welcome to Spectrum Brands second quarter earnings call. I am here with Dave Jones, our Chairman and CEO, Kent Hussey, your President and COO, and Randy Steward, CFO.

Before we begin, I want to remind you our comments this morning include forward-looking statements. These statements are based on management's best current assumptions and projections and as such they contain an element of uncertainty. 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 risk factors and cautionary statements discussed in our most recently filed form 10-K and 10-Q. We assume no obligation to update any forward-looking statements we make today.

We'll also be making reference to various pro forma non-GAAP 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 at www.spectrumbrands.com in the webcast and presentation section. This is pro forma information is prepared using numerous assumption and is is offered as a supplement to assist you in analyzing long-term trends in our business.

I will turn the call over now to Dave Jones for prepared remarks.

Thanks, Nancy, and good morning, everybody. Thanks for joining us on or call today.

This morning Spectrum Brands announced Q2 results in line with revised expectations we communicated to you on April 6. Q2 revenue was $625 million, a decline of about 4% versus last year's results adjusted for acquisitions and divestitures and down 3% on a local currency basis. We generated pro forma EPS of $0.03. In the middle of the range of April 6 guidance.

These results represent a significant decline from pro forma results from a year ago, primarily a result of under performance in our battery businesses in both North America and Europe and dramatically increase commodity costs across all categories, particularly in our battery business due to all-time record levels of zinc pricing. On the bright side, our Remington branded businesses had a very strong quarter. Specialty pet returned to mid single digit sales growth with aquatics showing sequential monthly improvement throughout the quarter.

Our lawn and garden business is poised for a solid selling season after being hit with retail inventory adjustments from some of our large customers during the quarter. Our integration efforts continue to make good progress, and we've recently announced major new cost restructuring initiatives throughout the organization targeting an incremental $50 million in annual savings worldwide.

There is a lot going on in our business right now and has not all come together as quickly or as smoothly as we might have hoped, but overall I believe we're making progress on all fronts. I will begin my detailed review by looking at the North American segment where we generated sales of $316 million down about 3% versus year ago adjusted results.

Our North American battery business declined 20% year-over-year with the biggest revenue hit coming from significant retailer inventory reductions that you read and heard about across a range of consumer product companies for some time. Had it not been for these inventory reduction initiatives our battery business would have generated relatively flat year-over-year results, not up to our expectations but still a stabilizing trend that we're cautiously optimistic will continue to improve throughout the year.

Retail battery inventories are currently at what we believe to be reasonable levels and we do not expect to see further significant reductions going forward. Certainly not of the magnitude we saw in the last few quarters. Aside from the inventory issue basically what has happened in our North American battery business is that while we were implementing our transition away from 50% more to our performance guaranteed campaign last year, Rayovac lost distribution and momentum in the alkaline marketplace and lost 1.5 market share points at retail over the last year or so.

More recently we gained a half share point from our low point and are now down one share point versus this time last year. We're trending in the right direction in terms of market share, albeit at a slower recovery rate than we had anticipated. We're rolling ought a number of exciting product and marketing initiatives in the next few months, and we expect that we can return this business to year-over-year growth within a few quarters. Commodity costs continue to be a challenge for us.

Zinc pricing continues in the stratus sphere, closing recently at over $3400 per metric ton, over three times last year's price. We've locked in toward contracts for much of our needs through the remainder of this fiscal year and a for a portion of next year's requirements but at levels obviously much higher than we enjoyed last year. Industry analysts and our own experts do not predict relief in zinc pricing until late 2007 or the 2008 time frame. This dramatic cost increase is putting pressure on the battery industry worldwide.

Spectrum Brands has taken pricing actions in other areas of the world like Latin America, and we believe current conditions may lead to further price increases later this year because cost pressures facing the industry are just too compelling to ignore. Remington had a very healthy second quarter with sales growth of 23%. The key drivers were strong sales in personal care and men's shaving, but we actually grew unit and dollar share in all categories during Q2 and historic first. We plan to invest in men's shaver advertising for Father's Day and also put substantial investment behind our launch of the new men's shaving platform this fall to build on these positive trends in our men's and women's shaving, grooming and personal care product segments.

Overall, we're very optimistic about our growth prospects in this category. As we discussed on our last call, retailer inventory reductions had a significant impact on our lawn and garden business during the second quarter, particularly in the area of controls which is starting somewhat sluggishly this season. Due to these unplanned cut backs, our Q2 lawn and garden revenues were down 1% versus last year. However, our sell-through is quite strong overall at approximately 10% year-over-year growth during the most recent quarter. We remain very competitive with overall industry trends, and our brands are growing at point-of-sale.

New and improved products and good product placement in key retailer plan-a-grams are the key drivers to this growth. Early spring weather has been pretty good in most key regions except for the West Coast. We're optimistic that the season is starting well and that we will see good results in Q3 from this business. Moving on to our Europe rest of world segment, we continue to be challenged in our battery business there. Revenue was down 19% versus last year in dollar terms, 12% in local currency.

Battery revenue across Europe was weak as we continue to see this region shift to a lower margin product mix due to private label growth and a negative distribution channel mix due to the strength of food in deep discount retailers. Our VARTA branded alkaline business is performing quite well with stable market shares, but we saw declines in our high margin photo and lithium battery segments after super shift purchases to other lower cost product alternatives and food and discount channels. A weaker Euro, sky rocketing raw material prices and lower production capacity utilization as a result of lower sales volume have all added to overall disappointing results in this segment for the quarter. A couple of weeks ago we announced that we're making significant changes in our European business model in order to match the organizational structure to the changes occurring in the marketplace.

This includes the closure of a packaging facility in Germany and the transfer of all private label alkaline production over to our Chinese plant which will generate very substantial cost advantages for us. Our goal is to stabilize the sales trends in this business by the end of fiscal-- of this fiscal year and to enter fiscal 2007 with a more streamlined cost structure that makes sense for the revenue opportunity. There is still a lot of work to be done here, but we're focused and motivated to turn this business around. When these restructuring initiatives are completed later this year, we will have reduced our European employee base by 24% and shifted significant production to China generating $33 million in annual savings.

