Spectrum Brands Holdings Inc (SPB) 2007 Q2 法說會逐字稿

Good morning. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands second quarter 2007 earning conference call. All lines have been placed on mute to prevent any background noise. Thank you. Ms. O'Donnell, you may begin your conference.

Thank you. Good morning, everyone. We appreciate your participation in today's call and your interest in Spectrum Brands. Joining me this morning will be Dave Jones, Spectrum Brands Chairman and Chief Executive Officer, Kent Hussey, our Vice-Chairman, and Randy Steward, our Chief Financial Officer. We're going to follow our usual agenda today, beginning with an overview from Dave, followed by a more detailed review of the financial results from Randy, and then allowing plenty of time for your questions. First let me remind you that today's comments include forward-looking statements. These statements are based on management's current assumptions and projections, and do contain an element of uncertainty. There can be no assurance that future results will occur as anticipated and may, in fact, differ materially from our expectations. We encourage you to review the various risks factors and cautionary statements outlined in our most recently filed Form 10-K and 10-Q in order to better understand those risks. We assume no obligation to update any forward-looking statements we make today.

We'll also be referring to certain non-GAAP financial measures include adjusted diluted earnings per share, which provide information regarding results of operations before restructuring and certain other costs. Management believes that these non-GAAP measures enable investors to better understand and analyze our financial performance and identify trends in operating results. Management believes the adjusted 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. A reconciliation of adjusted diluted EPS to GAAP financial results may be found in table 3 of today's press release as well as on our website, www.spectrumbrands.com.

So at this point, I'll turn the call over to Dave.

Thanks, Nancy, and good morning, everyone. I'll start the call today with some overall highlights from the quarter. First, we delivered excellent top-line growth, with Q2 net sales of $439 million dollars from our continuing business, an increase of nearly 6% versus 2006. We generated sales growth in every business segment and every geography, largely due to the increased advertising and marketing spending begun earlier this year, as well as a renewed focus on new product development. As you know, we've not been able to say that for several quarters and it feels good to see this positive momentum in our business. Significant progress was made in several targeted growth categories, including alkaline batteries, portable lighting products, Remington personal care products, and companion animal pet supplies, as well as in our Home and Garden business. We generated an adjusted diluted loss per share from continuing operations of $0.18 before restructuring and other one-time charges, slightly above our expectations as laid out in recent 8-K filings. Randy will discuss these charges in detail in a few minutes.

I'll now review our sales for the quarter by business segment. In our Global Batteries and Personal Care segment, we generated sales growth of over 7% this quarter. The biggest single growth driver was a double-digit sales improvement from alkaline batteries, with additional significant contributions from Remington personal care products and from our lighting business. We gained solid momentum with our Rayovac alkaline battery segment this quarter. In North America, Rayovac alkaline year-over-year sales growth was nearly 30%, driven primarily by pricing in combination with strong retailer sell-in. Our market share in North America has stabilized at the higher share levels we achieved with last fall's Brett Favre advertising campaign and brand relaunch, and our momentum with major customers is good. In Latin America, Rayovac was actually the fastest growing Alkaline brand at retail during Q2 and generated over 30% sales growth compared to last year. We've been successful in implementing significant price increases across Latin America and we continue to benefit from the positive product mix impact of the on-going zinc carbon to alkaline conversion. In Europe we saw a much welcome stabilization of our overall battery business with the help of a strong euro. Although the environment is still very challenging, we're seeing moderation of the negative trends experienced over the past couple of years and we're optimistic that we can maintain FY '07 full-year battery revenue generally in line with last year's results

Q2 sales growth also benefited from a targeted push in lighting products, particularly in North America, driven by new product introductions and improved distribution. This is a small category for us, but we've recently put a concerted focus on innovation to (inaudible) the market and we were rewarded with market share gains and a meaningful double-digit sales improvement. Remington had another solid quarter, growing 3.4% year over year. Softness in the North American men's shaving business was more than offset by exceptional sales growth of 19% from Remington personal care products around the world. Personal care has really performed as the key sales driver for this business in recent quarters. In North America, Remington's share of the personal care market is at an all-time high and is growing faster than the category. In Europe, Remington is growing at twice the market rate and is the fastest growing brand in continental Europe in this category. And in Latin America, we continue to grow this relatively small business at a rate of over 40% in Q2 as a result of increased distribution and market share gains from the sequential rollout of these products country by country in this fast growing region.

The North American Remington shaving and grooming business had a soft quarter in the men's shaver category. However, international shaving and grooming sales continue to show strong double-digit growth. We are reintroducing our classic Remington men's line-up in the U.S. for Father's Day, and thus far all signs are generally positive, with healthy planogram reset support from all of our top retailers. So we're hoping to regain some momentum in this important market as we move throughout the year. While we need to improve our men's shaving performance in North America, we are very pleased with Remington's overall performance on a global basis and we're confident that the newly realigned Remington sales and marketing operating structure will benefit both sales and profitability going forward.

Global Pet generated Q2 sales growth of 3.4%. We estimate that overall Pet industry volume increased a range of 2% to 3%, so we continue to slightly out-pace the industry. We achieved particularly strong Q2 performance in the North American companion animal business and from our Tetra aquatics business in Europe. Our European Pet business continues to perform very well, driven by our new product rollouts and by increased distribution in new markets, particularly in Eastern Europe. We were also assisted in Europe by strong currencies versus the dollar. Our companion animal portfolio continues to grow in double digits. This business has been just phenomenal for us and shows no signs of slowing. As mentioned previously, we are now in the early stages of launching a limited portfolio of companion products in Europe during the FY '07. More to come on this initiative in the future.

Our challenge in the Pet category this quarter was North American aquatics, which continued to lag behind the overall Pet category. We've talked before about the decision by a major customer to reduce the number of retail stores carrying live fish. The impact to our business is mainly in the sale of equipment; aquariums, filters, pumps, and the like. We currently anticipate a negative sales impact of approximately $3 million annually. We're working with this retailer and others, not only to minimize the impact of the decision but also to find ways to strengthen and reinvigorate the overall aquatics category.

