Spectrum Brands Holdings Inc (SPB) 2007 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Spectrum Brands first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

Ms. O'Donnell, you may begin your conference.

Thank you. Good morning, everybody. Welcome to Spectrum Brands Q1 earnings call. Participants on the call are Dave Jones, our Chairman and Chief Executive Officer; Kent Hussey, our Vice Chairman; and Randy Steward, Chief Financial Officer. Before we get started let me remind you that today's comments will include forward-looking statements. These statements are based on management's current assumptions and projections and as such contain an element of uncertainty. Actual results may differ materially. To better understand that uncertainty Spectrum Brands encourages you to review the various risk factors and cautionary statements outlined in our most recently filed Form 10-K. We assume no obligation to update any forward-looking statements we make today. We will also refer to adjusted diluted earnings per share during our remarks in order to provide information regarding results of operations before restructuring and certain other costs.

Table 3 of today's press release provides a reconciliation of adjusted diluted EPS to GAAP financial results. The reconciliation can also be found on our website, www.spectrum Brands.com. Spectrum Brands management and some investors use adjusted EPS as one means of analyzing the Company's financial performance and identifying trends in its results of operation. We provide this information to investors to assist in making meaningful comparisons of past, present, and future operating results and highlighting the results of ongoing core operations. Management believes the adjusted diluted EPS is useful supplemental information. However, adjusted EPS is not intended to replace the Company's GAAP results and should be read in conjunction with those GAAP results. So at this point I will turn the call over to Dave Jones.

Thanks. Hello, everyone, and thanks for joining us today. Before we begin our review of the first quarter results, let me update you on the progress of the strategic review we announced last August.

If you have read our earnings release you know that we confirmed this morning that we are pursuing a sale involving our home and garden business. Our stated objectives remain the same. To significantly reduce our debt and leverage and to achieve more financial flexibility to run our ongoing business. In fiscal 2006, our home and garden business generated $658 million in net sales, and adjusted EBITDA of approximately $75 million. From the sale of products including fertilizers, insect and weed controls, growing media, and insect repellents, including brands such as Spectracide, Vigoro, Sta-Green, Cutter, Hot Shot, and Repel, among others.

Although the home and garden category is a business that we like and a historically solid revenue performer, we believe that Spectrum Brands will be better positioned with the improved capital structure that a transaction will give us. It will enable us to move forward as a leader, more focused global entity with the flexibility to run our business for the long-term benefit of shareholders. As you all know, any sale process is not over until it's over. However, the divestiture of our home and garden business is a major focus for us right now and I can tell you that we are working hard to complete a transaction. Upon completion, we anticipate a significant reduction in outstanding bank debt and an improvement in our leverage ratio. We will update you on all the details as soon as we have definitive information to share.

After the home and garden sale is completed we will continue to reevaluate our remaining business segments and overall financial structure with a focus on additional asset sales or divestitures. It is likely that some additional initiative will take place during 2007. We will obviously advise our shareholders of future actions in this regard as appropriate.

In other corporate news, last month we announced the realignment of our organization into three vertically aligned product-based segments. Global batteries and personal care under the leadership of Dave Lumley, home and garden also under Dave, and our Global Pet Supply business, the combination of United Pet Group and Tetra, reporting to John Heil. As part of that realignment we reduced head count and other costs in order to better match the revenue opportunity of our go forward product portfolio including head count reductions at our Fenimore manufacturing plant and ongoing downsizing of our manufacturing employee base in Germany and elsewhere around the world, approximately 500 employees will be exiting the business in 2007.

In combination with other cost savings related to the realignment, we anticipate annual cost savings of approximately $40 million when complete. Fiscal 2007 will benefit by about $12 million. We believe this new operating structure will enable Spectrum to operate more efficiently and profitably by eliminating duplicative functions and overhead in each of our geographic units and by down sizing the overall shared corporate infrastructure. But even more importantly we believe the changes will reinvigorate the organization and provide more focus on and accountability for the profitability of each of our product categories on a global basis.

Along with the changes in our organization structure, we announced several personnel moves. As I mentioned, Dave Lumley and John Heil will take on full P&L responsibility for their respective business segments. Global batteries and personal care and global pet supplies. In recognition of their expanded roles, Dave and John have been named Co-Chief Operating Officers of the Company. Kent Hussey, formerly President and Chief Operating Officer, has been named Vice Chairman and will focus his time and efforts on corporate strategy and business development. Randy Steward will remain as Chief Financial Officer reporting directly to me. Ken Biller will be responsible for the de-integration of home and garden and transition of this business to the new owner. I think that covers the corporate announcements for today. So let's now turn to a review of first quarter results.