Our European Remington business generated growth of 3% in Q2 or 13% on a local currency basis. We're making significant progress in gaining distribution across the continent and investing heavily in brand awareness and new product development. This is paying off in strong sales growth, but the profitability trend is not yet as strong. However, we believe that long-term sustainable growth requires investment and we're willing to make that commitment to this product roll out. Remember that comps in our U.K. Remington business are very tough coming off last year [inaudible] success.

Some of Remington's growth in Europe is masked by that downward trend. This negative year-over-year U.K. trend will be with us for one more quarter, and then will go away. Overall we're very excited about rolling out an entire new product launch in the men and women's shaving category later this summer as well as a number of new personal care products across the region, and we plan to support the launch with some great looking advertising.

The key take away here is the overall trend is continuing to strengthen, and we remain encouraged about the long-term prospects in this category. Our Latin America segment had another good quarter, sales were up 9%. Battery sales improved approximately 4% partly as a result of selective pricing we've taken in various countries of approximately 7%.

Further aggressive pricing initiatives of an additional average 7% price increase are being rolled out across the region in the second half of the year which should help sustain our margins in the face of the dramatic cost increases we're experiencing. The Remington roll out continues to go extremely well in Latin America with very strong percentage growth off a relatively low base.

In our Global Pet segment we're very please to see the pet industry improving this quarter to growth levels more in line with historic trends. Spectrum Brands sales increased 4% or 6% excluding currency impact. This is a significant improvement from last quarter driven by return to growth in our aquatics business. Aquatics actually increased 2% versus a year ago or 4% in local currency and showed sequential improvement throughout the quarter.

Our companion pet business continued its strong growth trends turning in an impressive 10% year-over-year improvement this quarter. We have a number of new product introductions lined up for the third quarter including several aquatics product launches tied to the global Disney partnership we recently announced. The first round of product introductions will be around the release of the new Disney movie Pirates of the Caribbean, Dead Man's Chest, which is scheduled for release later this summer.

We have high hopes this and other aquatics initiatives we're launching will help to prolong and strip in the recent positive trends in this segment of the pet category. We remain very bullish about the long-term dynamics of this industry as well as our global business and believe this business unit will be a growth catalyst for Spectrum Brands in the future.

Now, Kent, I will ask you to go over some of our financial metrics and operational data then we'll wrap up and move onto Q&A.

Thanks, Dave. From an overall perspective the revenue challenges that Dave has just talked about generated disappointing results filtering down to the bottom line with gross profit, operating profit, and net income all declined compared with year ago results. Gross profit margin for the quarter on a pro forma basis was 37.5%, and that's down about 400 basis points compared with the 41.4% last year adjusted for acquisitions and divestitures.

Almost half of the decline was attributable to higher raw material costs, including zinc, fuel, and other commodities as well as lower utilization of our manufacturing plants in both the U.S. and Germany as a result of our battery sales declines. We estimate for the full year 2006 commodity costs will increase in the neighborhood of 55 to $60 million over last year. Zinc continues to be our largest commodity exposure with current pricing at record highs of over $3400 per metric ton after an increase of over 25% in just the last three months.

We've now entered into hedges to reduce our zinc exposure, and although we're hesitant to do so at prices north of $2,000 a ton, that decision quickly proved itself to be the right one. Remainder of the gross margin decline was largely a function of lower sales volume and unfavorable product mix. Looking to the rest of the year our projections assume that a better product mix, price increases and planned synergies will help offset the raw material and fuel cost increases we've been experiencing, but the gross profit margin for the full year will likely be a little short of last year's 40%.

Pro forma operating income this quarter was $45 million or 7.2% of sales compared to an adjusted $71 million, and 10.7% of sales last year largely a result of the factors I just discussed. On a segment basis North American profitability was 39.4 million compared with $33.7 million last year. It is not an apples-to-apples comparison, however. If you exclude the inventory evaluation charge we took in 2005 as a result of the United acquisition, segment profitability would have been $61.4 million or 21.9% of sales.

This decline again is primarily due to the lower sales volume in the battery category plus the higher input in fuel costs. In Europe segment profit declined to $6.6 million from $19.4 million last year as a result of lower battery sales volume, negative product mix changes, higher raw material and unfavorable FX. As Dave mentioned, we're restructuring our entire European organization, the goal of reducing costs on an annual basis by $33 million. Cash costs associated with these initiatives are projected at approximately $26 million. However, the changes we're making will not be sufficient to offset the negative cost pressures until we enter fiscal 2007.

Latin America segment profits of $3.3 million or 6.1% of sales compared with 7.3% last year mainly as a result of higher zinc prices. Scheduled price increases are in place across the region which should help offset most of the time cost pressures at they're rolled out. Our Global Pet segment generated profit of $21.6 million representing 15.7% of sales roughly flat versus prior year ago stand alone results despite input cost increases. On a go-forward basis there is significant upside to this business. This business' profitability over the next 12 to 18 months, since a large portion of the $100 million in integration synergies will accrue to the Pet Group.

Second quarter interest expense totaled $42.9 million, up from $39 million last year as a result of increased debt levels and higher interest rates. Depreciation and amortization expense for the quarter was $19 million. The effective tax rate was approximately 35% consistent with our full year expectations. Our prosecute projections for full year CapEx has been revised downward to around $60 million.

Now, turning to an update on integration and cost cutting programs, we remain on track to meet or exceed our $100 million synergy target on the scheduled time line of end of fiscal '07. Our manufacturing consolidation is well under way with two plants closed in fiscal '05, 2 more scheduled for closure this year and another 2 smaller plants in fiscal '07.

Fourteen distribution centers will eventually be consolidated into 5 mega centers. We already opened a large new packaged goods distribution center in Georgia and just this week will open a new St. Louis based PC which is replace four smaller existing locations overtime. Later this year we'll be consolidating distribution in Canada and early in fiscal '07 we plan to open another mega facility in California to replace a smaller one being used today. On the SAP conversion front, as you know we've completed the conversion of our U.S. home and garden business and the first of our pet conversions.

