Spectrum Brands Holdings Inc (SPB) 2007 Q4 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Spectrum Brands fourth quarter conference call. (OPERATORS INSTRUCTIONS) I will now like to turn the call over to Vice President of Investor Relations, Ms. Nancy O'Donnell. You may begin your conference.

Thank you. Good morning, everyone, welcome to the Spectrum Brands Q4 earnings call. First of all, I want to apologize for the delay in getting our release out this morning. We had some technical difficulties that precluded us from getting it out on a timely basis, and I apologize for that. In just a moment, I'm going to turn the call over to Kent Hussey, our Chief Executive Officer, and Tony Genito, our Chief Financial Officer. But, before I do, let me remind you all that our comments this morning include forward-looking statements. These statements are based on management's current projections and assumptions and, as such, contain an element of uncertainty. Actual results may, in fact, differ materially.

Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements noted in our press release and those outlined in our most recently filed Form 10-K and 10-Q. We assume no obligation to update any forward-looking statements that we make today. I also want to remind you that in addition to our GAAP financial results, we discuss certain non-GAAP financial measures, including adjusted diluted earnings per share and adjusted EBITDA. When we use the term adjusted EBITDA, we are referring to a number that reflects EBITDA contributions from both continuing operations and discontinued operations, and excludes certain elements of earnings that are unusual in nature or not comparable from period to period. We believe these non-GAAP metrics provide incremental helpful information about results of operations and serve as an additional means to analyze the company's financial performance and identify trends in its operating results.

In addition, adjusted EBITDA can also be a useful measure of a company's ability to service debt and is one of the measures used for determining debt covenant compliance. The non-GAAP metrics, while useful supplemental information, are not intended to replace the company's GAAP results and should be read in conjunction with those GAAP results. We provide a reconciliation of adjusted diluted EPS and adjusted EBITDA to GAAP results in the table in today's press release, and we'll put that information on our website as well. So with that, I'll turn the call over to Kent.

Thanks, Nancy, and good morning, everyone. We're very pleased to share our fourth quarter results with you today. I believe we clearly demonstrate that our business is on the right track. Our GAAP EPS loss is unusual in that we recorded some significant non-cash charges this quarter. These charges were related to the valuation of intangible and other assets in several areas of our business. Tony will walk you through this in more detail later in the call, but let me point out that, one, these are all non-cash charges; two, they are related to historical issues and performance; and three, we do not believe they are predictive of or will have any impact on the future results of our three business segments. My mantra since I became CEO in May is that with the global realignment we implemented last January, Spectrum Brands has the right organizational structure and the right management team in place. This quarter's operating results demonstrate the payoff.

We're focused on improving the profitability of our three business segments, and we accomplished that goal across the board in Q4 with more to come in fiscal '08. I look at fiscal 2007 as a year of two halves. For the first six months of this year, we were on a downward trajectory that began in 2005. Sales growth in the first six months was about 2.5%, or actually down slightly using constant currency, and adjusted EBITDA declined 34% year-over-year. On a trailing 12-month basis, adjusted EBITDA had been declining for the past two years. However, we bottomed out in the March quarter with trailing 12-month adjusted EBITDA of $237 million, and that is including our Home & Garden operations. Remember, we announced our reorganization into three product focused stand-alone business units on January 10, and immediately began to change our organizational structure. This was completed by the end of March. As a result, second half of the year has been a different story.

Net sales increased 8.4% for the second half of '07, or 4.3% on a constant currency basis in spite of the worst lawn and garden season in many years in the April to September time period. Even more importantly, adjusted EBITDA improved significantly by 28% year-over-year. We believe this positive trend represents a C-change in our business. From my perspective, we are not in a turn around, we have completed a turn around. We're focused. We're putting the distractions and challenges of the past years behind us, and we're moving aggressively to improve profitability. I'm as confident as I have been in recent years that we are doing the right things, and I expect further improvement in our business in fiscal '08.

We reported net sales of $548 million from continuing operations, a 13% increase as compared with 2006. Adjusted diluted earnings per share from continuing operations before restructuring and other nonrecurring charges was $0.23, and Q4 adjusted EBITDA, and this includes our Home & Garden business, was $92 million, or $278 million for the full year 2007, well above our earlier expectations. You may recall we guided adjusted EBITDA expectations down to a range of $260 to $264 million on July 12 after we suffered the decline in our lawn and garden business due to harsh weather in April. Our fourth quarter results reflect the fact we are building on the momentum we began last quarter and starting to reap the benefits of the hard work we've done and are doing to improve profitability. We generated top-line growth in all of our business segments, across all geographies, and across all product categories with the one exception of our outdoor lawn and garden products. Let me repeat that we achieved significant adjusted EBITDA improvement $34 million for the year-over-year growth in this quarter. That's a 59% improvement. We're excited about the progress we have made, and we're very focused on continuing this positive trend.

Now, let's take a look at our product category sales on a global basis. We were very pleased with the improvement in our Global Battery business where sales grew 9% this quarter. This reflects improvement across all geographies, including Europe. Sales of Remington Shaving and Grooming and Personal Care products grew 35% globally or 27% on a local currency basis, also driven by growth in every geographic region. Global Pet sales finished out the fiscal year on a strong note with 5.5% growth in the quarter. And in our Home & Garden business, which is accounted for in discontinued operations, even in the face of some very challenging weather conditions, sales for the quarter grew 2% versus last year, with 17% growth in household control products more than offsetting weather-driven slower sales in lawn and garden products.

Let's drill down and look at the growth drivers by business segment. First, Global Batteries and Personal Care where we generated robust sales growth of 16% during the quarter. The biggest driver of that growth was Remington, where sales increased 36% year-over-year. Remington's international sales continue to be very robust with year-over-year growth of more than 30%, or 26% in local currency. This growth was primarily driven by SKU gains of existing customers and distribution gains within our current geographic footprint along with some early gains from our rollout of Remington in eastern Europe. We also achieved 30% plus growth in North American Remington sales, a nice turn around in this region.

Now let me hasten to point out this improvement is in part attributable to the fact that some of our key retail customers moved their holiday sets -- moved to their holiday sets earlier than usual this year and, and as a result, we began shifting in for the holidays early as well. This phenomenon, which occurred in both Remington and batteries, resulted in some sales accelerating into the fourth quarter of 2007 probably to the tune of $10 to $15 million in the Global Batteries and Personal Care segment. Remington sales also benefited from good retailer acceptance of our new products. We have an exciting lineup of compelling Remington Shaving and Grooming products on the shelf this holiday season, including the new Code Young Men's Shaver, Clean Exchange, the world's first dry shaver with a replaceable cutting head unit, in addition to our upgraded classic Remington shaver. We also have good distribution with our 10-in-1 personal groomer. We're optimistic we're have a successful Christmas season as a result.

In personal care, which is primarily women's hair care products, sales increased 32% driven by strong point of sale for our growing line of products. This segment is traditionally not a featured line during the holidays. However, we will be introducing a whole new line of products next spring, and we'll update you on that in our next quarterly call. Global Batteries sales increased 9% versus last year, or approximately 3% in constant currency. Partly driving this increase is the growth in Europe. Yes, that's right. I said growth in our European batteries. For the first time since 2005, we generated a quarterly year-over-year sales increase in European batteries; 3% on a local currency basis, and 11% in dollar sales.

We had good results from our selling of our new and improved Varta brand alkaline batteries featuring Boris Becker as our spokesperson. In addition, rechargeables are showing good results. As we've mentioned before, we believe the industry is reaching an equilibrium point for private-label share, and we're hopeful that we can maintain our branded business at current levels going forward. The support for this belief is that our Euro denominated general battery sales in western Europe have been stable over the last six to eight months. Latin America continued its trend of strong performance with battery sales growth of 12%. Brazil, Central America, and Columbia, were the strongest performing regions. Growth was largely driven by successful pricing taken in the zinc carbon category which still makes up the bulk of battery sales in the region. North America showed 4.5% growth which we attribute primarily to timing issues of key retailers. As I mentioned some retailers moved to holiday promotions even before Halloween this year, and so we shipped in a fair amount of product to support that. Of the 10 to 15 million in timing issues we mentioned earlier, approximately half of that pertained to batteries. Also, we're benefiting from improved shelf presence and product placement at key retailers, fueled by a couple of exciting on-pack promotions.