The Q1 numbers we announced this morning reflect the impact of the home and garden business as discontinued operations. With prior year results adjusted to reflect apples to apples comparisons. FYI, our home and garden business net sales increased 4% for the quarter, better than industry results. Excluding discontinued operations we reported Q1 net sales of $565 million, essentially flat as compared with 2006 sales of $566 million. We generated adjusted diluted earnings per share from continuing operations of $0.12 before restructuring and other charges. Our business continues in a transition mode, as we reposition it for the future. We're making good progress on a number of fronts but our financial results reflect some short-term ups and towns and there's still more work to be done.

Let's take a look at our product category sales on a global basis. Which, I'll remind you, is the way our numbers will be reported beginning next quarter. Worldwide battery sales declined by 6% this quarter. These results reflect timing differences of shipments to some key retailers in North America and a continuing challenging environment in Europe, partially offset by very strong results from Latin America. We were quite pleased with the overall results from our Remington business where global sales increased 7% this quarter driven by very strong growth in both Europe and Latin America. Global Pet sales also started our fiscal year on a solid note with 4% growth on a worldwide basis. And looking at geographic results, our North American segment generated sales of $172 million this quarter, compared with 2006 Q1 sales of 191 million. On a positive side, battery sales benefited from the January 2006 pricing initiative, and Rayovac alkaline market share during the quarter was strong with year-over-year improvement in both dollar and unit share and all major channels.

We got good retail customer and consumer support as a result of the Brett Favre advertising campaign and our strong promotional tie-ins with the Pirates of the Caribbean movie and with Fisher-Price. Rayovac retail consumption increased 6% year over year outpacing the industry's 3% growth for the quarter. However, Q1 reported sales were impacted by the timing of our holiday shipments. As you may remember we had very strong double-digit battery selling in the fourth quarter from the rollout of our new holiday advertising and promotional initiatives which led to a year-over-year decline in Q1 sell-in.

Looking forward, as you know, we implemented new battery price increases effective January 1, which are now in effect and much needed to help offset continuing pressure from commodity costs. We are encouraged by the sell-through results and market share momentum that we are seeing and we expect this business to continue to improve throughout 2007.

North American shaving, grooming, and personal care sales declined this quarter, primarily due to a weak performance by the Remington brand in an overall weak men's shaving category this Christmas. Our rollout of the new Remington men's shaving platform performed below our expectations, losing market share in a quarter in which men's shaving represents a seasonally high proportion of Remington sales. We're dedicating significant resources to analyzing the Christmas season results and what we can do better in this important sub category going forward. However, Remington grooming product performed well and personal care sales were actually up quite nicely. As a matter of fact, Remington hair care recently hit an all-time dollar share high and grew to the number two hair straightener brand. So there was some good news from Remington in North America as well.

We're confident that the consolidation of Remington's marketing and product development resources globally under the new operating structure will benefit us greatly in both the development of global product platforms and improving our time to market in this category. While we need to improve our performance in North America, we were very pleased with Remington's overall performance on a global basis, and we think the new structure will be a strong growth driver of both sales and profitability in the future.

Moving on to our international businesses, reported net sales from Europe, rest of world, increased by 2% this quarter. European batteries continue to be challenged with sales declines reflecting continuing negative product mix shifts to private label, unfavorable channel mix, and continued price pressure in our private label business. We have achieved some success with price increases in our branded battery business, but to date not enough to offset the overall negative market trends. There are significant cost cutting initiatives in process in this region which will be ongoing for the next few quarters. This should help protect margins and profitability. However this region remains a problem for us. We have more work to do yet to stabilize this business and we're very focused on doing so.

Our European Remington business on the other hand had a terrific quarter with very strong sales growth. Remington sales and market share across continental Europe continued to improve reflecting across shaving, grooming, and personal care reflecting very encouraging steady distribution gains on top of organic year-over-year growth. We're very pleased with the Remington team's performance and we're hopeful that there will be an opportunity to leverage talents and lessons learned to reinvigorate our Remington shaving business in North America under the new combined global structure.

Our Latin-American operating unit turned in another strong performance this quarter, generating record sales and segment contribution. Q1 sales increased 13% year-over-year, a great start to 2007, after very strong performance throughout fiscal 2006. Battery sales growth was driven by strong pricing increases throughout the region. We also benefited from a favorable product shift mix as a result of the continuing zinc to alkaline conversion trend. Remington sales continue to grow rapidly in the region with meaningful contributions in Q1 from Brazil, Chile, and Argentina. We're generating the strongest Remington brand growth in this geography from our women's personal care segment backed by our Cindy Crawford campaign, and we are seeing very good results from shaving and grooming as well. Overall we're very pleased with our business trends in Latin America.

The global pet business generated solid sales growth of 4% this quarter. We estimate that overall pet industry volume increased in a range of 2 to 3% so we continue to outpace the industry with particularly strong Q1 performance from the companion animal business and from our Tetra aquatics business in Europe. Our overall global pet business continues to perform very well with good earnings contribution and represents the best long-term growth potential in our overall product portfolio. I will now turn it it other to Randy Steward so he can walk through the financials, then we'll wrap up and move on to your questions.