Although our Home and Garden business is reported as discontinued ops, I'll give you a quick update there as well. Home and Garden sales grew 4.7% in Q2 with good improvement in fertilizers and controls, as well as in household insect control products. We started the season off very strong, slowed down a bit over Easter weekend, when we experienced frigid weather across the nation. But we've come back strong with beautiful weekend gardening weather in most parts of the country over the past couple of weeks. Q2 POS at our major retail customers was up dramatically., averaging 18%. Fertilizers and seed sales were up 14%, growing media was up 13%, controls up 28%, household insect control products increased 18% for the quarter at point of sale. So we're feeling pretty good about this business and anticipate promising sales results for the remainder of the season.

I'll now turn it over to Randy at this point to walk you through the financials, then we'll wrap up and move on to your questions. Randy?

Thanks, Dave. Good morning, everyone. Moving to the cost side of the equation, gross margin for the quarter was 33% or 39% after adjusting for $6.7 million in restructuring charges. Restructuring charges this quarter relate to manufacturing cost cutting and downsizing initiatives across the organization and integration projects within Global Pet. Gross margin was positively impacted from the successful pricing actions taken in North America and Latin America battery markets. Raw materials continue to be a headwind for us, with unprecedented increase experienced over the past 18 months. Zinc alone increased by approximately $2 million this quarter. However, during Q2 our pricing initiatives more than covered this increase. We incurred total restructuring charges of $16.5 million in the quarter, $6.7 million of which was recorded in cost of sales. These restructuring charges related to: Cost reduction initiatives in Europe and Latin America, to streamline the operating structure and rationalize manufacturing; integration within the Global Pet business to consolidate manufacturing and distribution; and significant managerial head count reduction as part of the global restructuring; and realignment initiatives designed to reduce the global operations and G&A structure of the business.

Selling expenses in the quarter were $98.9 million and 22.5% of sales. This is an increase of $9 million versus the comparable quarter of last year. Consistent with last quarter, we increased our spending in marketing and advertising, primarily in support of our rapidly-growing Remington business in international markets. We also experienced distribution -- increase in distribution costs this quarter, as we realigned our distribution strategy, consistent with the running of three autonomous business segments. G&A expenses increased by approximately $5 million in the quarter. This number includes approximately $4 million in professional expenses associated with the sale process for the Home and Garden business.

Second quarter operating results also included a goodwill impairment charge of $214 million. Statement of Accounting Standards 142, Goodwill and Other Intangible Assets, requires that goodwill in indefinite lived assets are tested for impairment annually, or more often if an event or a circumstance indicates an impairment loss may have been incurred. The realignment of our business segments is one of the triggering events for the impairment test during an interim period. This impairment of goodwill is attributable to the decrease in the Company's market capitalization and the Company taking a more conservative, long-term growth outlook for the business. This is a non-cash charge and does not impact liquidity or debt-compliance requirements of the Company. Excluding the impairment charge and restructuring charges, Q2 operating income was $23 million compared with $22 million last year. Operating margin remains stable at 5.3% of sales.

Under our new segment reporting we have begun allocating a portion of corporate cost to each of the business segments. This will enable us to report true stand-alone operations for each of our business segments. Certain costs previously reported only at the corporate level, including manufacturing operations, sourcing, quality and research and development costs, these functions have now been embedded into the business segment. Prior-period numbers have been revised to be consistent with this new reporting methodology. Later today we will post on our website last year's quarterly financial results with revised business segment and corporate allocations.

So moving on to segment profitability on the new reporting basis, the Global Battery and Personal Care segment generated profit of $22.1 million or 7.4% of sales, compared with $13.4 million and 4.8% of sales last year. This 65% profit improvement was primarily attributable to our successful alkaline pricing increases in North America, where the industry to a 6% to 7% increase effective January, and also in Latin America, where we've been taking selective alkaline and zinc carbon pricing actions in a number of countries. We also saw increased volume in our -- in the alkaline batteries. This improvement was somewhat offset by continued higher raw material costs and increased distribution and selling expenses.

Our Global Pet supply business generated profits of $16.4 million, representing 11.5% of sales, compared with last year's $19 million or 13.8%. Although Pet's gross margin was stable, we experienced some increases in distribution cost in recent months, resulting from distribution and manufacturing consolidation projects. We are focused on completing this process and achieving a more efficient structure by the end of the fiscal year. However, we anticipate similar operating margin pressures next quarter as well. We also increased our marketing and advertising spend during Q2 versus last year in support of our sales growth.

Q2 interest expense was $69 million compared to $30 million last year. This quarter's interest expense included the write-off of approximately $25 million in deferred financing costs related to our previously-existing credit facility and subordinated notes. We also incurred a $12 million call premium associated with the early termination of that senior credit facility. Our current average interest rate is approximately 8.5%. We anticipate that full-year fiscal year '07 interest expense will be in the range of $215 million to $220 million, with a portion of that cost allocated to discontinued operations in accordance with Generally Accepted Accounting Principles. We recorded a tax benefit on current period results of approximately 18%, which was impacted by the impairment charge within the quarter. Exclusive of that impairment charge we would have recorded a greater tax benefit for the quarter and six-month period.

Operating cash flow was a cash of $110 million, the result of increased working capital in the Home and Garden business to support the very important spring selling season. Also included in operating cash flow is capital expenditures of $7 million and restructuring costs of $16 million. As part of the debt refinancing we also incurred approximately $51 million in financing and professional fees. Also, as part of the new financing in the quarter we accelerated payment of accrued interest related to the previous credit facility in the amount of approximately $30 million. Outstanding debt at quarter end was $2.659 billion and cash on hand was $118 million. Our senior leverage ratio at the end the quarter was 5.96 after netting cash against our debt balance, and is in compliance with the 7.5 maximum allowable senior leverage ratio under our new senior credit facility.