I mentioned in our last call we were working on an executing program with one of the world's leading entertainment companies. Today I'm most pleased to announce we signed an exclusive three-year agreement with Disney under which we have rights to feature all Disney and Pixar characters on Rayovac packaging, promotions and in merchandising. In addition we will be the exclusive supplier of batteries to all Disney parks and will be identified as the official battery of Walt Disney World, Disney Land, and all Disney resorts. This holiday season we have an exclusive promotion with Wal-Mart where we're shipping in Rayovac batteries with Mickey Mouse, the Disney princesses, and characters from Pixar's Cars on the Rayovac package. You'll find these packs in Wal-Mart today in the toy department and in the infant care aisle. This relationship is another validation that Rayovac batteries are the same quality and performance and other premium brands. So, go buy some Rayovac batteries and get more magic for your money.

We're also doing a nation-wide on-pack promotion with the Salvation Army this Christmas season. Salvation Army logo is prominently displayed on the Rayovac package and a portion of the proceeds from each sale will be donated to the Salvation Army. This is a high-profile partnership for this time of the year and October POS for both of these promotions is extremely encouraging. Our expectation for fiscal Q1 of 2008 is that we'll see good year-over-year point of sales growth in North American batteries. However, sales growth (inaudible) will likely be more limited since we got some of the (inaudible) benefit during Q4.

We had a good quarter in Global Pet as well, where we generated fourth quarter sales growth of 5.5%, the highest growth quarter this year. We experience continued strong performance from the companion animal business with sales growth of 11%, which was largely driven by successful brand extensions and increased distribution of some key brands. The introduction of companion animal products in Europe also contributed to the improve. Aquatic sales grew 3% on a global basis. North American aquatics was soft, down slightly in line with industry trends. Decline was more than offset by robust aquatic results in Europe and Asia, where our Tetra business grew in double digits. International growth is attributed to very strong demand for both indoor and outdoor aquatic products further assisted by strong currencies in Europe and Japan.

Finally, in our Home & Garden business, which is reported in discontinued operations, it contributed net sales growth of 2% this quarter. The outdoor lawn and garden season ended with no relief from the weather challenges we had seen throughout the season, and fertilizer and control sales declined about 5% in Q4, generally in line with the rest of the industry. Our household insect control sales, however, grew a very robust 17% this quarter. As you all know, the industry experienced some unpredictable and erratic weather patterns this year, and while we suffered from cold weather and then drought conditions on the lawn and garden side earlier in the season, we did get a sales boost from very rainy conditions in Texas and the Gulf Coast during the fourth quarter. This caused a resurgence of bugs and insects and, therefore, a strong demand for Cutter, Repel and Hot Shot products. Matter of fact, our Home & Garden for the month of September were the highest in the company's history in spite of the weather. So we ended the season on a high note.

Line reviews for next year are largely complete, and we have locked in pricing increases in the teens for fertilizer and other growing products in low single-digit increases in outdoor controls. This pricing should more than be -- should more than sufficiently offset anticipated [urea] cost increases and will assist in improving gross margin levels in fiscal 2008. We made significant improvements in the operating performance of our Home & Garden business during fiscal '07, although the financial impact of improvements was masked by weather issues. After an '06 someone marred by integration issues, we returned to 95% plus customer on-time and fill rates in '07. And as validation, we were recognized by Lowes as their most improved vendor in the category this year.

This operating improvement gives us confidence in the underlying fundamental strength of this business, and assuming a normal season, whatever that is, in terms of weather next year, we expect to see top-line growth and significant adjusted EBITDA improvement in '08. To summarize, from an overall company perspective, we were very pleased with sales performance this quarter. Again, we are not expecting continued 13% growth every quarter as nice as that would be. Our Q1 sales in North America will be impacted by the timing issues we mentioned earlier and, to a lesser extent, in Europe as well and we, like everyone else, are feeling a little cautious about consumer spending in the overall economic environment.

In terms of our exposure to a slowdown in the economy, first of all, I would say that we will be impacted by a slowdown just like every other consumer product company. However, we think our value alternative positioning in many categories insulates us to some extent relative to our peers. Feedback from some of our largest customers suggest they are expecting softness their high-dollar categories, but not so much in the lower expenditure and seasonal categories, such as the ones in which we participate. Our fiscal '08 plan calls for modest organic revenue growth in all categories, but I think we'll know better what to expect when we see what the holiday season holds for retailers a few weeks from now. As you think about expectations for fiscal '08, I want to encourage you to pay attention not so much top-line growth as to segment profitability, including adjusted EBITDA.

Since I assumed the CEO role, I have challenged each of our business leaders to focus on improving profitability not just through cost-cutting but through a number of smarter business practices that will contribute to earnings. Let me give you some examples. First, we've implemented an aggressive SKU optimization and rationalization program. Key initiative for 2008 in a number of our product categories, particularly Home & Garden and Remington. Reducing the number of SKUs we offer will meaningfully reduce production costs, inventory warehousing costs, working capital needs, and the complexity of our back-office operations. This initiative should begin to contribute to margin improvement and increased product profitability and cash flow in fiscal '08. Another example of smarter business practices is the identification of valuation of products, SKUs or customers that do not meet minimum goals for contribution for operating profitability.

We have taken aggressive pricing in some product categories, particularly fertilizers, to bring margins in to a more reasonable range. Where we are not able to do so, we will selectively exit some relationships. For instance, we will likely decline to continue participating in private-label battery contracts in Europe to the tune of as much as $30 million this year. While a negative on the top line, this step will actually improve operating profitability and allow us to focus our energies on customers and products that are driving the profitability of our business. On the cost-cutting side, we've talked about the 35 million impact from cost savings that we are anticipating next year. That improvement will be partially offset by head winds, such as increased commodity costs. Despite the offsets, we expect improvement at the adjusted EBITDA level, resulting from our more efficient cost structure. So, again, our goal for '08 is not just to grow sales, although that certainly is one of our goals. But more importantly, our number one goal for '08 to make Spectrum Brands a more profitable entity. I encourage you to measure our performance using that metric.

Now, before I turn the call over to Tony, let me address our recent decision to postpone our strategic asset sales process because I know many of you have questions about that. While I can't share all of the details, suffice it to say, we saw significant interest in the asset we were marketing from strategic as well as financial players. However, in early discussions, a number of interested parties indicated that the recent credit environment made it difficult for them to get what we consider to be a reasonable valuation for this extremely valuable property. I want to emphasize that this decision was made from a position of strength, not weakness. We believe the up side potential to holding on to the business and allowing credit conditions to ease far outweighs the down side risk. It benefits no one, equity holders or debt holders, to divest one of our strategic assets at anything less than a full and fair valuation.

Don't know exactly what the timing of the sale may be, but we believe this business will only become more attractive and more valuable with time. As we're confident that it will continue to demonstrate business and positive profitability momentum. We are still committed to reducing our outstanding debt and leverage through the sale of assets. However, since we do not anticipate liquidity issues that would force us to make a decision based on short-term considerations, we intend to the deliberate and thoughtful about the process in order to protect the long-term interest of all of our stakeholders. Our operating businesses are healthy. Our financial performance is improving, and we believe we are positioned to deliver operating profit growth next year. From my perspective, that's a good position to be in. I'll now turn the call over to Tony to go over the financial details.

Thank you have, Kent. Good morning, everybody. Before I go through our operating trends, let me walk you through the charges we took that impacted our GAAP earnings this quarter. As you know, GAAP accounting pronouncements can be very prescriptive and complex with regard to carrying value of assets. Part of our normal year-end reviews and closing processes, we revalued a number of assets using most recent actual performance and reasonable yet conservative assumptions. This resulted in a number of impairment charges or the establishment of valuation allowances against certain assets.