Thanks, Dave, and good morning. As Dave has already pointed out, Spectrum Brands is a company in a state of transition, and our financial results reflect that. We have made significant progress in our integration efforts over the past 18 months through consolidation of manufacturing facilities and distribution centers, outsourcing manufacturing of certain products, reductions in staffing, and other cost-cutting measures that are allowing us to run our business more efficiently. The progress that we have made, however, is masked by offsetting cost pressures, rising commodity costs, short-term disruption to the business, resulting from integration changes, and, of course, the restructuring charges necessary to accomplish these initiatives.

While we continue to see progress in many areas, we expect that our results will continue to be challenging for the next few quarters. With that said, let's look at our fiscal first quarter. Gross profit margin for the quarter was 37%, or 38.1% after adjusting for $6 million in restructuring charges. This is a decline of about 150 basis points when compared with last year's adjusted number. The 6 million in restructuring charges relates to the closing of two manufacturing facilities and the pet business and the downsizing of our manufacturing facilities in Europe and Latin America. Increases in raw material costs were the biggest reason for the decline in our gross profit margin. Both zinc and nickel spot prices were up about 150% over last year's levels. Zinc spot prices averaged $4200 per metric ton during the first quarter versus $1700 last year. Nickel averaged 33,000 per metric ton compared with 13,500 last year. Even with the hedging program we had in place, we estimate the higher zinc and nickel costs had a negative 8 million year-over-year impact in the quarter.

We reported Q1 operating income of 38 million or 43 million before restructuring charges. Operating expenses of 171 million increased about 17 million as compared with last year. The most significant driver of the increase was the investment we chose to put behind our Varta, Rayovac and Remington brands this year, with about 14 million in increased advertising and marketing expense. We believe this advertising support is important for both the short-term and long-term success of our business. We also realized an increase in distribution costs this quarter from the realignment of our North American distribution strategy as well as some temporary disruptions, the result of manufacturing consolidation.

Moving on to segment profitability the North America generated profits of 18.9 million, or 11% of sales, compared with 35.5 million, and 18.6% of sales last year. Lower profitability was attributable to lower sales volume, product mix, and increased commodity costs. Operating expenses increased slightly as compared with last year. We significantly increased our advertising budget in the quarter, offset by reduced selling, marketing, and administrative expense resulting from our continuing cost-cutting initiatives. In Europe and rest of world, segment profit declined to 21.4 million from 30.5 million last year. We realized lower gross margins in the quarter, the result of lower battery sales volume, negative product mix changes, and higher raw material costs. Somewhat offset by increased gross margin contribution from our Remington product.

The Remington business made improvements in both absolute dollar and margin percentage, as we began to realize the benefits from our brand investment and increased scale of distribution. European operating profitability was also impact by increased selling, marketing, and advertising expense of approximately 7 million in support of the Varta and Remington brands.

In our fiscal first quarter, we completed the downsizing of our German manufacturing facility. We believe we will realize approximately $15 million in annual cost savings with this initiative. Latin America segment profits were 10.2 million or 15% of sales versus last year's 6.7 million or 11.2%. Strong sales growth in Latin America during the quarter resulted in gross profit expansion. Gross profit margins also improved driven by strong Remington sales, the shift in battery purchases to alkaline from zinc-carbon, and the battery pricing initiatives we implemented to mitigate the impact of commodity cost increases. Also during the quarter we realized a 2.3 million benefit related to the reversal of accrued excise taxes in Brazil.

Our global pet segment generated profits of 21 million, representing 15.3% of sales compared with last year's 20.2 million or 15.2%. We experienced some temporary increases in distribution costs during the quarter resulting from the recent distribution center and manufacturing consolidation projects. Those increases were offset by a 2.7 million gain we recorded from the termination of a post retirement benefit plan at one of the acquired companies.

Corporate expenses increased from 4% of sales last year to 4.7% in the current quarter. The increase is largely due to the fact that in fiscal 2006 we did not accrue for any employee incentive pay based on that quarter's earnings performance. Our Q1 interest expense was 32 million, compared to 30 million last year. The Q1 effective tax rate was approximately 30%. The reduction in rate as compared with last year is largely a result of continuing tax planning strategies and the significance of our permanent differences as compared to our taxable income. We expect our effective tax rate to come in at around 33% for the full fiscal year. Free cash flow this quarter was the cash use of 78 million. Calculated after capital expenditures of 6 million, cash restructuring costs of 18 million and cash outlay related to discontinued operations of 31 million.

Outstanding debt at quarter end was 2.38 billion. Our leverage ratio was 9.05, in compliance with the 9.75 maximum allowable leverage ratio we recently negotiated under our senior credit facility. As of quarter end availability on our revolver was approximately 140 million. We now anticipate closing a home and garden transaction during our fiscal third quarter. Depending on the timing of that sale, and the other asset sales we may choose to pursue, we will need to work with our bank group to obtain waivers for the second quarter and beyond in order to remain in compliance with our debt covenant. We are in contact with our bankers on this issue and feel confident that we will resolve it satisfactorily in the near term.