We now have the first full quarter of the Lawn and Garden selling season behind us with no interruptions attributable to our integration efforts for the system's conversion. Second, Pet Migration is planned for completion by the end of the fiscal year with Tetra Germany and another U.S. pet division scheduled by calendar year end. Free cash flow for the quarter was $27 million after CapEx of $19 million, cash restructuring costs of $11 million, and a net in-flow of $101 million primarily from the sale of the [Newrow] Professional and Technology Division and is certain our surplus assets including the former Remington facility in Bridgeport, Connecticut, that was basically unchanged at $2.3 billion.

Operating cash flow for the full year is forecast at approximately $100 million before cash restructuring charges. Generated an additional 101 million in cash from the sale of nonstrategic assets I just described. We have revised our forecast of restructuring, cash restructuring costs to reflect the cost of the latest reduction initiatives in both North America and Europe bringing total restructuring and other cash costs for the year at around $50 million.

The net of the ins and outs and revision is an influx of approximately $150 million in positive cash flow for the year all of which will be applied against outstanding debt. As previously announced, we are currently in discussions with our banking group to amend our senior credit facility in light of our latest financial results and our latest forecast. Dave, Randy and I met with representatives of the bank group in New York city yesterday, to provide an update on the business and formally begin the amendment process. Our schedule calls for completion of this process in about two weeks.

Now I will turn the call back to Dave.

Thanks, Kent. So I would say in summary that it has been an extremely challenging period for our company. While there are many positives, particularly in our Pet, Remington, and Lawn and Garden businesses, there is still a number of challenges ahead. Our priorities at this point are clear.

Number one, it is imperative that we stabilize our battery business in Europe. We're addressing the situation on both the revenue and cost sides, and while we still have much work to do, we're hopeful that by the end of this fiscal year we'll see a moderation of the sales declines and the return to a much healthier overall business.

Number 2, we need to achieve a return to growth in our North American battery business. I think we're well on our way to turning this business around and would expect to see more tangible positive results as we enter FY '07. However, it is likely to take the balance of FY '06 for all of our many initiatives under way to show meaningful bottom line results.

Number 3, we have to execute flawlessly on the integration and cost savings initiatives we're implementing around the globe. So far this process has gone extremely well. We're on or ahead of schedule and expect to achieve the targeted levels of cost savings at a minimum. The impact of all of these efforts when completed will generate over $150 million in real costs taken out of our business. We're managing many projects at one time, and we cannot take our eye off the ball.

Lastly, we're intensely focused on getting our creditors comfortable with our current debt levels and our financial outlook. Our goal is to wrap up negotiations with the bankers over the next couple of weeks and then to focus all our efforts on improved operating performance and generation of cash flow to pay down debt. We're devoting a tremendous amount of energy and effort to address the priorities I have laid out, and we remain excited about the long-term prospects for our business. We're also mindful that it will still take some time before our efforts begin to show up in our financial results.

Taking into account the time needed to reverse momentum in our battery business, the dramatically higher levels of input costs that we're absorbing and the negative FX headwinds we face we are offering new financial guidance for the remainder of the fiscal year of $0.90 to $1. I remind you that the benefits of our efforts will build over time and therefore improvement will be much more evident in the fourth quarter than in the third. As I pointed out to you when we last talked in April, 2006 has been a very challenging year for our company.

The management team at Spectrum Brands is very disappointed in our financial performance over the past few quarters. However, we're extremely focused on doing the things we need to do to get our businesses back on track. We are confident we that we have the right action plans in plans in place, that we will begin to see the results of our efforts later on this year as we enter fiscal 2007. At this point we will take some question. Operator?

[OPERATOR INSTRUCTIONS] Your first question is from the line of Joe Altobello with CIBC World Markets.

Good morning, guys, just a quick question on the battery distribution side. You mentioned that you did lose some distribution. If you could quantify that, that would be great. How many doors today in North America versus a year ago, and where did you lose distribution specifically?

I don't have the numbers to quantify the doors, Joe. We actually lost distribution, two of our biggest losses that occurred this year were mergers occurs, K-Mart and Sears merged their businesses together, and Sears product mix included some brands plus a Die Hard brand and K-Mart's including a Premium brand plus ours. As a result of that merger they decided to put Die Hard throughout all their stores and replace Rayovac in the alkaline segment. We still have other business in other segments, and big business in Remington and other categories, but the net result of that was on an annual basis we lost 7 or $8 million of profitable alkaline business, and secondly, the merger of Office Depot, excuse me, Office Max to Boise Cascade was a Rayovac house and Office Max was a Duracell house and that was the one event, so Duracell got all that business. Those were the two big distribution losses and we had some wins such as Winn-Dixie and others. For the first time since I have been around, we had more, the net result was we had more losses than wins.

Also you mentioned price increases possibly this year. Is that lower promotional spending as some of our competitors are doing now or are you referring to a potential list price increase?

My sense is it is probably both, Joe. There is lower promotional strategies being put in place by some of our competitors, ultimately probably everyone which is a precursor to get pricing aligned properly by channels, so our belief is it is possible later this year there could be pricing actions in North America. There certainly input cost issues dramatic, they are facing everyone's business no matter how big or small it might be. I think the environment is such that there is a lot of reasons why pricing could likely takes place.

Great. Thanks.

Your next question is from the line of Lori Scherwin with Goldman Sachs.

A couple questions on the inventory destocking. I was really surprised at the magnitude of the decline in batteries and everyone has been sighting it but really none of our competitors that are in batteries or any other category are seeing it to that extent. Are you losing shelf space concurrently at Wal-Mart or was this just more of a function of the transition to the new pack sizes and then was destocking confined to Wal-Mart or also also seeing it at other food and drug retailers.

I not going to talk about Wal-Mart or any other retailer specific, okay? We have seen in several large retailers inventory destocking, in some of those retailers, it has affected us worse than our competitors because we have a larger business as a percentage of our overall mix, then they do, they having more expansive business model and wider distribution particularly in the U.S. That's probably why you've seen it affect us more than others, but there are many other categories and many other companies where those companies are beginning to report the effect of inventory reduction initiatives.