At this point I'll turn it back to Dave for final comments.

Thanks, Randy. Okay, before we move on to your questions, let me just take a minute to summarize. Spectrum Brands is still a bit of a work in progress at the moment, and despite our progress there remain a number of challenges and issues still ahead. We're committed to meeting and overcoming these challenges and encouraged by the improvement that's already occuring across many areas of our business. Overall, I'm feeling better about the business and our prospects for growth in both revenue and profitability than I have in several quarters. First of all, from an operating standpoint, we're making progress. We're encouraged by the positive sales momentum across the business, a result of a renewed emphasis on marketing, advertising and product development support, behind our most important brands and growth categories. We're focusing enormous time and energy towards streamlining our cost structure and taking significant cost out of our new business model. We're on track with our plans in this regard for 2007, which we previously laid out for you in some detail, and we anticipate that we will deliver year-over-year sales and EBITDA growth during the second half of 2000 -- of '07. FY '08 should show even more improvement due to all of these actions

In January we announced our plan to realign our business into three product-focused segments; Global Batteries and Personal Care, Home and Garden and Global Pet. Instead of the complex global matrix structure we had in place previously, this new organizational structure is designed to bring ownership and focus to each product category on a global basis, while significantly delayering the business and moving decision making closer to our customers. We're eliminating redundancies in product development and sales and marketing across all geographies, with immediate benefits through lower head count, reduced number of SKU's, and more focused new product development. We've taken out a layer of management in our global operations organization and improved business unit accountability and ownership of the manufacturing and distribution functions by assigning responsibilities to these functions to the business segments they support, rather than a single global support infrastructure

Under the realigned business segments each of our three businesses will function as an autonomous stand-alone entity, with all the functionality needed to accomplish its mission embedded in each business. This process should reduce our overall global cost structure by $50 million when completed later this year. In addition to improving profitability, we believe the new structure will ultimately provide increased flexibility and clarity in our asset sales strategy.

Secondly, the successful refinancing of our capital structure gives us increased liquidity sufficient to accommodate the working capital needs of our current product portfolio. We also gained much more flexibility to focus on running our business properly for the long term without short-term pressures from the previous quarterly financial covenant issues. This financial pressure has for several quarters kept us from being able to take full advantage of opportunities in several of our important growth businesses. The refinancing was a major achievement for the Company, although it's at the cost of a fairly significantly increased debt service burden. But life is full of trade offs and we believe the added financial flexibility will ultimately reward our patient shareholders and will prove to have been a vital part of our overall shareholder value creation process. Now that the refinancing is complete, we are better position to relentlessly focus on reducing our interest burden, as well as our overall indebtedness through improved operating performance and the strategic sale or disposal of assets, with the first focus being on our Home and Garden business.

Beyond that it's likely we will pursue additional asset sales to further improve our capital structure. We continue to believe that Spectrum Brands has several valuable businesses and many important brands in its overall product portfolio that represent significant unrealized value if properly monetized. We believe the right strategy is to create value for our shareholders is a combination of improved profitability and timely realization of value-enhancing asset sale strategies. For patient investors, there is potential for a significant value creation in this approach. We'll have more to say on this subject as the year progresses.

So at this point, I'll turn it back over the operator to take care of your questions. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from the line Bill Schmitz of Deutsche Bank.

Hi, good morning.

Hey, Bill.

Hey, can you just tell us what the restructuring charges are expected for the full year?

Yes, we're expecting restructuring charges approximately $47 million to $50 million.

$47 million to $50 million, great. And then just on the Lawn and Garden business, I think sales were up 5%, but you said retail consumption was up 18%. Was that because there was too much inventory in the trades or are they drawing down and there'll be a catchup, how did that dynamic play out?

I think maybe a little bit of both, but mostly retailers drawing down inventory. They started the season a little bit cautiously from our perspective. And I think it's evident by the fact that POS outstripped sell-in rather significantly, not only from us but from others, as well. And as it played out the Easter -- the first couple weeks of April -- March was strong for retailers and in the first couple weeks of April were weak because we had a freeze across the country, but since then, it's really come back strong. Our view is that we and others will be the recipient of good sales growth because most retailers inventories got down to lower levels than what they or us would like to see.

Okay, great. And then just in terms of timing of the Lawn and Garden selling, I know you said previously you thought the third quarter was a pretty good guess. Is that still the case?

I don't remember saying that exactly. But I -- think of it this way, Bill and others, we are in the midst of our season right now. And so there's nothing that we intend to do during the midst of our season right now, and so there's nothing that we intend to do during the midst of our season that would disrupt our ability to succeed this season, that would cause angst with either our employees or our retailers. And so don't expect us -- any activity -- meaningful activity to occur until the season ends. And then I think once the season ends, it's highly likely that you'll see an increased focus on that particular project.

Okay, great. Thanks, and one final one. Are just in terms of the corporate expense as reported in the segment detail, it was up roughly $8 million year over year on a pro forma basis. Is the $4 million from professional fees in that corporate line and does that explain most of the step-up?

Yes, it is.

Okay. And then how about the other $4 million?

The other $4 million is a couple pieces; a slight increase in legal expenses, and also a slight increase in total compensation expense.

Okay, great. Thanks very much.

Thanks, Bill.

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

Good morning.

Hey, Bill.

Just first on the Pet side, just the $3 million impact from Wal-Mart getting out of live fish seems pretty small. Do you still expect them to go to all 2,500 to 2,800 stores in terms of getting out of live fish, if there are changes, and do you see offsets of that business in other retailers?