One of the charges was a non-cash impairment charge related to our Home & Garden business. U.S. GAAP requires that assets classified as held for sale be recorded at the lower of their carrying amount or fair value less cost of sale. Fair value is estimated based on an reasonable selling price taking in to account current market conditions. Although we remain committed to selling this asset, with all of the uncertainty in the credit markets, we do not know exactly what the time willing be. Taking in to account this uncertainty in timing, coupled with the weather-related lower than expected performance during the past year, we have reduced the carrying value of these assets.

The resulting recorded value approximates $515 million. As Kent mentioned earlier, the fundamental strength of the Home & Garden business has and continues to improve and, as a result, we believe the attractiveness and value of the asset will increase in the future. This charge has a ripple affect on the allocation of our interest expense between continuing and discontinued operations. Per GAAP, we allocate interest expense to discontinued operations. With a reduction in the carrying value of our Home & Garden business, interest expense allocated to discontinued operations has been lowered proportionately by approximately $6 million while interest expense in our continuing business has likewise increased by $6 million. As a result of this reallocation, interest expense related to discontinued operations totaled $12 million in Q4. The allocation of interest expense in fiscal 2008 between continuing and discontinued operations, will be based on these same assumptions.

The second non-cash charge we took in Q4 relates to our U.S. net deferred tax assets. To date, the company has reported its deferred tax assets assuming that we will use U.S. net operating losses to shield future gains from asset sales. Again, although we remain steadfast in our desire to sell assets, taking in to account the current credit markets, we are uncertain when those sales will occur. As a result we have provided a valuation allowance against our U.S. net deferred tax assets in the amount of approximately $200 million. This, again, is a non-cash charge and of course does not affect in any way, shape, or form, our ability to utilize these net operating losses in the future.

In addition, this valuation allowance in no way changes management's belief that we will utilize these net operating losses against future after-sale gains and operating products. We also took a non-cash charge of $24 million against certain trade names primarily related to our Varta battery business. This charge is a result of an annual goodwill and long-lived intangible asset impairment testing required by GAAP. Again, all of these charges are accounting driven and they are a reflection of the underperformance of our business in the recent past. They do not involve the outlay of cash and, as Kent mentioned earlier, they do not have a business impact on operations going forward. With the closing of the books for fiscal 2007, we believe we have taken a reasonable, yet conservative approach to our balance sheet and to the valuation of all of our assets. So with that out of the way, let's move on to talking about the business.

As Kent noted earlier, our continuing operations generated net sales of $548.2 million this quarter, a 13% improvement over last year's fourth quarter sales. We incurred restructuring and related charges of $14.6 million in cost of sales during the fourth quarter. These charges related primarily to significant head count reductions at all levels within the organization, including our corporate office, that were designed to streamline operations. In the fourth quarter of last year we incurred $18 million of restructuring related charges. Excluding these charges for both years, gross margin for the quarter was 38.9%, representing an improvement of approximately 60 basis points versus last year. Manufacturing cost cutting and downsizing initiatives accounted for the majority of the improvement.

Operating expenses in the quarter were 147 million, excluding restructuring and related charges, or 26.9% of sales as compared with an adjusted 147 million, or 30.3% of sales, last year. This difference does not reflect the impact of currency on our operating expenses. While FX provided a positive impact on sales this quarter, it impacted operating expenses negatively. On a constant currency basis, operating expense would have declined by an additional $10 million, further reflecting the benefit of the global realignment cost-saving initiatives. Reported operating income of 7.2 million this quarter compares with a reported operating loss of 415 million last year. That comparison is not really apples to apples because, as you recall, last year's operating expenses included an impairment charge of 433 million related to long-lived intangible assets and good will. If you exclude that impairment charge and restructuring related charges for both years, fiscal 2007 adjusted operating income is 66 million this quarter, or 12% of sales, compared with 39 million, or 8% of sales, last year. We expect this improvement in operating income to continue in to fiscal 2008 fueled by the remaining 35 million in cost savings anticipated next year related to the global reorganization announced in January.

Moving on to segment profitability, Global Batteries and Personal Care segment profitability increased by 72% to $54.5 million. There are two drivers of this improvement. First, it is obvious that the solid increase in sales volume we generated in both batteries and Personal Care contributed significantly. The second driver was the cost savings from our fiscal 2006 European restructuring initiatives and, once again, the benefits from the 2007 global realignment initiatives. The majority of these 2007 cost savings were targeted at the Global Batteries Personal Care segment, and we believe they represent real sustainable improvements to the profitability of this business.

Our Global Pet Supply segment generated profits of $21.9 million, representing 15% of sales compared with last year's 18 million or 13% of sales. This -- the increase cost we experienced this year as result of supply chain and distribution consolidation are behind us and we are starting to see cost stabilize and profitability improve in this segment. Corporate expense was $8.2 million versus last year's 10.8 million as a result of cost savings across the board. Largely, these were head count related reductions. Fourth quarter interest expense was $53.1 million compared to $31.9 million last year. Remember, that there was an additional $12 million allocated to discontinued operations this quarter. At this point, we have fixed the rates on about 75% of our total debt for 2008. Our fiscal 2008 average interest rate is projected at approximately 9%. We anticipate that full-year fiscal 2008 interest expense will come in at around the $230 million mark, of which approximately 45 million will be allocated to discontinued operations.

Depreciation and amortization expense was 16.7 million in Q4. Next year, we are anticipating DNA in the amount of 60 million as a result of lower capital spending both this year and next. Discontinued operations showed loss of 179 million in Q4, primarily attributed to the impairment charge of 168 million coupled with charge of approximately 54 million representing that portion of the deferred tax asset valuation allowance that was related to discontinued operations. This business generated sales of 125 million and EBITDA of 5 million this quarter versus 122 million and 3 million last year. Gross margin pressures from rising your [urea] costs were more than offset by reductions in operating expenses. Fiscal 2008, we currently have about half of our your [urea] needs hedged of about $330 per (inaudible). Spot prices have spiked to over $400, so we do have some exposure there. Okay.

Let's turn to cash flow. Including Home & Garden, our Q4 operating cash flow was $135 million, and we define that as EBITDA adjusted for working capital changes, less cash interest of $59 million, and cash taxes of $3 million. We also spent 5 million on capital expenditures, 22 million on cash restructuring, and 4 million of fees associated with closing on our ADL facility resulting in free cash flow of approximately 104 million in Q4. This is significantly higher than our earlier expectations. We, of course, benefited from higher sales in EBITDA this quarter. We were also very disciplined about capital spending, and we aggressively focused on receivable collections as well.

With $70 million in cash on hand at September 30, and the borrowing availability under our recently closed 225 million asset-based facility, we believe we are very well positioned to fund working capital needs for all of our businesses in fiscal 2008. Cash tax payments were 21 million in fiscal -- in fiscal 2007, which I think is a very good run rate to use for next year. Full-year fiscal '07 cash restructuring costs were $70 million, higher than planned, but that should reduce our next year's payments to around $30 million. Outstanding net debt at quarter end was $2.39 billion, which is in line with what we expected. This was made up of gross debt of $2.46 billion, less $70 million in cash on hand. Our ABL facility was undrawn at quarter end. Our senior leverage ratio at quarter end was 4.67 times, well within the maximum requirement of 7.5 times and one full turn lower than just three months ago as a result of our strong cash generation and EBITDA improvement.

In summary, our fourth quarter results showed significant improvement from an EBITDA standpoint. A 59% increase. Full-year EBITDA, including Home & Garden, was $278 million, pretty darn close to our original forecast for the year back in March. This compares to a trailing 12-month EBITDA of 238 million as of March 31. That's 40 million, $40 million in EBITDA improvement in just six months. This improvement is the result of a lot of hard work, and we've got a lot more to do. We are very confident in achieving a 35 million in cost improvements we are anticipated next year as the actions necessary to secure them have been taken already. This should help offset an estimated 30 to 35 million increase in commodity costs before factoring in any assumed top-line growth in our business. So we think we're in a good position to continue the trend of EBITDA improvement as long as the economy holds together reasonably well. This concludes my prepared remarks. I'll turn it back over to Kent for his concluding comments.