Okay. And then you're seeing it in Batteries and in Lawn. You didn't mention anything about destocking in Pet or Remington. Did you see it or do you expect to going forward?

We think there is little to destock in Pet. That business has been run for some time, much more on a consumption basis, and Remington is such a seasonal business that it is unlikely that retailers let inventories get out of control in that type of category.

Just a question in Latin America. I know it is a smaller part of your business. It really seemed like it has been slowing materially over the past couple of quarters, backing out currency and excluding the price increases. It almost seems as though the battery business may have been down this quarter. Is that right and what's going on there? That region had really been recovering across the board.

The battery business was up for the quarter. I think the battery business was up about 4% in dollar terms. The only factors below that through really occurring is that alkaline is growing significantly in Latin America and the zinc carbon business which still represents over 75% of all unit sales in Latin America is either flat or slightly declining. That's really the mix that's occurring with that business in the region. In the other thing is that we acquired our Brazilian business a little 2 years ago, and so we were showing more sequential growth largely as a result of us turning that business around, but overall we think ours about business is healthy there. It is growing, and our market shares are very favorable in the region.

It just seems as though alkaline is going to continue to grow that could continue to be an issue. Do you have an opportunity to move more of your mix to call alkaline since you have been predominantly carbon zinc in Latin America.

When we [inaudible] but limited in 1999 we had no alkaline business and now our alkaline market share in Latin America, somewhere in the teens, and so we have grown significantly. Our zinc carbon market share is in the 40's, and so the challenge for us is to move that product to Rayovac alkaline as the zinc converts, and the opportunity is as we do that we'll obviously see a better margin structure and a higher dollar rate.

Okay. Thank you.

Thanks, Lori.

Your next question is from the line of Dara Mohsenian with J.P. Morgan.

Good morning.

Good morning.

Given the weakness in the North American battery segment would you consider tweaking the new packaging strategy at some point in.

Yes. We actually have a lot of work going on right now to sort of test ourselves or to make sure our messaging with our new campaign, same performance for a lower price, and if you price and will give your money back if you're not satisfied which we think is a pretty compelling message, and now it is at retail every where. We're looking at that and seeing if there is stronger messaging, so we are reevaluating our go-to-market strategies and campaigns both in North America and in Europe, and in the last week we've hired Mckenzie to assist us in that effort, and to give us a separate set of eyes to make sure that our both our businesses the way they're structured as well as our go-to-market strategies and branding strategies are as good as they can be.

Okay. Sounds like those changes are focused more on the marketing or branding side as opposed to pricing versus your competitors?

Yes, not pricing. Think of it as branding, advertising, and product performance.

Okay. From an integration standpoint, sounds like you're on track there. I think you did mention in a recent conference that you might slow down the Pet integration slightly. Can you take us through why that is?

When we said slightly, we're talking a matter of a month to six weeks, and it really related to just the work load in the system side of the business, and we wanted to make sure that we did not have any risk to customer fulfillment, customer service levels, so we gave ourselves an extra basically 30 days to do one of the major systems conversions. Again, it won't affect the total savings. It is just we backed it off by a month in order to reduce risk, very minor.

Okay. This is more in identification of possible future risk as opposed to do some hiccup already occurring.

Absolutely, absolutely. Give ourselves more time to make sure we're fully prepared when we flip the switch on one of the system's conversions.

Okay. Thanks.

Your next question comes from the line of Karru Martinson with the CIBC World Market.

In terms of your promotional spend it somewhat seems to be a disconnect. You're not getting traction on the consumer side with the battery positioning and yet you will be spending less money to kind of communicate that to the consumers. What exactly are you looking to do to turn that battery business around with consumers?

Actually thinking-- looking prospectively we'll be spending more money. As we enter '07, we certainly have initial early plans to spend at a higher level than we spend in either '05 or '06 to support the various campaigns that we have -- we'll have going both in the U.S. and in Europe, so I think it is fair criticism that we haven't gotten as much knowledge as we had hoped to get or as much momentum as quickly as we had hoped, but we do think our plans make sense, and are overall solid.

We also brought some people with extensive battery marketing experience back into that marketing group they were actually working on some other product categories, and many of the promotional activities have been successful for Rayovac in the past if we went away from we're focused on getting back to doing some of those things. Another factoid here is we have never really up to now taken advantage of the marketing and advertising opportunities on the internet. We required some expertise there and there will be a major thrust to begin to at least utilize that medium to try and connect with various segmenting of consumers. A lot of new things going on in the marketing departments of batteries nearing helping us connect with our target consumers on a much more effective basis.

In terms of the price increases you would be looking at for batteries, would you take that unilaterally or wait so see what the market does here?

I don't want to talk in any level of detail about pricing initiatives other than to tell you in areas in the world where we're market leaders, we are pricing aggressively, the best example of that is in Latin America where we have already taken an aggregate 7% increase in zinc, carbon and alkaline pricing, and we have another 7% increase planned for the second half of this year, and as the market leader there, we believe that we have to do that. It is important that we lead the industry because this is an issue, this issue with input costs which is dramatic and it is the first real threat, input cost threat we've in at least ten years that we have to act aggressively, boldly, and I would think in other markets where other people are leaders that they have to consider and probably are considering similar approaches.

Would you feel the 25% price differential on average between yourself and Duracell and Energizer is the right spread in this market.

I personally think it is a little too much. If we can get our messaging more crisp, we will probably overtime reduce that. If you go back for any of you who have followed the Company since we've been around, back in the late 90's, '97, 'the '98 we reduced that price gap. We had very crisp messaging, performance guarantee, we called out our products as good or better than the competition, and as a result of that we were able to do some price gap. When we got off that, the price gap to be competitive and effective the price gap increased, and now we think going forward it is likely to decrease rather than increase.

Okay. Just given all of the guidance revisions that we've had, how much confidence do you have here in the second half and going into '07 that all of these actions you're taking can get executed in a timely fashion and generate savings you're looking for?