As a reminder, we previously announced that we are reorganizing into three product focused business segments. Global batteries and personal care, home and garden, and global pet supplies. Starting in Q2 we will report segment results for global battery and personal care and global pet supplies and will continue to report home and garden as a discontinued operation until a transaction is closed. We will post historical sales information for these three new business segments on our website shortly. Now I will turn it back over to Dave for final comments.

Thanks, Randy. Before we move on to your questions let me just take a minute to summarize the state of the union for you. I think you can all appreciate there are a number of challenges and issues that we are dealing with at present. I hope you can also appreciate the progress we are making and the opportunities we have going forward. We are currently focused on closing a divestiture of our home and garden business. We believe we can achieve a transaction that will significantly reduce the short-term pressure from our current leverage position. We will likely pursue further asset sale opportunities as well. We believe this course of action will provide us the opportunities to take a more strategic view to running our remaining business and make the investments required to take full advantage of the global growth potential that exists in our remaining portfolio.

At the operating level we can devote our time and attention to the primary business at hand. Restoring the profitability of our battery business, continuing to grow our global Remington personal care and pet supply businesses, while managing the ongoing cost reduction and efficiency initiatives we're pursuing around the world. I mentioned earlier that we're targeting $40 million of cost reductions from the realignment we announced on January 10. There's an additional 35 to 40 million in previously announced cost savings we are targeting through manufacturing consolidations around the world and the remaining integration opportunity in global pet. These cost reductions should go a long way towards mitigating the pressure from commodity price increases which will remain significantly above last year's levels throughout fiscal 2007.

Overall 2007 will be a year of transition with some bumps along the way. However, we do see the opportunity to grow sales and profitability, and we believe 2008 will benefit significantly from the successful execution of our plans. At this point I will now turn it over to the operator to take your questions. Operator.

[OPERATOR INSTRUCTIONS] Your first question comes from line of Bill Chappell of SunTrust.

Good morning.

Good morning, Bill.

First, on the home and garden sale, can you maybe help us with a little color what's holding that up? It sounded like form the other players that were bidding on it that the auction was ended somewhere in December, and now two months later it doesn't sound like there's a clear end to it it. Maybe you could give us more color on when you think it might close and what's holding it up?

I think I shouldn't talk about any details, Bill. If you have followed auctions, which I know you and others have, they take fits and turns, and some go quickly and some take a little bit longer to do. We believe we're towards the end of the process and we have a good confidence that we'll get to the finish line here as soon as possible. That's about the best I can tell you.

Okay. And then I guess switching to Remington, it seems like Remington North America and the men's grooming, you had new products, you had a big marketing campaign, and we still aren't seeing great results. What do you do from here?

Well, I think Remington, you've got to look at it -- well, in total I think we're very happy with our Remington business. 7% growth is good solid growth. It's fairly consistent with -- if you track back to the -- when we first acquired Remington we have been growing that business with some sort of ups and downs between quarters about 7% so we feel pretty good about that.

Europe is terrific both in sales of all Remington categories, Latin America all Remington categories, and in North America, in grooming, women's shaving, and women's personal care we had very good momentum, and so the one issue that we have is men's shaving, and we did launch a new product. It was code named Everest. A new higher end look. That product did very well in Europe. It was designed by BMW DesignWorks. It had somewhat of a European design to it and it did well in Europe. It didn't do so well here in North America. So, our belief, and we're still doing the research, is that the design was not exactly right for sort of the middle market in North America, North America consumers, and we will probably do some modification to the lineup fairly quickly as a result of that.

We also had actions by our -- one of our competitors in the category that caused some of the issue of men's shaving because one of our competitors took their pricing down significantly on top of our launch. And that created some issue in some of our large retailers because we found ourselves at a disadvantage by up to $10 per price point, as a result of the actions that they took. So that was not planned for, obviously. We do think our Remington advertising was good everywhere, and it was memorable, and Cindy Crawford did her job, and advertising is something that you can't really measure necessarily at that moment, and we do think that there was good brand building that went on in that category, and our retailers feel the same. So we're disappointed in men's shaving in North America. We feel quite good about everything else.

Okay. Then just one last question. Central Garden and Pet talked last night about a large retailer, my guess is Wal-Mart's decision to get out of the live fish business and how that will impact aquatics. Any gauge on what that will do to your business as you look forward?

Well, a large retailer made the decision to eliminate live fish in 700 of their stores and do a test to test how that works versus a reassortment of space. The good news with that is that the pet -- the pet area in the store is not being reduced as a result of that. That space is going to other pet categories. So we think there's an opportunity there, because it's a jump ball for all of us to convince that retailer that our products, our assortment, our planogram selections are appropriate for the space that's available. So it does present us a short-term issue in products that we sell around aquatics and live fish, we've been aware of this for sometime. We do have a number of action plans that we have been working on for sometime, and we think we'll get through this okay. It will create some short-term blip in that account that we'll have to overcome. Having said that, people will buy fish somewhere, and we do think that other competitors, other retail competitors will benefit from that decision and our -- and are beefing up their programs in live fish to try to take advantage of it.