Thanks, Tony. At this point I'll just reiterate Tony's statement that we're confident we're doing the right things in improving the profitability of our business model. We certainly have challenges yet to face, but the trends are positive. We look forward to continuing that upward trend and updating you on our results as we go throughout fiscal '08. At this point, I'll turn it back to you, operator, for the Q&A period. Thank you.

(OPERATORS INSTRUCTIONS) Your first question comes from the line of Connie [Maneti] of BMO Capital Markets.

Good morning.

Good morning, Connie.

Let's see you mentioned that you are reviewing products, SKUs, and customers that don't meet sort of minimal profitability targets. What is the order of magnitude of sales that these pieces represent?

I can't give you a specific number. I can say specifically, as I did on the call, that in Europe we have identified private label battery sales to customers where we're not meeting minimum standards for profitability, and we intend to either significantly price-up products or to withdraw from those customers. That's about $30 million. Here in Remington, as you know Remington is a -- is a category that's driven by product innovation and new product introductions each and every year. Our goal is to exit underperforming SKUs, replace them with better-performing, fewer, better-performing SKUs so that net-net we actually don't lose any sales in Remington. In fact, we hope we will improve sales. As an example, last year we launched what was called Everest. Because of a lack of discipline, we actually had 29 different SKUs of essentially what should have been a very limited product line.

This year, in terms of relaunching that product or actually the relaunch of the product which will happen in early 2008, we have pared that down to 5 SKUs that we think will meet the needs of consumers. So taking 24 SKUs out of inventory, out of potentially obsolete inventory and out of the system we think will significantly enhance profitability. The goal for Remington over the next two years is to reduce the SKU count by about 30%. The other area I mentioned where we're focusing on SKU reduction is Home & Garden, and we have a similar goal of 20 to 30% SKU reduction, again phased in over the next 1 to 2 years, eliminating non-productive, low volume SKUs and replacing them with fewer high-performing SKUs.

So it sounds then that you might be looking at something on the order of magnitude of maybe 10% of your sales fall in this kind of -- in this -- description?

I can't do the mental math to tell you whether that is right or not. I would just say a substantial portion of Remington and Home & Garden and particularly some of -- again, some of the lower-performing SKUs, particularly in the fertilizer and growing media area.

Okay. And can you explain -- I've -- I'm wondering about this. How come if both the pet business and Home & Garden are candidates for asset sales one is in discontinued ops and the other isn't?

Excellent question. We put Home & Garden in discontinued ops when we were in an active marketing process in 2007. Even though we were not successful at selling that, there still is activity ongoing relative to selling that business. And as a result, rather than returning it to continuing ops because it is not meant to be a continuing op, we have left it as a discontinued operation. In the case of the other strategic asset, we started down a path to have a process to sell it. We stopped it very early, and at this stage of the game, since it's been postponed, the auditors have allowed us to keep that business segment in continuing operations. So it was discussed. There is a logic for what we've done. And one of the strong arguments we used was that to move these business units in or out of discontinued operations would make it even more confusing for investors to understand the real underlying performance of the business.

Connie this is Tony, if I could just add some color commentary to what Kent said. Basically the classification between discontinued and continuing is really driven -- well, there's several criteria if you go to the actual (inaudible), I won't bore you with it, but the overriding is management's intent. And with respect to the Home & Garden business, we -- we -- our intention is to sell that business, as Kent said, there's an active process. There was an active process underway. There is an active process to continue to look for active participates, and it's our intent to sell that asset. With respect to any of our other businesses, although we obviously -- we never received formal board approval to commit the company to sell an asset, it's really been prior -- previously was just to feel out interest and see what -- what -- what value was out there, but the -- let me put it this way, the asset was never in the marketplace. So, it really had to go to management's intent to what level it has been formally approved or allowed to go forward. That's just a little additional color commentary as it relates to the -- how it relates to the GAAP accounting.

Okay. Well, this just opens up a whole list of questions. I guess the bottom line is do you intend to sell both the pet and the Home & Garden business?

Pet is a business that we have clearly stated is for sale. It is in discontinued operations -- I'm sorry Home & Garden. We have never announce what other strategic asset that is for sale. There is another one, that as we said we are contemplating selling when conditions would allow us to do that.

Okay. Thank you very much.

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

Good morning.

Hi, Bill.

I guess to follow up on Connie's question, and I think somebody asked this a quarter ago, but with businesses improving and restructuring behind you, why sell anything? I mean why -- what's the sense of urgency now, especially as you kind of put a toe in the water recently and didn't see the bids that you were looking for. Why not just run all three businesses on a go-forward basis and kind of operate as is?

In the short-term, that's exactly what we're doing. As I said, we're not under pressure. We're not attempting to do something that would undermine value creation for this business. The businesses are improving every day. They are good businesses. They have very solid positions in the industries that they participate in. What I have said to people is at the end of the day, however, the amount of absolute debt and leverage that is on our company is in excess of I think where we should be operating. It brings with it a certain degree of risk that I think is unacceptable for our company. And as I much as I hate to part with one of those three assets, any one of those the assets, because I think they are all phenomenal assets, as I said before I think it is the right strategic thing to do to significantly reduce the debt, the leverage and the interest burden on the company so that the remaining business units then are not at risk for some type of a dislocation that could threaten the well being of the entire enterprise.

As you look out, in terms of priority of sales, I guess garden had been taken off the block due to, one, timing as you were going into the peak season and then we had a pretty tough garden season. Six months from now as you ease your comps, would that take precedence over another business for sale?

It is the one that is publicly stated as being for sale. It is in discontinued ops. I think I tried to convey to you that that business has been dramatically improved on many, many fronts over the last year. Unfortunately, we suffered through the worst weather season in recent memory that dampened the financial results of that business. I think most buyers who would like at that business are in a show-me, don't tell me that it's going to be better next year. And actually, we're sitting here in November, good news is that line reviews are done, positive results, pricing is done, positive results, service levels are up, organizations in place, books have been separated, the business is performing well.

It's very well positioned to execute in the season. The season starts in earnest in January and is over in June. To me, that's right around the corner. And so we'll see how things go early next year. And I think once we demonstrate clearly the true fundamental strength of the business that it will become extremely attractive to buyers who continue to express interest in it. And we'll be able to achieve what I said is a full and fair valuation for the asset.

Okay. Just switching gears. On European battery, certainly it's nice to see growth in that business, but how -- I mean, as you look at it going forward, do you feel like it's really stabilized or are we seeing very easy comparisons or how do you look at it?

If you look at Europe, it's the branded battery business, and the total battery business revenues have been in decline for well over two years. Let's put it this way, they were in a decline for well over two years. If you look at calendar year '07, basically in the first quarter we saw a leveling off of sales. If you look in western and eastern Europe, there's still some weakness in western Europe, but we're growing rapidly in eastern Europe, so on a combined European basis, we actually have had for the last six to eight months relatively flat sales of our batteries denominated in your Euros. So this is not a one-quarter wonder, and we were very cautious about telling anybody up to now that -- we hinted that we thought it was beginning to stabilize. I think now after seeing literally three quarters of stability that -- that it is a reality. Now, that's -- I can't predict what is going to happen next quarter. But certainly three quarters of stability is much more of a trend than one. And so we're very encouraged that -- as I said, we think that this growth of private label is getting to an equilibrium point now and that our branded business is leveling out as well.

Okay. And then just last question on zinc prices, certainly it's been -- I think it has come down from 3700 a ton down to maybe 2700 a ton in the past few months. When would you start to see the benefits of that?

Bill, we're 74% hedged for next year on our zinc purchases, so we're probably not going to see that benefit until, probably talking in towards the latter part of this year.

Of '08.

Of '08, I'm sorry when I say this year. Fiscal year '08. So the -- as you mentioned the price right now, it -- it has been about 2800 a metric ton on the spot market. We're hedged that 74% at a price of about 32.85 a ton, or close to $3,300 a metric ton. So we probably won't see any benefit until the beginning of the fourth quarter.