I think on the cost front and Kent went throw all the integration savings as well as restructuring savings that there is not a whole lot of risk, and we've proven throughout our entire stay over the last 10 years that we've been able to execute near flawlessly on everything that we've committed to do, so I don't view that as risk. There is always marketplace risk, some that you can control and some that you can't control, but overall we think we have the right forward guidance in place.

We do think it represents and recognizes all of the known issues that are facing the business including significant negative FX year-over-year, higher interest costs, and at least $60 million of higher input costs that are facing our business and all of the other factors. I think it is our best view of where the business is likely to be. We feel worse than anybody that we've had to sequentially take down earnings in steps and I wish I would have had a crystal ball 9 months ago when we began this that said gee, it is really in that range we talked about today, but the world doesn't always work that way. We do think we have it gauged properly given everything we know right now.

Just lastly you talked about in the past delaying acquisitions for calendar 2006, it would be a reason assumption to see that extended out?

For sure we said that we don't see any acquisitions in calendar 2006. We really don't have -- I don't think we have anything to talk about in '07 yet. We're trying to layout our early stage planning on '07. We do have a pet business that represents enormous opportunity for us in terms of roll-out potential of smallish acquisitions. We're on the sidelines right now. We tonight be on the sidelines forever. When we got more to talk about there which is likely to be soon, we will talk about it. There are overtime a number of roll-up opportunities that we want to explore in peel albeit they're fairly small bites at the apple.

Thank you very much.

Thanks.

Your next question is from the line of Jason Gere with AG Edwards.

Thanks. Just going to the guidance on the sales side with the non-battery businesses, you're talking low single digit to it mid single digit. Obviously that encompasses currency. What's your outlook on the organic side? Can you give a little color there?

I think if we were to aggregate all of those categories, and the good news here if there is good news, is that the battery business is really our only problematic business that we're having to focus on, the beauty of that is we can all focus on it. The other business segments, if I were to aggregate them, I would think we're probably going to have mid-single digit growth that occurs mid to maybe a little higher that occurs across our Remington product portfolio, Pet.

Pet, I just touched on it briefly but having an absent FX 6% growth in Pet is a significant quarter we've had, and when you look at Companion Pets, so everything but aquatics we had double digit-growth. We certainly either add or lead the industry in total in those sub categories. Those things continue to look good. We've had great growth in Remington, and the growth in Remington, which was 20 some percent in the U.S. and 13% absence currency in Europe, the real number was much higher in Europe if you set aside the U.K. because our U.K. business because of this year-over-year issue was down 25% for the quarter our continental business was up 44% for the quarter which is, the best results we've had, and it continues to grow exponentially. We feel good about organic growth rates in those categories.

We don't feel comfortable with being able to predict growth in the battery industry yet because we have all of these other factors that we're trying to deal with, and I do think we're dealing with them, but we won't be talking about organic growth in batteries for a few quarters. Hopefully in '07 that can be something we talk about. It is not going to be something we talk about in '06.

Organic sales would be at least mid-single digits in these other businesses would be your best -- look at your crystal ball.

That would be my best guess. It may be plus or minus that depending on the category. In aggregate, I think that's a good way to look at our business.

Okay. Just in terms of the discussions that you had with your banks obviously we're not privy that right now. Last time when I think it was a couple months ago you amended some of the terms with your banks. What was the fees or the interest rate that was charged to enact such a transaction?

When we did it.

Yes.

When we did it -- Our December amendment we increased the LIBOR spread by 15 basis points.

15 or 50.

50, 5-0.

We should anticipate something of a similar magnitude on the low side this time as well.

Time will tell. We're in the midst of negotiations. It doesn't do us well to negotiate in public.

That's it. Thank you.

Thanks, Jason.

Your next question is from the line of Peter Barry with Bear Stearns.

Good morning, gentlemen.

Good morning, Peter.

Randy, one numbers question. On the P&L there is an other expenses $7.4 million. Can you describe what that is, please? It is in the segment category.

Yes, hang on Peter. That incorporates the net gain we saw from the quarter from the sale of two idle plants that we had.

Is that not an expense or is that income?

No, that was income for the quarter for us. We had sold specifically the Remington facility where we saw proceeds of approximately $9 million from that.

That's a plus number, not a minus number.

Income number, yes.

Okay. Dave, looking at the remainder of the -- maybe this is more for Kent actually. Looking at the remainder of the fiscal year, you mention that the pattern of earnings would probably favor the fourth quarter. Does that mean that the seasonal spike if you will in the September, excuse me, in the June quarter is not likely to occur this year or did I hear you incorrectly?

The Lawn and Garden business, Peter, that will be their biggest quarter. Okay? My comments weren't related to Lawn and Garden specifically. They were to the overall business.

What I am asking you basically is the June quarter still likely to be a larger number than the September quarter? Earnings wise?

Yes.

Okay. Looking out a little further if I may, allowing for all of the costs that you're absorbing and clearly will continue to absorb, could you give us sort of a broad ballpark sense of your sense of the Company's underlying earning power? Is it 250, is it $3 per share?

We're not going to go there, Peter. We're not going to go there. I would just sort of to touch on a couple elements of that, our input costs which have been unbelievable this year can set over 60 million. I am not sure that properly captures all the fuel surcharges we're experiencing around the world as well. We certainly don't see that same level of increase that is likely to occur in '07. Okay? If it is 60 million this year, maybe it is 20 next year would be our early predictions, so we do think that some of those input costs are beginning to moderate, and we can't imagine maybe this is wishful thinking, but we can't imagine that zinc can stay overtime at a $3400 level when we think the real market level where manufacturers make reasonable profit and demand is there is somewhere around $1600 a ton.

Speculation and 80% of all contracts now are held by hedge funds and not by manufacturers or people like us that are buying zinc. We think that's got to work its way down at least. Having said that, we have begun to hedge, and we've hedged -- we're hedging at awfully high prices. We got a lot of '06 hedge and a pretty good chunk of '07, so we are trying to have a more predictive business model albeit we're having to do some of these hedges at high prices.

Let me ask the question a little differently. We know what earnings expectations were before these various issues began to under mine earnings delivery. Is there any reason why '07 couldn't resemble those earlier numbers in some way, shape or form?