Bill, I think it's a -- it's a project that's in play right now that the final answer is not totally clear. They've eliminate live fish in 600 stores. It is sort of held at 600 right now so that they can evaluate how those stores are performing. I think the jury's out in that regard. When I said $3 million, I think -- think of the $3 million, if they hold to 600 to 700 stores, then we anticipate that it would create about a $3 million revenue shortfall for us. And their decision were to go to more, it would create more of an issue that we'd have to work through. And obviously, if they reverse some of the decision, they would be a net benefit to us. As best as we can predict right now, for this fiscal year '07, given what we know about their plans as well as how it's going in their stores. And we have been very much involved since we're the category manager in aquatics category there that we think it'll be about a $3 million headwind against revenue in that business.

Okay, great. And then just switching gears to Battery and Personal Care, it looked like -- if I'm doing my math right -- that EBITDA margins moved back to close to 11% in the quarter. Does that sound right for Battery? Are those numbers sustainable? Can you improve and give us an update on where you are with zinc for the rest of the year?

I'll go and then maybe Randy can follow. We did see a fairly significant improvement and profitability in that business segment. We do believe that that profitability is sustainable unless something more dramatic occurs in terms of input costs, et cetera. We have been able to initiate pricing effective the first of this quarter in North America and that pricing's stuck everywhere, as it did for all of our competitors. So that's a good positive sign and should create incremental profit pool not only for us, but for the entire industry in North America as a result. We are continuing to see input cost increases in zinc and in nickel and some of those commodities, but it's not been as bad as in the past and we've been able to overcome that with pricing. In Latin America, we have priced much more aggressively in both our zinc business -- zinc carbon business and in our alkaline business. As you all know we're the market share leader in most of the markets in Latin America, and as a result, we have been first with pricing and first to market with pricing. And for the most part, the industry has priced as well in Latin America. We think -- we think those prices will have all stuck in every market that we have priced up in and -- so we should benefit from that in the future, and it should give us improved profitability with our Battery business around the world as a result. Randy, do you have any other comments relative to zinc or hedging?

Yes, sure, Dave. We are very well positioned from a hedging perspective for the rest of fiscal '07. So the challenge certainly is in the outlying, certainly going into fiscal '08. But as I said we're well positioned in the current year. Your question relating to the Global Battery and Personal Care EBITDA, if you remember because of the seasonality of Remington and our fiscal second quarter is really the low level of sales, and so the EBITDA contribution in Q2 is a little under 10%. But certainly for the full year, our EBITDA contribution we believe is going to be in the11% to 12% range.

Okay. Great. And Randy, one last -- just why would the fees for Lawn and Garden sale be in continuing operations? Why wouldn't they be in discontinued ops?

I'm sorry, the professional fees?

Right.

Because that was incurred at the corporate level.

Okay, okay, thanks a lot.

You bet.

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

Wondering if you could talk about the Lawn and the Home and Garden business. Looks like EBITDA beat your forecast that you laid out in the 8-K I guess by $3 million or $4 million, even though sales were slightly short of what you guys had been looking for. Can you talk about what drove that, if I'm looking at it right, even?

In the Home and Garden business in relation to the 8-K filing, we're pretty much on expectations with EBITDA within the Home and Garden business.

So what would I be missing? Didn't you -- D&A is up $4 million, right, and operating income was about $14.6 million and you guys were looking for $15 million in the 8-K? Is that not right?

Yes, the operating income excludes D&A, you take $15 million plus from that fact and you end up with approximately EBITDA of about $16 million for the Home and Garden business.

Okay. Yes, I'll follow up on that I guess. Can you just talk about North American Battery sales? I think you guys had said sell-in was 30% in North America Rayovac brand was 30% in the U.S.?

Alkaline.

Yes, Alkaline. If that's the case, where are trade inventories now relative to where they should be? In other words, are we going to see that reverse back out? And also with respect to sell-in, what was weaker than that? How did carbon zinc or some of the other batteries do in the U.S.?

We had strong sell-in and we had strong sell-out, Chris, and so there's not an appreciable inventory build that occurred during the quarter. There may have been a little bit of pipelining to maybe some new accounts, although I can't really speak specifically to that. So think of it as Alkaline strong, both sell-in and POS market share strong. And we have had improvements -- sequential improvements in market share, year-over-year improvements now for six straight months over last year. And so we -- we do have a very good performing business in that respect. There are other categories in batteries that we're not seeing that kind of growth. And, in fact, some categories we're seeing negative growth. Zinc carbon as an example, which is a small category for the industry, but a pretty large category for us historically is really in a state of decline and many people have replaced a lot of key retailers have replaced their zinc carbon planogram with the alkaline -- or lower cost alkaline planogram. That's having a negative effect if you were to add up all battery sales. And then in specialty batteries -- that would include rechargeables and some other smaller categories -- we're really not seeing any significant increase in that business, as well. What we're really focused on, as everybody is, is on alkaline because it represents the bulk of the business.

Okay. And just to be clear, you guys said North American take away in Batteries was 11%, but you're saying North American take away of alkaline batteries was much higher than that, closer to what the sell-in was, more like 30%?

Alkaline sell-through.

Okay. I don't have the data sitting here in front of me, Chris, and I don't want to be -- I don't want to give wrong data. We'll get back to you on that, but I don't know the POS was.

Yes, the Alkaline POS was 11%.

Okay.

That's your question, right, Chris?

Yes, okay. So that was -- Alkaline POS was 11% and sell-in was 30%, is that right?

That's right.

That is correct.

So there was a big disconnect. So you're saying that was pipeline --

Well, I don't know the exact answer, okay, and it -- from quarter to quarter depends on where products are shipped on promotion. I can't recall exactly what the last quarter's alkaline sell-in versus sell-through was, but I think it had somewhat of an inverse relationship and the quarter before that was similar to this quarter. So there's not a direct comparison always between sell-in and sell-through because it's timing of promotional shipments, when Easter occurred this year, what promotions ran against it, et cetera. I'm not aware of an appreciable build of inventory at major accounts as a result of either sell-in or sell-through that occurred this quarter.

Yes, I'm just trying to get at whether -- what's the right way to look at growth --

Yes, well it's a good question, I just can't give you a more sussinct answer than what I have.

Okay, thanks a lot, guys.