Yes, let me make one other comment. We're not speculators we're not trying to time the market going up and down and hoping we catch it in the right place. We, with the assistance of some what I believe are industry experts, have developed a very disciplined hedging program. Our objective here is to have predictability and stability in our business. We have a program where every quarter within certain prescribed limits, layer in hedges out in to future quarters, so basically we are trying to average out our cost over a long period of time. Now, when you have dramatic swings in the market up or down, we may be on the wrong side which is exactly where we're at now. You could say we're on the wrong side because we hedged out at roughly 3300 and the market has now dropped. But as we saw a couple of years ago, the market can also go the other airway in a hurry, and it went from 2,000 to 4,000 a ton in a matter of six months. So I think we're doing the right thing to protect the stability and predictability and viability of our business.

Okay. Great. Thank you.

Your next question comes from the line of Grant Jordan of Wachovia.

Thank for taking the question. I believe you outlined about 21 million of one-time costs in the Home & Garden business that occurred in the first quarter and second quarter of fiscal '07. Those are not added back to the 278 million of adjusted EBITDA, is that correct?

That is correct. It is not added back.

Okay. So whenever you talk about 35 million of potential cost savings next year, are those 21 million of one-time costs included there?

No.

No.

No.

Okay. So that would be incremental to the 35 million offset by any sort of raw material head winds.

That is exactly correct.

Okay. How are the Home & Garden inventories at retail heading in to, say, next spring selling season?

Yes. I think they are tighter than they have ever been in history. Obviously with the weather patterns this year, retailers were very nervous, and the numbers I have, and this is -- call it an average of our three largest customers that would account for about 70% of our business, inventory levels are down about 4% over all this year, so we're actually going out of the season with lower inventories this year than last year and, according to people in the business, in a healthy position so that we don't have any hangover going into '08.

Great. And then my final question, you talked about this a little bit in terms of where you stand on your covenants. Just walk us through kind of what are your required senior leverage covenants this year, and kind of your thoughts on those.

Sure. Well, I mentioned that our covenants at the end of this year, are 4.67 times the leverage ratio. Senior. And keep in mind that is on senior debt only.

And that's the only --

That's the only leverage covenant that we have. That's versus a requirement of 7.5 times. Now, next year, it does step down beginning in the first quarter of our fiscal '08, the quarter that we're in right now, beginning 10/1, it steps down to 6.25 to 1. And, you know, that's --

Hold for a year.

Hold for a year and then it steps down again the following year to 5.75 to 1. And year after that granted it drops down to 5 to 1.

Okay. So it is safe to say you feel like you have a good cushion at 4.75 versus 6.25?

I think it's extremely safe to say. In fact it was very, very safe to say. I would say it. I sound like the marathon man right now.

Thank you, that's all I have.

Your next question comes from the line of Ben [Rodinski] of Bear Stearns.

Hi, good morning.

Hey, Ben.

First, just a quick accounting question. Home & Garden I believe can only be listed as a discontinued op for 12 months. Did you get some allowance by our auditors because of your intention?

Yes. Well, first -- Ben, you are right, but it's generally for 1 months. And once you go beyond 12 months, there has to be a reason as to why it didn't sell and what have you done to adjust for that? Or you take it out of discontinued operations. Our case, as we said in our prepared remarks, the -- the turmoil in the credit markets has -- has basically resulted in -- that coupled with the lack luster performance driven by the weather for the industry in total, basically by us taking that impairment charge, we've readjusted, so basically it stays in disc ops.

Let me just give you a little more color. Part of the reason that it is that even though we assume that a transaction will not take place until sometime next year, after the effort that we had to sell the business earlier this year fell through, there have been repeated expressions of very serious interest from a number of buyers, and so there are some ongoing to dialogs and discussions with those buyers. So Home & Garden is not a formal auction process, but certainly as a business it is held for sale and we've told people, if you have an interest, come talk to us. So there are discussions underway. Again, it is not an action, but it is an active sale process.

Okay. Can you give us some color as to what you believe your sell-through market share is in battery for both North America and Europe? And if you can also talk a little bit about what the retail support is, in terms of plantograms for the holiday season and beyond.

In North America, in alkaline batteries, which is the important category, we have traditionally been around 11% dollar share, we range actually between 10 and 11%. I believe the number for the last fiscal year was about 10.6%. So we have actually lost some 10ths of share. Good news is that going in to the holiday season, however, at major retailers, we do have significantly more presence in the main fixtures, and some of the holiday -- what they call power stations that are added. Because, as you know, batteries is a somewhat seasonal item. The biggest quarter of the year is the holiday season.

We have more placement this year than last year. We also have, as I mentioned earlier, the special promotional packs with the Disney characters. Those are in the toy department, which is still one of the segments where there's the most rapid growth, in terms of demand for alkaline batteries, and in infant care as well. Because of the additional distribution, we're optimistic we'll see an uptick in our share during the fourth quarter. So, 11% is traditionally where we run and I that's, I think, where we're going to end up at the end of the fourth quarter. In Europe, our branded share of alkaline batteries across all of Europe, based on the Nielson data we have, is actually about 12%, but we are a major player as a manufacturer of private label batteries. We've always had that mix in our business. So if you look at what's called a manufacturer's share of the alkaline market on a dollar bases, we're at about a 24 share which is maybe one to two points less than we were, say, two years ago.

Okay. In your prepared remarks, you said your restructuring, you believe, is completed?

That's correct.

Does that mean that we will no longer see any restructuring costs?

Well, never say never. I would say that all of the major restructuring of the company is over. We are in an organizational structure that I think is the right structure for the business. We have taken all of the actions, we have exited all the people. There are still -- there are always opportunities, and I think in this case on a much lesser scale to potentially make good business decisions that may result in some additional restructuring charges. I would say any restructuring of the magnitude that we have had is clearly behind us. We have the right structure.

We want to have stability. And so -- and as I said before, I think the only place where there may be additional organizational work is in Europe. We made significant progress this year. But still, we have a goal to continue to improve the profitability in our European business and adjust the business model to make sure we have got the right cost to serve in Europe. We also have -- you saw we took a write-off of some manufacturing assets this quarter, idle assets. We still have a little bit too much capacity, and one of the challenges we have is figuring out how to deal with that going forward. But clearly, the kind of massive restructuring charges you've seen over the last several years are behind us.

Okay.

I'm sorry just wanted to add to Kent's comments regarding -- that's -- Kent was referring to the P&L. Keep in mind that I mentioned in the last call that we do have the cash -- the actual cash related to the actions that we took this year. That remaining cash that has a longer tail that will go into next year impacting our cash flow in '08.

Got it. Okay. And then the last one for me, and then I'll hop back in the queue. Your CapEx in '07 was 23 million versus '06 of 55, 56 million. First, what would be a normalized CapEx for the business? And second, have you underinvested given your interest carry costs over the past six to eight quarters> And that's it for me. Thanks.

Sure. No problem. The average CapEx going forward should be about $30 million. I think that's a reasonable range. You are actually right, the numbers you cited we did -- we had a drop significantly in CapEx. The prior years, though, when CapEx was higher related to the installation of battery lines around the world when we were building capacity. We don't need that any longer. And basically, I think that the 30 million go-forward is a reasonable number, and that number is adequate to address our new-product developments as well as the requirements to maintain and keep the business active and moving forward.

Thank you.

Your next question comes from the line of [Karu Martison] with Deutsche Bank.

Good morning.

Good morning.

In terms of the postponed divestiture, in your conversations with potential bidders, what is your confidence level that it is just the credit markets here, and you can realize the full and fair value that you are looking for?

I would say the strength of the interest and the number of very sophisticated potential buyers who recognize that -- and agree with us -- that Global Pet Supply is one of the most attractive consumer categories that is still out there and available for somebody to take a position in. So, we've always felt that that's a great category and I think a lot of other people see the attractiveness of it as well.