We really don't have guidance, Peter, for '07. I would just say that a lot of these things, let's take the battery categories as an example where we definitely lost momentum in the battery category, and we're having to deal technological and structural shifts particularly in Europe. It will take some time for those to moderate or us to neutralize the negative effects that are going on, we never anticipated those sorts of issues when a year ago we were talking about higher numbers in terms of guidance, so we just got to break down each one of those and figure out where we are. $60 million in input costs as an example, if you tax effect that, that alone created somewhere around call it $0.80 to $1 of EPS as a result of unplanned input costs. That's not going to come off of our issue list next year. Maybe it will moderate but we still have that $60 million to deal with. Once we get restructuring behind us, once we get the integration synergies behind us, we'll be in a lot better position i.e. a lot of what we're doing will offset a lot of the negative factors that occurred. It is going to take time for those to work out and momentum is a weird thing just like in a sporting event you get it and it is awesome and you don't get it, and it takes awhile to get it back.

One final one from me. Dave, in your sight willing the four top priorities, one of the last one that you mentioned and maybe there is no rank order here, but comforting your creditors can we assume, I know you're at a very difficult and delicate stage here, but can we assume one that interest costs are likely to go up in the second half if for no other reason but some penalties are exerted or can you share with us some issues that might or confront you in that regard.

I would say generally the way you should look at it is one, we can't tell you the final result until it is done, and we're not going to negotiate publicly, but we'll end up -- there will be a cost to bear for us as a result of having to restrike some covenants and there will be an increase in spread over where we are today, and there will be some fee that we have to pay to get the amendment. There will probably be other puts and takes, but that's really the way you all should think about it.

Nothing insurmountable, however?

We think it very constructive. We've had a bank group with us for a long time, not just in our current facility, Banc of America, lead bank, has been our lead bank since September of 1996 when the Company was acquired, and as a result of that relationship and their understanding of the business, which they're about as knowledgeable as we are about the incident intimacy of the business. We've had an extremely constructive process. Yesterday's meeting in New York which was well attended in person or on call was an extremely productive session. We're very encouraged we will get through this, it won't take us long to get through it, that there will be something extracted from us as there should be based on our performance.

Thank you all.

Thanks, Peter.

Your next question is from the line of Bill Chappell with Suntrust.

Good morning. Questions on the Pet and Garden side. On the Garden side you look at the strong consumer take away and the decline in sales. I understand there was carry ore on the controls from last year into this year. Are you seeing out-of-stocks? In the first few weeks of this quarter are you seeing a spike in sales?

We're definitely not seeing significant out-of-stocks. We are seeing a good POS sell through, and as you we measure POS in our 3 largest accounts near instantly. If we were to aggregate those 3 accounts through the first quarter, our average POS across all Lawn and Garden categories is up 10% which is a very strong number. So we obviously are working inventories down. We did end last season with far too much inventory in controls because controls had a terrible season last year. It didn't rain towards the end of last year. For those of you who live in the midwest, there were no bugs and no mosquitoes. As a result the industry was off some 20%. We were off the same. We didn't lose share. In fact, we gained margin share in that category but ended up with way too much inventory as we entered this season.

Okay? Then overtime because we have installed SAP now into that business unit, we should have much better control on inventory and control on being able to control selling in versus selling out and so we're going through a little adjustment period here that's somewhat due to last year's inventory that was left in the season, changing to a new much more sophisticated IT model in that business, and so we're having a little bit of indigestion as a result of that. All of that is one-time in nature. We're not being affected in sell-through. That 10% growth represents probably about what category growth was for the first quarter, and our leading competitor's growth was for the first quarter. We think our share is stable and our business is doing very well. We've just had to deal with adjustments here that were unplanned.

If I am looking on average 2 to 3% price increase and strong consumer take away and thought of mid single digit growth for the back half of the year seems conservative assuming weather holds up.

I think that's probably -- I think that's probably right. I think our biggest growth opportunity, again, POS, growth opportunity lies in the Lawn and Garden segment this year, and potentially represents greater growth rate than we're likely to achieve in some of the other categories I talked about.

To switch quickly to Pet, when you look at the Pet number, it was a strong number especially in light of what we saw in the whole industry in the back half of last year. Was some of that pipeline fill as retailers were restocking after a sluggish couple quarters or was it --

It was really POS driven, Bill. If you look at aquatics has been the most significant turn during the quarter because aquatics was comping at flat or minus for the last three or four quarters, and if we were to show POS for all top three Pet accounts which represent two-thirds of the U.S. marketplace, you can actually track back about three or four months ago when their acquatics business started comping positive growth. So all we're doing is reflecting what's occurring in the marketplace right now.

With regard to Pet typically see stronger shipments after the Global Pet expo versus before. Is that similar for your business?

Yes. We had a fantastic show. You were out there, I think. We had a fantastic show and we had a lot of new product launches in aquatics, and with this Disney promotion that we've now entered into, this licensing agreement, there is going to be a lot more, and next week we'll have an entire team over at Interzoo in Germany, the big German show as well as the three of us will be over there as well, and we have a lot of exciting new things that we're rolling out in Europe next week, so stay tuned to that. In total we really think our Pet growth is fueled by new product in all category and is in aquatics where we are the leader and we have said to ourselves we have to get aquatics growing. Retailers, we are the person that can get it growing. Retailers are relying on us to do it. I think you've seen us step up significantly and John and his team have stepped up and have a lot of new stuff to put through the pipeline there.

Thank you thanks.

Thanks, Bill.

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

Your comment suggested that shipments excluding inventory reduction in North American batteries was essentially flat with last year?

I think it is look at it in terms of the way I would view what I was trying to do, look at it in terms of market share. Except for taking out retailer inventories, our market share was not only flat but was up sequentially for the quarter versus last year which again is one quarter doesn't make a trend, but one quarter is important, and we gained approximately a half a point in alkaline dollar market share for the quarter and so that would suggest to us that our alkaline declines have bottomed out from a market share standpoint, and that we should see more improving results as we sort of go through the next few quarters.