Thanks for the color.

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

In terms of the incremental $40 million savings from the realignment how does that fit with the original 100 million savings from the synergies and the 50 million of incremental savings? Is this on top of these numbers?

Yes, this is Kent Hussey. Let me jump in here. The $100 million of synergy savings from integration of home and garden and pet, I think we have to put that aside now. We did achieve very significant synergies related to the home and garden business, well over half of the target. Unfortunately all the work that we did there and the benefits are going to accrue to the purchaser of that business. We also have changed some of the strategy relative to how we're going to go forward integrating Global Pet now that there is no longer a home and garden business. Some of the opportunities as a result of the spin-off of home and garden will not be available going forward.

When we talk about -- Dave talks about the $40 million of restructuring savings that is related strictly to the restructuring of the Company into these three new product focused business units where we're stripping out redundant functions in the various units, we're downsizing staff, we're taking our global operations group and integrating that back into the product business units and also adjusting the size of some of these functional units given the smaller size of the total corporate structure. Of the original 100 million of integration Dave also mentioned 40 to 45 million of ongoing savings, and these are some of the other programs that we have previously announced. It's the downsizing of the German manufacturing plant where we are going to get about 15 million of savings this year. It's slim and fast, which is a program that we announced to downsize the SG&A structure in Europe. We got some of those benefits last year. There's another 10 million that we expect to get this year, and then there are remaining synergy operations in pet. We are looking somewhere in the 10 to $15 million range by the time we complete the total integration of that business on a global basis. The total number Dave talked about is a reflection of the remaining initiatives that were put in place last year, the remainder of the pet integration synergies, then this incremental $40 million relative to the whole corporate reorganization.

In terms of the advertising dollars that you are spending if you back out FX doesn't seem like there was a lot flowing through to the top line. Are we going to take a pause here and evaluate what we're doing or are we going to continue to spend going forward?

Most of our advertising spending because of our product categories is spent in our fiscal first quarter, October to December. Particularly as it relates to Remington. The only Remington spending that the industry does, that shaving segment does, is typically in the Christmas quarter, the six weeks leading up to Christmas and around Father's Day and Mother's Day. We will have some spending around Father's Day, a little bit around Mother's Day but really there's no significant spending in that category until Q1 of next year and it will give us time to see how our overall business is trending and doing before we make a decision on whether we should double down and continue to spend significantly against that category.

In batteries it's much the same. Our battery advertising campaigns have always been around the Christmas holiday season starting in September, October, through January, because January is a big battery month, unlike some other categories. And then us and the industry does moderate to little spending throughout the year. So again in that case I think the good news there is that we can pause and see we made investments in Rayovac. They are working and we are having sequential market share increases and we'll have to gauge how that's going. And that will lead us to whether we decide to continue to advertise in Rayovac here in North America.

We did make a small investment in Varta, particularly in markets where we're just penetrating. We have high growth of Varta going on in eastern Europe, former eastern Europe and all of those countries, including Russia, and so we are spending money to develop the brand there, and again we just have to evaluate to see how we are doing. We did make a bet in this quarter, and we do believe it's the best long-term bet because we can't run a business that has declining market shares that are in continual decline, and we believe that bet was a good one, albeit, it had some dampening effect on profitability for Q1. So we'll see. We will take a pause here and spend the next few months trying to figure out exactly how the business looks.

If I could just have one more. In terms of asset sales that you were discussing that are likely for 2007, should we think of them on a similar scale as the home and garden business or are we looking more at divestitures of perhaps some select brands?

I think you should think that we're looking at everything, that would include looking at everything that you just mentioned. But bear in mind that our focus in any asset sales, as was the case with home and garden is -- our two objectives are to pay debt down, absolute debt, and to delever the business, okay, and so to the degree there's other asset sales, it really needs to fit into that mold, because the whole objective here is to get our leverage down from an uncomfortable level to a more comfortable level, ultimately allowing us to do more focus and investment in remaining businesses. Pet is a business, as an example, that has enormous opportunity, one of the highest growth rates around the world, but it's one because of our overall corporate leverage issues that we have not been able to take full advantage of this global business that we have in place. And there's an area that if we can get our leverage down that we want to focus on. That's the whole objective to the home and garden sale and then other asset sales that we might do here in 2007.

Thank you very much.

Your next question comes from the line of Chris Ferrara of Merrill Lynch.

Just to be clear you're saying that any future asset sales are going to be related to getting debt and leverage down. Does that mean that -- like has something changed between when you initiated the looking for a deal for lawn and garden and now that you don't think that you will be comfortable with your leverage even after the lawn and garden sale has taken place?