I guess you mentioned that Home & Garden has some ongoing dialog with buyers. In terms of your other asset, are you seeing continued interest, or is that just on a back burner, completely right now?

What we have been told is when you're ready and the credit markets improve, we will certainly be back in with both feet very quickly.

Okay. Last year, if I'm not mistaken we had some incremental advertising, about 14 million year in the fiscal first quarter. Are we going to see that repeat this year?

You are not going to see incremental over last year. But we will continue. We have budgeted monies for advertising in all of our business units. I think this year will be smarter how we spend our money. You'll see Rayovac batteries advertised during the college rivalry week on TV. You'll see Remington ads during the holiday season. We need to do that to compete with our two other competitors. Next year you'll see in Home & Garden resumption of advertising of our national brands, which we haven't done for several years. And then in pet, obviously we don't do a lot of national TV-type advertising, but certainly we advertise, promote and support products primarily at point of sale type activity. We have not cut any advertising budgets in '08.

Taking a little step back on working capital, you sold the Canadian business. That should reduce our working capital needs. I mean, what are you seeing the kind of swing for next year in terms of working capital?

Well, I think from a working capital standpoint for '08, we should see a -- what I'll call free cash flow of positive -- I'll say neutral to positive for free cash flow, which would be defined as our cash flow fall-in. Adjusted for CapEx spending.

Maybe I'll add to that, if you look at the APL, we have a 225 million ABL asset back lending facility. During the course of the year, the average draw on that facile city about $100 million. So we have we believe more than enough liquidity to operate the business even through the seasonal peak period.

If I could drill down a little bit on aquatics here domestically. You were off a little bit for the quarter in line with the market. What are we seeing there as the consumer continues to have a cautious slant?

I don't have a wonderful explanation as to why. I can tell you that the guys in the North American aquatics business have some exciting products and programs that they think will simulate our business in North America. It's kind of unusual that we see continued very strong growth in aquatics in Europe, both indoor and outdoor; outdoor being pond. We have a much smaller footprint in outdoor aquatics in North America. And that's is truly one of the areas where we're putting a major focus so that we can maintain our business in indoor, but we can significantly grow in the growing segment, which is ponds and outdoor aquatics. So I think that's where we're focusing our energies to try to get some growth back in to aquatics back in North America.

Thank you very much, guys.

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

Hi, guys. I just wanted to talk about the writedown in the Home & Garden business. I apologize if you went in to some of this. But it went from 750 to 515. Can you talk about -- other than near-term stuff what drove that? Is that calculation based on a discounted cash flow analysis you guys do to write it down to 515?

No it I don't want to get in to all of the specifics and the details, but the reality is the recorded EBITDA in that business in '06 was in the 70s. Okay. The actual EBITDA of the business as a result of the horrible season and some other, what I feel are nonrecurring costs that hit the business in '07, was in the high 40s. That's a dramatic drop in profitability. That is one of the key things that you have to factor in when you value a business. And so as we said on the call, some of these impairments or writedowns are good conservative accounting based on historical performance. They in no way reflect what I believe the true value of these assets is. So don't get overwrought about the accounting entries. The business, I'll come back and say it again, it's now a totally stand-alone business unit. We have a complete management team in place. We have great line reviews. We have got significant pricing. Our ability to service our customers is better than its has ever been. And barring another disastrous season next year from the weather, I think you'll see a dramatic improvement in the profitability and with it will come a dramatic improvement in the value of the business.

Is that 515, is that -- it's a got be obviously lower fair value or carrying. Is that the fair value in the calculation?

That's our conservative estimate of the fair value.

And I guess a follow-up to that if you had had an offer on the table for 600 million --

Chris, I don't want to speculate, I really don't want to speculate what I would or would not do. I tried to make it very clear to everybody that in the current environment we are not able to achieve a full and fair value for these businesses, and the passage of time will enable us to do that. I can't predict the day or the month that that will happen, but those are assets that will be sold and they will be sold for a full and fair value. And there really isn't anything more I can say about that that. I think speculation about how much and when is non-productive.

Kent, I wasn't trying to get you to speculate, really. Just from an accounting perspective, if you had a 600 -- or if you a $516 million on the offer on the table would the fair value calculation in the accounting rules be 516?

Yes.

Great. Thanks a lot, guys, I appreciate. Your next question comes from the line of Joe Altobello of CIBC World Markets.

Thanks, good morning, guys.

Good morning.

First question is on batteries. Obviously you mentioned earlier that zinc costs have come down pretty aggressively. Are you seeing any signs that your competitors are taking that as an opportunity to increase promotional activity?

No, not at all. Basically the pricing that the industry got this past year of about 7% was very important to help us recover the dramatic increase in zinc costs over the last two years and while they are coming down right now, I don't know whether other people hedge like we do, but certainly our -- our actual cost as a result of hedging are not $28 -- $2800 a ton right now. I think in terms of what is going on in the category, batteries always see an increase, they step up in promotional activity over the holiday season. We're seeing what I call normal promotional activity, nothing out of the ordinary. It's just what you always see around the holidays.

Okay. Perfect. And then in terms of Europe, if you guys do exit this private label business that you are talking about of the $30 million in sales, does that impact your relationship with the retailers who you are now supplying with branded product?

That's why you have to be very careful about how you do it. But certainly there are other sources of supply. One of the things that you find in Europe is there is a lot less -- I have to choose my worlds carefully here. Perhaps value attributed to the full supply of services. What you find in Europe that, thank God you have not yet seen in North America are what are called internet auctions, and it's basically the lowest price wins. And there are people out there who are in a business model of purely supplying private label product, and will be very happy to let those people take that business in the future.

Okay. So the 30 million that you talked about earlier, that -- that is a number that, one, is not profitable for you and, two, you feel like you can go that far without impacting the brand itself?

Absolutely.

Okay. And then on Home & Garden, your major competitor, I guess last week, talked about a major investment program there. Obviously it's a discontinued op for you guys, but that sort of raise the bar? I mean, does it make you guys have to respond? And does it hurt your value in a potential sale?

I'm trying to answer that. I listened to the call myself, I was curious. I listened to the replay. I have to tell you, I was quite confused after listening it to. I'm not quite sure exactly what the connect take away was from the call. One of the things that pointed out was that they cut their management incentive plan this year by $15 million, and they stated that part of the increase in their operating costs next year was that they were -- they plan to reinstate their bonuses, I thought that was pretty interesting.

Just as a factoid, and I think is very important, we had a difficult year the last -- actually last two years. We paid virtually no management incentive last year which was the right thing because we did not perform. We are very pleased this year with the improvement in the performance of our business and we were able to meet or exceed our internal goals, and the number that we posted for this year of $278 million is after we funded an accrued -- an incremental $20 million of management incentive payments this year, compared to last year. Very significant. It shows you the underlying -- the real underlying strength of our business. Now, don't assume that that goes away next year.

Our plan is to continue to meet or exceed the goals we have agreed to with our board of directors. We plan to continue to pay those incentives to the people who have helped us rebuild this business. But it's just example of how we have got upward momentum and perhaps others don't. So I really can't comment anymore about what their plans are or not. We invested very heavily in the last year rebuilding our capability in our Home & Garden business. We have got a top-notch team of managers. We organized our distribution, we run that business on now a stand-alone state-of-the art SAP platform. It's up and running. It's stable. So we have done all of the hard work this year to put us in to a position of being a top-notch, world class competitor next year. I am not quite sure what they're going to do that could knock us off our position right now.

Okay. Then lastly, for Tony, the free cash flow comment you made earlier regarding neutral to slightly up, that is how I would define for cash flow in terms of operating cash flow less CapEx including any cash restructuring you might have next Europe or this year.

Yes, what I -- neutral to slightly up would be the cash flow excluding CapEx but with -- and I might have misspoke. Including CapEx it would be neutral to just slightly down.

Neutral to slightly down?

But it has other -- restructuring and other --

Oh, yes.

That's net-net bottom line.

That's bottom line with any restructuring charges, the hangover that I talked about remaining from the actions we had taken from this year.