This market share reflects your top customers or is it the drug grocery channel?

Reflects all Nielson measured accounts.

Including Wal-Mart.

I see.

Including Wal-Mart panel data.

I see. And then as far as absolute POS on a year-over-year basis, your POS to your customers, however you would aggregate them or average them, regardless of market share was your POS flat, down or up? Can you provide any color, please?

It was positive.

Okay. And would you say that that POS positive did that strengthen during the quarter or about the same during the quarter?

I really don't know.

Okay. On Europe did you think that Europe which seems to be declining at a 12% rate last two quarters ex currency, is that sort of the run rate for another couple of quarters before it bottoms out or are you going to -- is the rate of decline likely to decelerate?

This is crystal ball, but it is based on a lot of knowledge is that it will decelerate from the rate of decline experienced over the last couple of quarters, and --

This is local currency?

Yes, yes, local currency, and FX is something we can't control quite as much, and the shifts that have hurt us which was nicely shift to say private label in central Europe, which is where our strong market share positions are, we're number one in most of central Europe, and that those have begun to decelerate and that where we're seeing product label increases now are in southern Europe where big French and German retailers now moved the business model to. In areas like Italy, Spain, Portugal, which are less important areas we are seeing growth in private label. It is not over, but it is abating, and then more recently we've seen this shift which has been particularly hard on us from traditional channels of trade like electronic retailers, photo shops, to more large big box retailers in food and in deep discount. VARTA has historically owed the photo chain but in terms of product technology as well as market share, and as that shift occurs, it is affecting us more than the other brands because for every unit that shifts to those other channels we're losing revenue dollars and we're losing a significant amount of margin. So that's something that's relatively new that we've begun to get our hands on in the last three to four months, and there is a lot of actions that are taking place to try to neutralize that. That will take a little bit more time to play out. If you were to look out, call it three or four quarters from now, we think we will have that pretty much in hand as well.

On the commodity cost increase you mentioned, Kent, of 55 to 65 of that this year, how much of that would be fuel related costs, a third? Half?

We only capture that in North America. That's about $20 million specifically in the North American marketplace. North America represents about half of our overall business. It is about the size of the other three business units put together, and so I think it is reasonable to assume that maybe double that.

Okay. And then lastly, cash restructuring charges in this fiscal year will be $50 million, is that right, Randy, Kent?

Yes, that's correct.

And will you have additional cash restructuring charges of anything close to that in '07?

No. We'll be down in '07 but because of the manufacturing initiatives over in Europe, we're estimates cash restructuring in '07 approximately about $30 million range.

Got it. Thank you.

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

Good morning.

Hey, Alice.

Just one housekeeping thing. Your guidance of $0.90 to $1, does that include in the first quarter the $0.22 including one time items or the $0.12 GAAP number.

The guidance is based on pro forma numbers.

Okay. So $0.22?

Yes.

Okay. Then you made a comment a little bit earlier about how you might not see organic growth in batteries for a few quarters. Could you just comment on comparisons for the next three quarters in terms of shipments because last year as you know the industry, the retailers loaded up on batteries in the June quarter, and then there was a whole lot of inventory destocking from excessive levels through the September and December quarters. Does it make sense to think your shipment comparisons will be hurt quite a bit in the June quarter but at this time be up for two quarters if even if you were to just hold share at the consumer level?

Yes. That's exactly the way to look at it, Alice. The industry began pricing up last July/August, okay? Part of what made inventory levels grow so significant, and there is other factors in the June quarter was ahead that far price increase that was announced, and so the June quarter will be a difficult comparison quarter year-over-year. September quarter will be much easier because destocking as you're well aware began to occur significantly in that quarter and also continued in the December quarter, so assume that June is going to be a tough comp on batteries, and it gets easier in the other two quarters.

And EPS should be up in the September quarter and the December quarter because of the --

Yes, year-over-year. We're not talking about December quarter now, but certainly in September quarter.

Okay. And then on this inventory destocking issue, do you ever any idea why you're shipments would be hurt by inventory destocking in lawn and garden and Scott's were not? Their shipments were up in line with sell through pretty much?

I don't know their business or their business model. I would assume they have a different mix of business. They have much more of their business in fertilizers and soils, a much higher percentage in grass seed and stuff than we do, and those are businesses where the sell-through was significantly good, double-digits last year for all participants and for the industry. Where businesses were hurt the most were in controls, insect control and control products you put on your garden.

This is a much higher percentage of our business. It had a tougher season last year and inventory got jammed up pretty good. The other thing I would add is that Scott's has an excellent distribution, logistics system in place that's been in place for several years, and I think they're probably much better at control and delivery than the Company that we bought, okay? I think once all of our systems are put and integrated which as Kent said we do have SAP across that business unit. In future periods we'll be much better at it, but internally were at a disadvantage to Scott's distribution system up until recently and frankly still are until we get all of our systems in place.

Thank you very much.

Thanks.

Your next question is from the line of Connie Maneaty with Prudential.

Matt Palosoto for Connie. your outlook for the aquatics business seems fairly positive. How do you reconcile that with oil north of $70 a barrel? Is it mostly off of the Disney partnership? Is that what's driving it? I think the thinking is that as discretionary income shrinks people are less likely to spend income on sizable aquariums. Is that fair enough?

I think all of that is fair. We do expect that as movies have in the past driven aquatics, and example, there is some re threes this summer that will further drive it and because the partnerships we're developed and we're doing specific launches around movie releases, that going to help us. The second factor is the store traffic has improved in all three of the major Pet retailers and their comps year-over-year comps in aquatics hades begun to turn positive. If we were sitting here and in spite of having these movie releases, if we were looking at negative aquatics comps by the retailers, we had wouldn't be bullish at all. We are seeing good sequential growth.

Okay. Secondly, are there any signs that the European battery market is now becoming more rational in terms of the number of pricing tiers in private label? I think you talked about that in the past.