It's good both ways.

Your next question comes from the line of [Retha Fuahad Sudah] of Lehman Brothers.

Good morning.

Good morning.

I don't know if you touched on this, but Europe sales trend for Batteries, excluding FX, can you touch on that?

Yes, it's down approximately 2%.

2%, okay.

Yes, we weren't -- in Europe, not like Latin America and North America, we really haven't been able to price up significantly in Europe. But we certainly have seen significant stabilization in that versus what we've seen the past four or five quarters.

Right, and this 2% excludes foreign currency, right?

Yes, that's the local currency.

It was actually up in U.S. dollars by --

They were up 6%.

6% in U.S. dollars, 2% down on local currency, which our characterization is that stayed pretty damn good performance given what's occurred for the last five or six quarters there. And it gives us some comfort that the negative trends in both move to private label and channel shift that we've discussed for over a year have moderated a fair amount.

In terms of the Remington portfolio products in Europe, the sales gains there, is it fair to assume the sales gains there are driven at least in part by distribution gains?

Yes, yes. It's a combination if you -- we've been at it for a couple of years and the first step is to gain distribution in an account and it's normally a limited number of SKUs. And then your selling effort is over the next few seasons to continue to expand your assortment, and so we're seeing some of that. That would not be distribution with new accounts, that would be distribution within accounts.

I see.

And then we do have a very rapid growth plan and initiative to rollout into new distribution and new countries and we have very favorable growth that's occuring in the former Eastern European markets where we had no presence of Remington in the past. And now we have people on the ground in almost every country and we have a lot of growth that's occuring there, and that would be new distribution.

Right. But the Remington distribution gain -- sales gains in Europe, is some of that -- can you -- would you characterize some of the gains as also pipeline sales?

Yes. When we get a new account, yes, the answer's yes, although I can't really give you a breakdown of what piece of that pipeline versus -- versus the other pieces that I just referred to.

I hear you. And then, in terms of the Home and Garden business in the U.S., the cost issues, raw materials, manufacturing efficiency you touched on. Are those issues that are likely to stay with that segment in the coming quarters or are there costs that were lumpy and may fade?

I think you should think of it as the cost issues that we've been faced with for the first six months in that business are, in many regards, an overhang from inefficiencies that occurred in the latter part of last year as a result of transitional issues, distribution problems that we've talked about in the past, that got hung up on the balance sheet and inventory, et cetera, that rolled out over the last two quarters. And you should see little of that that should continue to plague us beginning in the quarter that we're in right now. So the back half of this year we are planning and anticipating significant improvements in that business.

And the raw materials are stable?

Raw materials in total are relatively stable in that business, except for the price of urea and potash has been driven up over the last six to 12 months, principally as a result of this whole issue with corn and ethanol and farmers conversion to corn products. And I'm not a farmer or a farm economist, but it's really -- that's what's driven the cost of the urea up. We have in our business model this year have significant forward purchases of urea, and so it's much less of an issue for us in our FY '07 performance. It could create some issue for us in FY '08 if we don't see some moderation of trends, but we're very focused on that right now.

Fair enough. And then lastly for Randy, do you have an idea of cash and total debt as of today?

No, I don't know as of May 10th what our cash and debt balance is, but certainly the high water mark is the end of March, and you will -- certainly our cash we anticipate in the next 30 to 60 days that we'll put in an asset-based lending vehicle so that we'll have a more normalized cash balance and we will see a good cash flow in the third and fourth quarter that we believe will significantly reduce our debt here in the next two quarters.

Right. And you don't know the cash and debt number as of the end of April either?

I do not have that here in front of me.

Thank you very much.

Yes, thanks.

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

Hi, good morning.

Hey, Lori.

On the cost savings for the realignment, the $50 million that you've talked about, I think before you had been targeting to achieve $12 million of that this year. Is that still the right number and how much have you conceivably achieved to date?

I think the right number -- the latest number somewhere $12 million for this year. Many of the actions that will ultimately get us to the $50 million -- and we're running extremely hard to try to get all of the actions in place this year so that the $50 million comes to us as quickly as possible -- most of those actions either are currently in process or have been taken -- or have already been done, and it's just simply the effects of when that rolls into the P&L. So we're very encouraged and very bullish on our ability to take the $50 million out. Yesterday we had a review of that specific topic and I came away from that believing that we will at least hit the $50 million and that we are either on or ahead of our previous discussions on how quickly we're going to get there.

Has any of it already flowed through or is that all in the back half?

Very small part has hit Q2 and the majority of that $12 million is going to hit the back half of the year.

And when we see it, is that going to flow through the corporate line or within each of the segments?

It'll go through both. Some of it's being done -- so some of it's in global operations, which has been pushed into the businesses and some of it is also at the corporate level, but we'll try --

Okay. And then also on cost savings, is this a total number new, $50 million, because I think there might have also been other restructuring initiatives within Europe and the U.S. that might not have been part of this, and I'm just wondering if that's wrong and maybe it's just this one bucket now?

No, it's -- that's right the way you originally said it. The $50 million is a separate program. There has been many cost initiatives that I know all of you have listened to us talk about over the last six to eight quarters in Europe -- particularly in Europe. We call that project that we called "Slim and Fast," which took down the G&A structure in Europe and the restructuring of the facilities in Europe and the move to China. That's all independent. This $50 million, we set out on January the 10th to restructure the Company into three separate stand-alone businesses and had the objective in that project to take an additional $50 million of costs out of the business. and we will achieve that. And that's the way to think about it, Lori.

Okay. Just separately on marketing, how should we be thinking about this for the rest of the year? I had been under the impression that the big step up was going to be in the first quarter, but it sounds like from your prepared remarks that it was up again in the second quarter. I guess, first, can you quantify the step up this quarter and then also if we should expect similar trends in the back half of the year?