Okay.

Okay?

Perfect. Thanks.

And one last point, Joe, before you get off. Just to make sure that -- I think it was evident in Kent's response back to you regarding the Home & Garden business, you had mentioned that -- in your question, even though the Home & Garden business is discontinued as if -- maybe one would not make as much of an invest inspect that business versus the others. I think it was clear from Kent's response that although that business is classified as a discontinued operation, it is our -- our objective obviously to dispose of it, we have treating that as continuing business in the sense of the way it's managed, the way it's run, and it's part of the family until it leaves the family, and we're making all of the right moves.

Okay. Thanks.

Your next question comes from the line of Bob [Whitenhal] of Royal Bank of Canada.

Hi, good morning. Great quarter. Just a recap on some numbers. You're forecasting 35 million of cost savings next year, interest expense of 230, CapEx of 30 million, and cash taxes of 21 million, correct?

Correct.

Those are very -- yes, that's in line with our expectation.

Okay. What are cash restructuring costs next year? Is that going to be up about 30 million as well?

Yes.

Okay. Then -- and you said that working capital is going to be neutral to slightly positive as a source?

No. No. No. I said that the free cash flow would be neutral. The working capital -- we were anticipating a -- a -- a use of working capital next year.

Would you be willing to give a magnitude around that?

One of the things I think I want everybody to understand is don't forget what Tony said about cash flow results in Q4 just ended. We have a phenomenal quarter, in terms of positive cash flow, and some of the cash flow that I think that we planned to come in next year actually came in early this year.

That's exactly -- I think when we look at cash flow for '08, Bob, we need to probably take it over the span of '07 and '08. We were varying aggressive during this year end with our capital spend, which -- our cash -- cash collections with receivables. Those cash collections with receivables we were -- we were so good that we probably are going to see some use -- that's the use of working capital that I see coming out of next year. Bottom line is where we were in the third quarter, when we were having this call, we had our projections for cash flow for '08, I would say that they haven't substantially changed significantly because if you look from '07 to '08 on a continuum, then we're basically where we thought we would be, it's just basically a timing between '07 and '08.

Totally understand that. On the commodity side 75% of zinc costs are hedge, 50% of [urea] costs are hedged. Shouldn't -- wouldn't that protect you, in terms of gross margin? And I think Kent had said that you might see some pressures on that side. I was kind of confused why if your hedged that would be an issue.

Yes. What we're saying is that obviously, just quickly speaking of zinc and then we'll go to [urea]. Zinc is hedged at about the 75% level. If you look at the spots right now, one could argue we shouldn't have hedged but, as Kent said, that's not our position. We're looking to take the variable out of the -- the uncertainty out of the cost line. So, we are hedged 75%. If we were not hedged the remaining 25% and spots held, spot rates held, there would be -- we would obviously have a lower cost. In the case of [urea], I think what Kent had mentioned in his remarks, as well as myself, is that we're 50% hedged with [urea] right now. When you look at the cost of [urea], where it is today, I mean, there has clearly been a spike in that area. Over -- it was $420 a ton as of yesterday. Which, when you compare to where it was last year, 275 a ton, Kent?

Yes. Right.

Just to get the number. So that's rather significant. We have got 50% hedged at about a $330 a ton level, and we haven't hedged that remaining piece which these -- as I mentioned in my prepared remarks, we have got some little exposure there.

Let's be more granular if you are concerned about it. We've projected the unhedged portion of [urea] costs us $370 a ton. Today it is over 400. We have a small exposure there.

Yes. it's a not large.

If you look at across the company, there might be $1 to $2 million exposure on [urea], potash, those components of fertilizers, but clearly if we take advantage of the decline in zinc, there's probably an offsetting opportunity as we finish our purchases of zinc for next year because clearly that's well below the 3 -- the number that we have got factored in.

I'm just saying in the prepared remarks, you guys suggested that higher commodity costs would be a $30 to $35 million.

That's a correct number.

That is that much?

If you look at '07 versus '06 -- I'm sorry '08 versus '07, the total cost -- the projected cost to buy all the commodities versus '07 are up approximately $14 to $15 million.

We didn't -- in our prepared remarks we did not say that that was our exposure.

Right.

We're saying that was the cost increase from '07.

Right. And by the same token, the overall basket of various commodities and things we buy in our Global Battery and Personal Care Business, we see about a $15 million increase year-over-year in those purchases as well.

Okay. So let me just try to summarize that. If you are telling me that interest is 230, CapEx is 30 million, 21 million of cash taxes, and 30 million of restructuring, that is saying that before working capital, EBITDA has to be 311 for you guys to be free cash flow neutral. Is that correct?

I can't do any math that fast in my head.

I'm just saying 230 of interest expense, 30 million in -- let's see 230 in interest expense, CapEx is 30, and 21 million of cash taxes, and 30 million of restructuring payouts on a cash basis, that assumes before any working capital investment due to higher sales, your baseline 311 EBITDA for '08?

We're not making any forward guidance here.

Okay.

Sorry.

That's great. Great quarter. Guys. Thanks a lot.

Thank you. Bye-bye.

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

Hi, good morning.

Good morning.

First question is on lawn and garden. I think one of the comments I have gotten out of Scott since that call is one of the reasons for their caution is the major retailers are just so skiddish about the environment that they are being very tight with their orders for next year so far, and the weather doesn't really turn in to an easy comparison until April, so is there any reason to expect your lawn and garden sales to be up any more than they are here through the next couple of quarters until maybe in the June quarter?

Pricing.

Okay. But -- but not -- not on the volume side? And would the -- and would the retailers as they have in last years, order less than their sell-throughs including in the March quarter and push shipments, demand for shipments out into the June quarter?

They did that this year. They were very cautious. They actually reduced inventories this year, and I don't want to speculate on how they are going to run their business next year.

All right. Batteries. Is the European battery business still bigger than the U.S. battery business?

Yes.

And without accounting for this 30 million in private label that you are going to be deciding about, what is the mix of your European business between branded and private label now?

On a unit basis, it's about 50/50. Okay? I don't really care to comment on the value base.

Yes. Yes. Okay. But, well, with we can work with that. I know one of the issues with Varta is they had been particularly strong in some of the smaller retailers that were losing share to the big retailers.

That's correct.

Has that channel shift ended or stabilized?

It has stabilized. The big, big change in the last two years is what we call the all-D and [ledal] effect which kind of decimated the smaller retailers primarily in Germany and some of the surrounding countries. So as they rolled out their business model and their platform, they have taken significant share of what are called the traditional or specialized trade in that part of Europe, but that's where we see things stabilizing now.

Okay. And my last question -- within aquatics what was the local currency growth of aquatics in Europe? I mean, I know that you were up in Europe, but I just -- can you tell us maybe -- aquatics overall as a company was flattish? Down in the U.S.?

No. No. Aquatics was actually up overall. Down slightly in the U.S. and up double digits in Europe.

How much was it up in Europe ex-currency?

I don't have the percentage calculated.

Like 5% or something?

Yes, we had about $2 million in sales impact from currency in the pet division.

Okay. And that would have been mainly aquatics because that's the bulk of your European business, right?

That's correct. Companion is very small at this stage in Europe.

All righty. Thanks a lot.

Your next question comes from the line of [Reza Bahabsada] of Lehman Brothers.

Good morning. Good morning?

Morning.

Just on -- in terms of consumption and POS trends, can you talk about POS trends in the U.S. for Remington shaving as well as your battery business?

I don't have the latest figures in the U.S. I think the market overall, if you go back 52 weeks, was up roughly 7%. All of that was pricing driven. We were up slightly less than that over the same period. I think our business was up about 5% for the year. However, again, as I'm saying, our presence at retail is up very nicely going in to the holiday season, and the early read is that we -- at a couple of our key retailers that are important to us, we are outpacing the market growth about 2 to 1 right now, largely by these new promotions. So I think POS currently looks good in the battery category. In Remington, as I think most of you will remember, we did not have a good year last year, primarily men shaving, because the product we launched did not perform well in the marketplace. It was not properly positioned or marketed. We have replaced that product. We have gone back to something called the Remington Classic Rotary. It has been upgraded and repackaged and the good news is both a the key retailers here at the U.S. and in Europe where that product has been on the shelf now for the last month or two, we have seen very, very healthy double-digit sales growth POS growth versus last year. So I think that bodes well for the holiday season as well.