No. I don't think anything has changed at all, Chris. When we first started this strategy, we've done, with Goldman and others, we've done a complete analysis of all of our businesses and all of their -- what we believe their likely opportunities are and then how that fits into what we think our global strategy should be going forward, and you should think of this as just a continuation of the dialogue that began last summer on this subject. We identified home and garden as the right candidate for us, and once that sale is completed, that process is ongoing, and I wanted to make a point today, so that everybody understood that it's not likely over. There probably will be one or more asset sales that occur in this company before we think we have the business aligned and sized properly and our balance sheet and debt structure the way we want it.

Maybe I heard this wrong. It sounds a little bit like you're pushing some of the functions that you went toward corporate sizing back into the segments. Is that right or am I not hearing you guys right?

That's right. There's a lot more to this restructuring than just -- we're creating three businesses, one of them is being divested, which leaves two businesses, okay, but within that structure we're also trying to eliminate the inefficiency that exists. Take Remington as an example. We have marketing, market development, market research in North America, in Europe, and Latin America, we have contracts with ad agencies in North America and Europe and Latin America, and we have product managers in each place, all doing their own thing. And then somewhere in the Far East we have a group that takes those ideas and builds them out to something.

In this structure we are trying to -- and I just use that as an example -- we are trying to streamline that, eliminate the inefficiencies that exist with that and create one global Remington marketing -- market research, advertising product development entity, and I could go through similar example with our other businesses, so that's what we're trying to achieve, and at the same time we're trying to embed as much of the functionality of our business into those business units. So in Dave Lumley's business that's based in Madison or John Heil's business that's based in Cincinnati, we're trying to put full functionality into their business units so that they have full P&L responsibility and so that they have all the resources they need to drive their business performance.

Let me chime in here. You may remember that in the past we talked about our geographic business units that had full commercial responsibility. We had a separate major organization called global operations, so we were running a very large complex matrix structure between all of the functional organizations that were being run on a global scale and the commercial operations that were being run on a regional scale. We're basically dissolving this large global operations group and all of the matrix in relationships here and embedding now those functions into the functional business units. Simple example is manufacturing. Manufacturing was being run by our global operations group. They ran all of the plants around the world. Well, as we continued to grow this became an ever more complex function to try and manage and interface with the regional business units.

So now the pet manufacturing plants are in the pet group and they report to John Heil. The battery plants are in the battery business, and report to Dave Lumley. The purchasing activity related to batteries, which is somewhat different than the purchasing activity related to Global Pet supplies, has now been split and moved into those business units. Part of the other benefit we're getting here is we are downsizing the total amount of resources in these various functional groups to reflect the fact that we are going to have a simpler organization structure and we are a smaller business overall, so that's where a lot of these savings are coming from.

Thanks. Is another byproduct of this, and a benefit, I guess, that it makes it easier to strip them apart and potentially sell them right?

Possibly.

Thanks a lot.

Your next question comes from the line of Connie Maneaty from Prudential.

I just want to follow-up on that last comment because as we consider -- you consider future asset sales and given the way you have reorganized the Company, is splitting the Company then into two distinct pieces to realize more pure play value rather than conglomerate value also on the table as an option?

Yes, it's on the table for discussion, Connie, is about the only thing I can tell you. The beauty of what Kent and I tried to articulate is that we really are creating much more efficient, quicker to market business structure where that both Lumley and Heil have full access to all of the resources that they need to drive their business, while at the same time we're creating two distinct near stand-alone businesses within our business. So it would make it easier for any divestiture that we might do in the future, it would make it easier for that to occur, because divestitures we're finding out are harder to do than acquisitions. Splitting them apart and splitting supply chains or manufacturing or common distribution points and all those things take a lot of time and effort, and the beauty of this realignment, I think we can have our cake and eat it, too, that we get a better business structure and we also get these things aligned in a way should we decide to do further asset sales that we can do them as painless as possible.

So is there, as you reorganize this way do you not incur some increased costs as well so that each -- each of the two business units not only has discrete manufacturing but discrete distribution capabilities, and so for awhile, anyway, for instance, you might have two distribution centers in the same county, that sort of thing?

Think of it as there are some inefficiencies that are duplications that are created although they're relatively minor. For example, manufacturing there's no real duplication issues. There is in distribution, okay, you bring up a good and valid point that we had a vision -- go back two years ago we had a vision that where we were going to integrate all of our case goods products into a common U.S. distribution system, and now with these changes, we're creating a distribution system for case goods as it relates to Remington and batteries that's separate from the case goods distribution system in pet. And there are some short-term inefficiencies, and when I talk about short term, probably a year or less, inefficiencies as a result of moving to that type of a system. Distribution centers that may be too large, sized wrong, slightly the wrong place, things like that, which we're working on, well aware of, and so there's some inefficiency here over the next few quarters, but our belief is that 6, 9, 12 months from now those inefficiencies will have been worked out of the system and that we'll have two efficient distribution systems. So think of the inefficiencies we're creating as principally distribution but we're on it pretty good.