No. It is want? It is extremely fragmented industry that is not likely to change in private label there is at least 3 distinct pricing tiers and performance tiers to private label and in branded products there is 4 to 5 pricing and performance tiers. It is much different than the marketplace here. The good news with that type of thing, on the branded side and everybody that participates we can move people up the performance curve in the price curve and it allows the branded alkaline business to continue to be healthy there both in terms of growth which it grew again this quarter an average of 4 or 5%, the branded piece, and in profit. Unfortunately, the tiered system and private label works against us because the opening tier or maybe the opening 2 tiers are becoming totally priced, and big retailers are willing to take shipments from the Far East in one consolidated shipment to one central warehouse and then them take all distribution and supply responsibility where people like us would have done it in the past and that really put significant pressure on pricing and profiting at private labels.

That's not going to change in the way we've dealt with that is we have a certain price we will bid on private label because we know our advantages are top tier performance and the ability to have a world class supply chain to these retailers. There are some that still want and need those, and the other that I mentioned was simply walking away from and I think we told you a couple quarters ago if you look at revenue comps year-over-year we will be dob in that respect because we walked away from the number now is five major retail private label contracts that we had a year ago.

Lastly, I am not a commodities expert. Is there anything that substituted in for zinc in terms of the production of a battery?

No.

Nothing, that's it?

If you know any friends, give us a call.

It is something we're going to have to ride out. You feel my belief that it is going to be into '08 before we see a significant structural reduction just due to aloft of things including capacity, needs in China. China was a net exporter of zinc up until a year ago. Now they're a net importer of zinc. There is a real structural thing driven by automotive and building industries. We're sort of like a pimple in the zinc market. The building industries and the auto industries absorbed 95% of all the zinc requirements. You have that that's a real issue that will not go away, and then you have an enormous amount of speculation right now which I think our view was that is that a moderate somewhat overtime. We do think it is going to bounce back. We can't predict when we think when. Wee result is we have to go out and protect ourselves. We are putting in hedges at awfully high hedge values. Our aim is to try to make '07 more predictable than '06 was from that respect.

Fair enough. Thanks a lot, guys.

Ladies and gentlemen, we have time for one final question today from the line of Chris Ferrara with Merrill Lynch.

Hey, guys, I just wanted to get my arms around the North American strategy a little more. Stop me if I get something wrong here. I thought you said even last quarter that promo in batteries may have to come up because of the challenge of reception for the new packs, and then I thought you said competitors are not spending as much now, maybe as a precursor to pricing and I thought you said that price gaps are too high and they might come down. I am trying to reconcile all of that with how promo and pricing might go the rest of the year?

You ask a lot of questions simultaneously, and let me see on how to respond to it. We've seen actions in the last thirty days by our competitors aimed at reducing the amount of promotional spending that they're willing to support to retailers for on ad promotion it is. They're prig to make it -- less expensive and make it more uniform from trade channel to trade channel and frankly we're in the midst of doing that as well. I think that bodes pretty well.

As I said, my belief is that it is possible that there could be a pricing action that would help pay for some of these input cost issues later this year. From our branding stand pointed we do have a much stronger brand position we launched in the marketplace. It moved away from price is the only weapon to a positioning where that we're shouting out that our performance is as good as the other guys, but we sell for a valued proposition. We are looking at ways to make to shout that out even greater than the ways that we have done that in the past.

One of the things Chris as a reminder we used call a lot of our promotional dollars in given the consumer free batteries. That's where we spent some of our money previously. Now that we've gone away from that, call it promotional feature in the way we were in the go to market strategy, we do have more dollars to devote to traditional cross promotions, value-added promotions. Things that are fairly traditional in the industry and worked very effectively for us in the past that we've gone away from.

And the other thing, I think the third part of your question relates to price gains. Historically the price GAAP floated around between 20% and as high as 33% when we had a 50 % more program which was affective for awhile in the market place, it did increase the price gap to 33% because of the nature of 50% more battery. It helped us initially and hurt us overtime because it reinforced a price message rather than a value message. It made us almost be perceived as too cheap of a product with that kind of price gap. If you you look at other consumer categories and look at the history of Rayovac we've been very successful in the past when we've had a price gap of around 20%. Right now the price gap is an average of about 25%.

My belief is later this year when our messaging gets out there and a stronger way than it has prospectively and retrospectively we're going to be able to close the price gap to as much as 20% which was our best ever performance historically when we had a strong message, Michael Jordan, same value for less, try us if he don't like us and we'll give you money back. We're embarking on a similar campaign that saw allow us to be able to do that. If I am right about all that, it will give us extra pricing that will help pay for some of the stuff that's gone wrong in the business over the last year.

That gap closing from here is just a function of your better penetration of your current program? There is nothing incremental to the program, right.

Right. Ask us two or three quarters out, Chris, how that price gap is and it is not anything we can do over night and some of it is evolutionary rather than revolutionary in design. I think a year from now as an example we'll see a much more much better price gap. I think better because I really believe that value brands there is a certain price gap you should achieve and beyond that you're really hurting your brand as a result of trying to increase your short-term sell-through.

Got it. Just one other, back to Latin America on batteries, how is battery volume, like unit volume growth? Was it down year-over-year in the quarter?

No. It was up low single digits, and I don't have the number in front of me. I am guessing it is probably up 2 to 4% in unit terms for the quarter. You've got a lot of other moving parts, and our view of what means health is you have an industry growing in units and dollars. Is the industry able to handle the conversion from zinc carbon to alkaline in the right waw and can we all price down there something we can overcome these input cost issues which are greatest by the way in Latin America because the heavy concentration of zinc carbon, the cost increases to our business model in Latin America are greater than either North America or in Europe, and so far the industry has been able to overcome you will all of those things and that's how I would view the health of the industry there.

Thank you.

Okay. We've let it run over intensely. Hopefully that's a sign of continued interest in our company, and Spectrum Brands, and we do thank you for your time today. Again, we don't feel good about our performance. We don't feel good about having to have take down our earnings guidance once again. We do think we've learned some lessons, and we do think we have our hands on all the business issues that we're facing and that we have given you all proper guidance as to our short-term prospects, so thanks for your time and have a great day.

This does conclude the Spectrum Brands second quarter earnings call. You may now disconnect