Most -- as you pointed out, most of it occurred in Q1 because that's really the selling quarter in many of our businesses. Some of our businesses also have Q2 aspects. And it has been in our plan for some time to have spent the amount of marketing and advertising that we just reported in Q2, so that's no surprise to us. And think of Q3 and Q4 as maybe a moderate increase in advertising and marketing, but it would be in a range call it 3%, 4% increase, so not the huge increases that you saw in the first half of the year. There was a lot of brand building, strategies around alkaline and Remington, in particular, that were heavily focused towards the holiday selling season, and then -- so a moderation of what we've done. And I don't believe that you will see a significant step up in '08 over '07 levels. I think you'll see a moderate increase in advertising and marketing support. We really think what we did in the first two quarters, which we believe is -- and you can see tangible evidence that it's paying off was the right thing and needed to be done -- but we don't anticipate that we're going to double down on that bet here in coming years.

Okay, great. And just lastly, on other potential asset sales, you've been talking about that for a while, and I'm just wondering timing. Is it possible you could sell something before you sell Home and Garden? Because if Home and Garden is theoretically on hold until after the selling season or after the season in total, would you look to sell something else first or are you going to wait until you sell Home and Garden before you actively explore other sales?

I would say possible, but not likely. We've done a lot of preparation work related to Home and Garden, separation of it financially, carve outs, et cetera, so we're far along in both our thinking and all the work that has to be done to make your thinking reality. And while there is much discussion and much preparation work going on, discussion of other businesses, none of those are as far along. Having said that, I couldn't guarantee you that Home and Garden will go first. Somebody may just have to have one of our other businesses so bad that they could convince us otherwise. I think you should think of it as Home and Garden sequence first, most likely.

Okay, great. Thanks, Dave.

Thanks, Lori.

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

Thanks, good morning, guys.

Hey, Joe.

First question, I did want to go back to an earlier question, I think, from Chris regarding the Battery business. You mentioned, Dave, some new accounts and didn't want to give us color on that. I was hoping you could add to that a little bit and how much that contributed to the 30% increase in selling?

I wish I had the data because I don't have the data, okay? We have -- think of it -- the best I can describe it is think of it this way is that we have spent a lot of time and effort and money and resources to turn around our alkaline business. You all lived through that, redoing all of our branding strategies, redoing our market messages. And we told you that if we were -- when we finally got through that it would be successful and that it would improve our market share. It has done that. We are very satisfied. We have good market share, have had good market share growth, we're very satisfied with where our market position is now and we're showing good momentum. If you were to go back a couple quarters, the fourth quarter of '06 we had a huge increase in alkaline sell-in driven by timing of promotions and other things. And then in the last quarter that I reported to you all, in a Q1 quarter of '07, we did not show that growth. And I talked about the timing of promotions and other things where sell-in and sell-through did not always match, and you're just seeing some of that swing back this quarter.

We're seeing good POS growth, we're seeing good sell-in, we are seeing improved distribution. I'm very cautious about talking about that. We've been working hard, and we lost some accounts way back when and we've been working on regaining those. Some of those take -- some of those are -- we have gained some alkaline distribution. Some we've gained some private label distribution. Some we've gained some hearing aid or other type distribution. The message is our business is healthier than it's been in a long time. We're seeing momentum that we used to see religiously and haven't seen in a couple of years. And I really -- I don't have anymore facts, but I will make a note and focus the next time that we have a call, I will lay out in more detail to you the dynamics of that.

Are these national change you're adding in terms of new accounts?

Some.

Okay. And then moving on to -- actually staying with Batteries for a second, the price increase, are you seeing a sen -- or getting a sense that your competitors are spinning back that price increase yet?

Not much would be my sense. I think the overall industry is very healthy and it is not overly promotional. I say that after having spent now almost 11 years in the industry where we've -- I've seen it go both ways significantly, I would call it very much healthy and very normal in that respect. And that's not to say that people are not at times promotionally driven, because this is an industry that drives volume on promotion, particularly around key times. So I don't see anything that makes me worry and I don't see any responses or competitive actions that make me overly worry. I think we said from the outset that our program was not designed as it was back in the late '90s to go grab a bunch of market share. That it was designed to return our market share to normal levels and to create positive momentum, so moderate improvements in market share sequentially, that's exactly what's occurred. And so we really don't see anything on the horizon that should upset our apple cart there.

Okay. And lastly on the Pet side. It sounds like in terms of the Wal-Mart destocking of live fish that you're assuming to be only stayed at 600 doors for your $3 million estimate, the shelf space that used to be live fish, what is that going to? Is it still in the Pet segment or other?

It's still in the Pet segment, but it's gone to -- it hasn't gone all to aquatics, okay? It's gone to increased aquatics plus increased other categories, companion animal categories, where the industry's growing at a pretty fast rate. Not only us. We've had double-digit growth in companion animals for a number of quarters in a row, so has our principal competitors, and so, we've seen some of that shift occur. And they're still -- this is a work-in-progress and they'll ultimately make the decision they make. And they're smart people and they'll figure out how to make the planogram or whatever the end result is the planogram work for them. But we do -- in our planning and in our discussions this morning, it's all based on our belief at this moment that -- and our hope and belief that it will be somewhere 600 to 7 00 stores.

Okay. Thanks.

Thanks.

Your next question comes from the line [Carute Artinson] of Deutsche Bank.

Good morning.

Hey, Carute.

If I could just go back to the Home and Garden EBITDA question that was asked earlier. I thought I heard you say that EBITDA there was about $15 million to $16 million, and I was wondering if you could just run through those numbers again, because operating income of $14.6 million, was that before or after D%A?

Well, when you record a discontinued operation, you are no long -- you no longer amort -- do amortization or depreciation, so that $14.6 million is really after depreciation and amortization. And then there's just some other numbers going through other income. So for the quarter, you can look at Home and Garden as having an EBITDA of approximately $16 million.

Okay, $16 million.

That's without D&A.

And if I heard you correctly with your guidance or you were reaffirming your guidance, the second half will be better in sales and EBITDA, kind of what's in line with the 8-K that you guys put out, correct?