If I could go back to the press release in July or August when you said you would look for strategic alternatives to improve the balance sheet but also position the company for better growth prospects, could you -- I can see how the balance sheet is going to change, but could you explain how selling one of the better growth potential businesses helps position the Company for better growth, or is that just an aside at this point?

I think life is a balancing act. Number one, we wanted to do a divestiture that significantly paid -- that paid down a significant amount of debt and delevered the Company. Some businesses that we could have sold would have paid down debt and not delevered the Company. That was a principal need that we had, okay. And then secondly some of our businesses are more attractive than others. Some would attract a larger buyer base than others, and you have to put those considerations in i.e. a potentially higher price. Finally, we do think though, with our decision, home and garden while we like the growth prospects of it it's really a North American business and the rest of our businesses are all global businesses. And the remaining businesses both batteries and personal care, which has a global footprint in over 100 countries, and pet which has a global footprint now in somewhere between 90 and 100 countries, all separate distribution, we think is a very good business remaining after the sale of H&G. So life's not perfect, Connie, but I do think we achieved most of our objectives in our decision to divest H&G.

Can I just ask one more question? On the home and garden business, is the discontinued operations loss you reported, how is the business doing? Is it -- in this period of transition is it holding market share, losing, gaining, is it meeting the objectives that you had set out for in the.

I can talk about revenue because I am sort of up to date on that. In the most recent quarter which you got to understand home and garden for the whole industry the lowest volume quarter is October to December, so keeping that in mind, our revenue was up 4% for the quarter, both of our principal competitors' revenue was down for the quarter, okay, and so we think we performed well. There's not a lot of sell-out that occurs during that quarter. A little. Most of it is just preparing for the early stage lawn and garden season, some products that break in some parts of the country as early as January or February in Florida, in Texas, in California as an example. We think we have done very well, and in that trend continues into this quarter, and so we think that's going well.

But over the last year has it gained share or held or lost?

We think on balance we've gained share. We have held share or gained share in nearly every category that we participate in. If you were to go back and retrace -- I'm not going to do it it because I don't remember it, but if you were to retrace our growth over the last two years since we have owned the business in home and garden, to the projected growth of the industry by us and our competitors you will have seen that we would have grown equal or outgrown the industry during those two years. And we feel good about that and in fact our listing process in home and garden for the season that's upcoming is very strong, it's very solid, we have a net gain of listings in all of our major retailers, and we got some moderate pricing and so we do think our business, our home and garden business is very healthy. And maybe unfortunately because we had to divest something is that we have done a whole lot of work and a lot of integration and a lot of cost savings in that home and garden business that we took the hit for last year because we were doing a lot of stuff, installing SAP, inefficiencies around that, et cetera, that's now completed. So we do think we have a very good business, it's growing, and it's going to be more profitable in the future than it's been in the past. So we've got a good business there.

Thank you.

Thanks, Connie.

At this time we have time for one more question. Your last question comes from the line of Joe Altobello.

First question, if I could, if you could remind us what the covenants are over the next couple of quarters in terms of leverage?

As we mentioned this quarter was 9.75, and the next quarter it drops down to 8.75. We -- when we went back to get a amendment on our covenants we got a two-quarter release.

Okay. Then upon consummation of the sale you expect to be under those covenants, I imagine?

Yes, we had done the calculation assuming a sale of the home and garden business in our fiscal second quarter.

So we potentially have a timing issue here. We originally projected that we would close the sale of home and garden, and this is an internal projection, in late second quarter. We think it slipped a little bit, and so from a forecast versus our internal plan, we think we've got an issue with covenants in Q2, depending on the timing of the close of the sale and our bank, B of A is very well aware of it. We're trying to work through that issue with them.

Then secondly, in terms of the EBITDA number you gave out in fiscal '06 for the home and garden business, 75 million, I assume that's a stand-alone number and doesn't include any allocation to corporate overhead.

Right, exactly. And again, I specifically mentioned that just so that you all had a concept of size of the home and garden business because I have read things in the press and read things that many have written that are all over the map in terms of size of that business, expected proceeds, et cetera, et cetera.

So going forward post the sale and post some of the cost savings initiatives you guys are doing, what is a good run rate in terms of corporate overhead as Spectrum would exist after the asset sale?

I think we'd prefer to give you a little more guidance on that once we have consummated an asset sale.

Okay. Great. Thanks.

Okay. Operator let's take another question or two here. Maybe another five minutes.

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

Good morning.

Hey, Lori.

First, just as as follow-up to Joe's question would it be possible to get restatements for last year including -- or accounting for home and garden as a discontinued op?

Yes, we will provide something out on our website for you. You can see all of fiscal '06.

Then, Dave, if we could just talk about are Europe I think last quarter you had suggested that you were seeing a moderation of some of the negative mix pressures. It doesn't seem like that's still true any more. What do you think is going on and as you look to fix that business what incremental actions can you really take following all the restructuring you have already done to date?