Thanks. But for the fourth quarter, would you say that your battery POS -- I'm sorry, I got confused. Was battery POS flat, up, or down for just Rayovac in the U.S.?

I really don't have that answer. I'm sorry.

Okay. I can follow-up. For shaving, you thought you were up in the fourth quarter, in your fiscal fourth quarter?

Oh, yes.

And for North America shipments for battery and saving, do you have that data by any chance?

Shipment in is the sales figures. Remington was up 30% in the quarter. 3-0.

North America?

In North America, yes. And batteries was up 4.5% in North America. Now, again, caution you some of that was due to the fact that some major retailers decided to move to their holiday sets a month earlier than normal. So some of the sales we expected to ship in early October, actually were shipped in September, so -- but it was very, very strong performance in North America in both of those product lines.

Fair enough. And then as far as consumption trends, I know they are hard to attract in Europe, but how would you gauge consumption trends for your Remington business in Europe? Is it in line with your shipments?

Yes.

Okay. And then lastly, as far as 2008, you got 3035 of cost savings -- actually 35 of cost savings, 3035 of cost inflation. So the rest of the EBITDA improvement would be from pricing and some --

Organic growth. Right.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Kevin Stock of Needham & Company.

Good morning.

Good morning, Kevin.

In your it can 10-Q you projected your year end NOL at 718 domestic and 94 foreign. How did you actually end up? If you happen to know that off the top.

Our domestic NOL is -- is approximately 750 million, between 725 and 750 million.

Okay. And how much of that is now reserved by a valuation allowance? Did you decide to reserve all of it?

100%.

Okay. That's what I was wondering. The CapEx number you gave, the forecast that includes Home & Garden just to be clear?

Yes.

Yes.

On the asset-backed facility would you project that peak borrowing would probably occur probably when you are shipping fertilizer out in February and March?

Yes. Yes, March/April time frame is the peak. That's obviously, we really begin ramping up in January and meet the peak in March.

You could near full utilization of that facility?

No. You still have a very, very nice unused portion of the facility?

But what I'm saying is at that time --

That's the peak borrowing, yes.

Okay. Bigger picture question. As someone who does a fair amount of gardening himself, I do understand how much of a factor the weather was this year, but I do wonder whether you are underestimating the cyclical impact, particularly from the housing recession that we're in, on the Home & Garden business as a whole and whether -- it is a discretionary enough --

Let me give you my -- I'll give you my thoughts, and this is one man's thoughts.

Yes.

Housing new starts are down 40%, but that doesn't mean we stop building new homes. The inventory of homes is at a record high because of the building boom we had the last several years and we have still adding to the inventory, number one. Number two, the thing that will be most impacted I think by consumer caution are big ticket items. They are not going to remodel. They are not going to buy a $30,000 new kitchen or a $50,000 SUB, but they may continue to do things that give them pleasure around their home. The home is the center of who we are. When gas prices go up and the economy softens, people tend to cocoon in this country. They spend more time at home. And my belief is, and there are a number of other people in the consumer products business that would agree with me, that people will spend -- continue to make their lives more pleasant, but they'll spend it on less expensive things, and outdoor backyard living is a growing trend. People are moving from living inside their home to outside their home, and so that's, I think, a macro trend, and with gas prices going to 3.50 a gallon, people are going to be driving all over the play. They are going to stay home. So I personally think that there will are a lot of positive drivers that could have a very, very good influence on the Home & Garden business next year. And as to whether Amy Yoder who runs the business grew up on a farm, she spent her whole life in the ag industry, she is more of an expert than I am. She said you would have to be way out in the bell curve, in terms of probabilities, to have two back-to-back years like we had this year. So that's why we're more optimistic about the weather next year.

And you're essentially arguing that the economy could help that business.

I am absolutely arguing that.

Okay. Interesting. Thank you very much.

Your next question comes from the line of Jason Gere of Wachovia Capital Markets.

Good morning. I'll make this quick because I know it has been a long call. Can you talk, Kent, a little bit more -- What's that? Oh, it's only an a hour and a half. Can you talk a little bit more about your thoughts. You were mentioning about consumer spending, a little bit cautious going into the holiday season and good quality at a more reasonable price. Can you talk about how that may translate into more on the marketing side, how you translate that or convey that a little bit more aggressively to consumers?

You know, if you look across our product line, we are the value alternative in many categories. Obviously, the two important categories for us during the holidays are Rayovac batteries. Where we have the same quality, same power and performance as the other guys for 15 to 20% less. It's all about attracting the consumer to consider the purchase of our product and catching them at point of sale, because clearly we don't have budgets that allow us to pound the airwaves like our premium competitors do. For us, it's package, promotion, on-self presence that is really, really critical. We think that between Disney and Salvation Army and proper positioning on the shelf we should have a -- hopefully we'll attract the consumer. The other key business is Remington. We are the value alternative there. Norelco and Brawn have a product well over $100. The sweet spot in our offering is probably in the $40 to $50 range. We top out somewhere in the say $80 range. Again, with a lot of interesting new product, not only in shaving but in men's grooming, which is the fastest growing segment in shaving and grooming, and we have a lot of new product there, we think we'll be in the right position to attract the consumer. I think the consumer may not want to spend $179 for a shaver, but our $59 shaver is going to be in the right place this holiday season.

I guess in terms of the early sell in with the holiday season, and maybe my mind is going, but I don't recall any of your other competitors I guess pointing that out. So I that came as a little bit as a surprise. Was that just more specific to you or was that more industry-wide?

I can't comment about my competitors. I can tell you if you went in to a number of major retailers, they actually had a lot of the Christmas stuff up on display in September, which was -- about a month earlier than they normally do. They are just trying to capture the consumer earlier in the holiday season. So, again, I can't comment on others, but I can tell you clearly we had shipments scheduled for October that actually went in September.

Fair enough. I'll follow up with them separately. And I know you take everything one year at a time, but looking at '08 about the cost savings of 35 million, I mean, how would you kind of look out to '09? I don't mean to jump the gun here. Just trying to think about the following year. I know you said that Europe there might be more opportunities there. But how would you think about where some of the incremental cost savings and potentially a more benign commodity cost environment coming in to play.

Yes, I personally think if we do have more of a global slowdown here that commodities will come back, and that will be in our favor clearly. I think the stability in our org structure will enable us to focus on optimizing our business model. I think there is some more work we can do in Europe, not a huge amount, but I think there's also work that we're focused on now, in terms of perhaps optimizing our manufacturing footprint around the world, particularly in batteries now we seemed to have settled out of a lower level of activity than we had a couple of years ago. The big bang kind of sweeping reorganization is over for this company. We are where we need to be. Where we're going to continue to be going forward. The challenge is to focus the energy of people away from being inwardly focused on reorganizing and cutting costs and doing all those difficult things to being much more successful in the market place. It's taking our energies and being better competitors, better serving customers, better serving our -- the end consumer and hopefully growing our business that way and improving margins rather than by whacking internally.

Okay. Thanks a lot.

Okay. I think we have been on for a little over an hour and a half, actually an hour and some 40 minutes. Hopefully we have tried to give you a full, complete understanding about where this business is. As I said, we are not in a turn around. We have completed a turn around. These are, I think, very dramatic numbers that we posted today. If you peel back and look. We have health in every one of our business segments. We are optimistic about 2008. We're not giving guidance here, but I think hopefully you understand the positive momentum we think we have generated here. And we look forward to delivering good news to you as we go in to 2008. So thanks for joining us this morning and look forward to chatting with you again in January. Operator?

Yes, sir?

You can close us out now. I think.

That concludes today's conference call. You may now disconnect.