Yes, well I'm not giving forward guidance on this call. We tried to quit doing it but it's a hard thing. But it should be -- yes, I think we're -- that's probably a good way to characterize it. There's no significant changes in what we put out in the 8-K as a result of our refinancing.

Okay. And just in terms of the aquatic category as a whole beyond Wal-Mart, your competitors have talked about softness there and I'm wondering if we could get a little more color on what you're seeing and also on some of the steps you might be taking to mitigate that?

At Wal-Mart, particularly, we have good growth in virtually all of our businesses that are occurring. That's not surprising because Wal-Mart's certainly high growth company. And the only area that we're having trouble with is in aquatics and it's a direct result of this live fish change that's going on in Wal-Mart stores.

Okay. In terms of the battery market, your competitors have talked, yes, that it's a rational market, but some of them have been grousing on market share losses. Are you seeing any early signs of increased couponing or anything along those lines that would give you pause?

Generally, no. The things change and we have promotional periods or a period of promotion followed by a calm. That all occurs in the industry, but we're not seeing particular change or focus. But you have to understand we're the value brand, too. We do not go to market the same way that our two biggest competitors go to market, who are premium, nearly identical priced premium and have very typical promotional and hallow strategies ,particularly in food. So, one, we have a different mix of distribution, and number two, we have a completely different way to go to market. And because that we're the value in player, we're -- not often do we go head to head in that context. So you'd have to talk to those two to understand if they're seeing changes or dynamics against each other that may be more relevant to where you're driving at.

Just in the Pet -- the transitional issues that you had, are we pretty much through that or should we continue to see some impact here in the fiscal third quarter?

I think you're going to see some impact. We have moved a lot of -- we have redone the distribution system of Pet, we're in the final stages to a national distribution network, where -- So there's been a lot of distribution changes, closing of facilities, moving from three PLs to our own facilities and we have had two major plant relocations. The very large facility that existed in High Park, New York has been moved to other facilities. That work is complete, but inefficiencies or costs that we incurred as a result of that are still flowing through the P&L. And then, we have a very large facility move that's occuring next month, June, in Moorpark, California, which is a big aquatics plant, that facility's closing and moving to other areas. So those inefficiencies that you saw some in this quarter, I think you'll see Q3 and Q4 until they're totally washed out. But our initiative is all designed as we enter '08 that we have all of that work done and all of those inefficiencies out of the system. And the net result is they're significant payback projects that should produce improved profitability in '08 and beyond.

And just on urea, are you fully hedged on urea and kind of at what pricing? And also in 2008, what are you seeing on the hedging front for you?

We're hedged for the full year on urea about 80%, which is about as high as you want to go to have an effective hedge for accounting purposes. So we feel that we're pretty well positioned in F '07. F '08 there really isn't a market that goes out more than nine months or so, so there is some concern, certainly if the prices as they are today relating to going into fiscal '08.

And we're focused on that and we're trying to understand where the market is likely to be. Trying to get all the consensus that we can relative to that from experts and then that will lead us, and our competitors who are doing the same thing, to determine what the right pricing actions should be with our retailers in line reviews that will be coming up later this summer.

Just lastly, as you -- have you given anymore thought in terms of the exchange notes and the cash payment? I know you talked about the first payment would be made in cash, but beyond that?

No, no, no thoughts at all.

All right. Thank you very much, guys.

Thanks.

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

Good morning. I have to say I really appreciate the amount of detail that you gave in your prepared remarks on the development of sales. It helps to understand the dynamics, I think, better than we've been able to in the past. So --

Thanks, Connie, and I'll mark that down and make sure I do that in the future.

But I'm not sure that we really understand.

Okay.

As I'm looking at the third quarter, there's a range of estimates out there, maybe they're not all current, but there's a range from a loss or $0.11 to a profit of $0.33. So that's a -- that suggests to me that we're guessing as to --

I don't think -- I'm not guessing -- if you say we're kind of guessing, [do you mean the analyst community?]

No, I mean mean me, being the analyst.

I actually think there's a combination of things out there. Some people have attempted to update their models after or just while the refinancing was going on, because there was good visibility and there was data provided by the Company in our 8-K filing around that refinancing that should be pretty good in terms of at least beginning a modeling process. And there were many analysts who chose to wait until after this call to redo their numbers. So I think you got a combination and that's why you see a wild range out there.

So I guess just as a general question, do you expect to be reporting a profit or a loss in the third quarter?

I expect to be reporting a profit and I expect to be reporting good year-over-year growth.

Great. Secondly, you made some comments of value creation for patient investors, and it's pretty clear on the asset sales that that could lead us there. But I'm also wondering with your new organizational structure if you are considering splitting the Company into two publicly-traded entities?

I don't know where ultimately we will go, but I think the discussion has and will include a wide range of initiatives. And I can't really predict whether that -- each of the businesses will ultimately be sold off and if so in what form or how the ownership would be. But we -- we've been working with Goldman for quite a while. They're awfully good at this and ultimately we hope that the strategy we embark on will create the greatest value for shareholders. But I would not underestimate, in addition to that, the value to shareholders of improved performance.

My belief is that we have spent the last four to six quarters doing an enormous amount of work that is just starting to be reflected and I've said this quarter is the inflection point. This quarter we had EBITDA growth year over year, moderate, slight, but for the first time in a long time. And we think that going forward a lot of the actions that we've taken place will begin to show, and it'll begin to show in Q3 and Q4 and will accelerate in '08 and improved performance. If you look at our debt levels, et cetera, verses trailing EBITDA, we think we will show significant improvements, because this Company is going to improve because of all of the things that we've done. So a combination of better EBITDA or better profit, however you characterize it, EBIT, and in '08, it's certainly going to be better than in '07. And to the degree that we do asset sales in '08, they're not going to be off of '07 run rates, they're going to be off of current run rates, which would be '08 run rates and much improved that we're going to see good, solid, value creation in many respects.