I think we have seen somewhat of a moderation of the negative trend. That's the good news. But the bad news is the negative trends continue, particularly private label trends, and it's really two components of that. It's moving more to private label, I think it's nearing or more than 50% now, 50% of all European battery sales now are private label. And it's being driven by the big retailers like Care4 and Audi and Leetle, super discounters, and other retailers fearing that they are going to lose some of their customers, and it's not just in this category. Audi has 1,000 items, it's in a thousand -- it's all thousand that they are trying to react to and that's exacerbating the issue. It's more of an issue for us frankly, because it's occurring most in middle Europe which has historically been the highest market share of branded products. So in Germany, Austria, Switzerland, it's occurring more, it's already occurred in France but our strong points are in those German speaking countries.

So it's absolute movement to private label and then it's private label pricing because these retailers, many have gone to Internet auctions of private label business where that in an eight-hour period or 12-hour period, everybody in the world that will bid on that, they just put one against the other, so we're seeing a margin erosion in private label. So that's what's affecting our business. On the positive side is that our branded business and pricing and margins and market share are holding up fine in the grand scheme of things but it can't offset the negatism that's occurring in private label.

Our Remington business is doing terrific but it's a small business compared to our battery business and it can't offset the negative trend. There is nothing fundamentally that us or any of the other industry participants can do to change that retail trend that's occurring. Retailers are driving it and all that we can do is adjust our business model, drive costs out of our overhead structure and drive costs out of our manufacturing footprint. That's why you have seen us in the last quarter significantly downsize a very large plant we have in addition in Germany and move that to China. And so that -- the stuff that we moved is private label production.

We have, in essence, created a strategy to move all of our European private label production to China-based manufacturing which obviously is at a lower cost to us and somewhat attempts to offset this margin pressure that's occurring in that business segment but that's the issue in a nutshell. I wish I could say that we could go over there and from a marketing standpoint change the private label mix that's occurring but we can't do it, and I think all we can do on this particular item is focus on cost, but we can and are focusing on the branded business. That's one reason why we have spent more money investing in the Varta brand and we obviously are very focused on Remington brand business.

Dave, you have already done a lot in terms of trying to improve the cost structure for your batteries. Margins haven't really responded yet. I guess I'm just wondering how much more is there really that you can do to downsize the cost structure? Are there really that many opportunities still left?

Yes. There are opportunities left, Lori, and I really don't want to try to quantify actions here, but we still have a very large business operating structure that exists in Europe that's a -- either a country specific structure or in some cases a regional structure, and many other consumer product companies, whether they are U.S., -- large consumer product companies, whether they are U.S. or European based who have faced into these issues in their categories before, it's affected ours, have created a much different streamlined approach to a very broad pan-European or even broader than that, European, Africa, Middle East structure where they're able to be much more efficient from an overhead, distribution, supply chain, et cetera, et cetera. There's more work to do. The bad news is I can't give you all as investors this glimmer of promise that we're going to be able to overcome all of the negative trends that exist in Europe. I think we're running 1,000 miles an hour just to try to stay where we are.

Thanks for the color.

Thanks, Lori. Let's take one more question and then we'll have to close off.

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

Good morning. Randy, you mentioned zinc and nickel and other raw material costs impacted earnings, I think you said, by about $8 million. Is that a reasonable run rate impact just on the cost side excluding pricing for the rest of this fiscal year or not really?

No, you saw more of an impact on Q1 because first quarter last year is where we saw the real run-up of zinc. You could probably say in the -- it will probably be approximately that amount for the rest of the fiscal year.

In total?

In total. You're probably looking 16, 18 million total for the whole fiscal year.

And this is U.S. and Europe?

Yes, this is global.

Okay. And then as for as lawn and garden business, I know you're going to file these results later on, but can you say how the EBIT for that business did sort of year-over-year?

It was down just slightly, more because of the sales mix, and on a disc. ops basis we do allocate interest expense and we did see interest expense in the business but directionally it's -- it was pretty much flat year over year.

Is that an EBIT-positive quarter for the lawn and garden business?

No, it's a significant losing quarter for the whole industry.

So what about EBITDA basis on the lawn and garden, is that a positive for that quarter or no?

No. That's a negative for the quarter.

Thank you.

Okay, I think I'm going to cut it off. Listen, appreciate everybody's time. I appreciate your continuing interest. We know we're somewhat of a work in progress here. All I can tell you is that we are working extremely hard, have never worked harder as a company, as a management team, to overcome the headwinds that have faced us, particularly the commodity headwinds, in my career, which is a long time, I have never seen a business that's had to face commodity headwinds to the degree that we have and our industry has, particularly the battery industry, over the last two years. We are facing into that and I think we are taking the actions required and when we do have -- when that does turn, and it will turn, we think we'll have a pretty good business model in place and we'll enjoy the benefits. So again, thanks for your continued support. Have a great day.

This concludes today's conference. You may now disconnect.