Great. That's very helpful. Thank you.

Thanks, Connie.

At this time, we have time for one ques -- one final question. Your last question comes from the line of Peter Barry of Bear Stearns.

Hey, Peter.

Dave, your prepared comments you mentioned that alkaline growth, particularly in Latin America, continued, if not accelerated. Could you give us a sense whether there is a significant pricing gap and whether it's widened or narrowed between alkaline and zinc carbon in Latin America?

Yes. Peter, number one, there is a good growth that's occuring just in general in the Battery category in Latin America for the industry, which is a solid positive sign. Then as you pointed out, there is this conversion. And Latin America, as most people know, economies are doing pretty well. There's regional GDP growth of sort of 5%, so it's really in pretty good shape. And as a result of that, we've seen this movement back towards conversion to alkaline. When the economies got in trouble here two or three years ago, we saw that stall; now that's beginning to accelerate. And so, that's all positive signs.

What we have to be careful and mindful of is to watch the gap that exists, because historically the gap that has existed between alkaline and zinc carbon of about three to one in terms of pricing, so a much greater gap than if you saw the conversion in U.S. or in Europe, which was sort of a two to one gap. Now we're the leaders in zinc carbon so we have to be mindful of that and protect our zinc carbon franchise at the same time we participate in the alkaline conversion. We've seen that gap over the last year because of aggressive pricing actions that we've taken, not only in alkaline, but in zinc carbon. We've taken more aggressive pricing actions in zinc carbon because the zinc issue is a bigger issue to zinc carbon batteries because there's a greater concentration of zinc in those batteries. And we've seen that gap close to about 2.5 to one, and we've been very mindful of that and probably have been the active participant to make sure that that gap stays in about that area, so that this transfer from zinc carbon to alkaline occurs over time and occurs so that it creates help for all in the industry. I hope that was not too confusing, Peter.

But is the gap -- is the gap as narrow as it's likely to get between zinc and -- zinc carbon and alkaline?

If I were to predict -- let me go up maybe three years, I think the gap would probably go somewhere around two to one, which is what we saw in the U.S. years ago, we saw in Western Europe the last ten years and we have seen in Eastern Europe, which is very much a developing market like Latin America, that we've seen that in the most recent two to three-year period. That's just the Dave Jones prediction is that that's probably what you'll see.

Sticking with Batteries, I don't think you mentioned what your current market share is, Dave, if so I missed it. And what's changed? It sounds like there has been a seat change either in competitive conditions or pricing has been a catalyst. Something clearly has changed in the last several months turning this into a somewhat better environment for you all.

Well, I think you got to start with -- well, first, our market share is between 11 and 12, that's a dollar share. And to put in perspective, it probably -- at our low point when we were having all of our troubles with movement and going to the new program, it probably dipped down to ten -- to ten. And so we've seen a good improvement, not a dramatic improvement, but a good improvement. And just to clarify on the other side, probably our high water mark for dollar market share, branded market share was probably 12, if you go back over the last ten-year period, so we're sort of in a good range. Showing momentum in our business. But beyond that, industry's growing, which the industry quit growing for a while and it's growing. Some of that's driven by pricing, which is also a very good thing. Two years in a row, there has been a 6% to 7% price increase that has occurred in the industry and has stuck in its entirety. So Peter, you've been -- you've follow this industry for a long time and you could go back ten, 15 years, and pricing actions as well as good dynamics grow this industry year after year after year. That's because the last --

(inaudible) running about what, Dave?

I'm sorry?

Unit volumes are running about what?

Unit volumes are probably up slightly, up moderately, 1%, 2%. But again, we went through a period where unit volumes were down. When unit volumes were down post Y2K, pricing didn't occur, market share battle heated up, and a combination of those things created the pain that we all went through in the early 2000's and that just -- we've moved way beyond that dynamic now. There's good reason for why pricing should occur in the industry and it has. And there's good health and there's good profit. The profit pool in the U.S., which is what you're talking about, in the alkaline segment is very good, very healthy, very large. And as we look at battery profit pools around the world, either in geographic markets or particularly categories, it's the best there is and so -- for all. I think that's good signs.

Just a couple more from me. Randy, could I ask you for a currency impact, either by operating unit -- that would be preferred, obviously -- or overall, top line and bottom line?

Yes, I'm sorry, bear with me here a minute. Versus last year, Latin America we saw about $1 million impact currency favorability in sales and slight a bottom line improvement. Europe we saw approximately $10 million improvement in net sales, currency wise. And I'd say net income impact of between $1 million and $2 million, positive. Now in the Global Pet business, we saw approximately $3 million in net sales and about $0.5 million improvement in bottom line.

Okay. I actually had a couple more, but I know you're running short on time here. The one thing I wanted to ask you, Dave, is in the Home and Garden space. Hasn't there been a notable -- other than seasonality a notable gating issue that's delayed the transaction?

You're talking about in terms of the market itself?

No, no, no in terms to have sale of Home and Garden.

We were near sale, Peter, before the season started and that process was shut down. I don't want to go into the details of why, but it was. And because if that sale wasn't consummated before the season started and when we shut it down, I made the decision -- and certainly the board concurred -- that we did not want to keep that going hot and live while we're in the midst of the season, causing confusion by any of our employees or by retailers, et cetera, and so we just put it on hold. That's not to say there's no discussions or dialogue and strategy things this are going on. But the season we need to fulfill and we need to make it successful, and then when we make it successful, we'll get back at it.

That buyer, I assume, is still in the wings?

Maybe, (LAUGHTER) a definite maybe, Peter.

I'll conclude with that. Thank you very much.

Okay. Thanks. You know, we've run over time. I appreciate everybody staying on, appreciate all your time and support -- continued support of the Company. And I truly believe that for those people that have stuck with us and those shareholders [proved] to look a at us as a longer term work-in-progress that there's going to be a reward at the end of the day. Thanks, have a great day.

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