Spectrum Brands Holdings Inc (SPB) 2008 Q2 法說會逐字稿

Good morning my name is Justin. I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands second quarter, fiscal 2008 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder ladies and gentlemen this conference is being recorded.

I would now like to introduce Miss [Kerry Skinner] DVP of Investor Relations. Miss Skinner, begin your conference.

Thank you Justin. Good morning everyone and welcome to the Spectrum Brands second quarter conference call. As Justin said, my name is Kerry Skinner and I recently joined the company heading up the investor relations department. I'm very excited for this opportunity and look forward to getting to know each of you as we work together in the quarters and years ahead. You can find my phone number on this morning's press release as well as on our website.

With me today are Kent Hussey our Chief Executive Officer and Tony Genito,our Chief Financial Officer. Before we begin, let me remind you that our comments this morning include forward looking statements which are based on management's current expectations, projections and assumptions and are by nature uncertain. Actual results may differ materially. Due to that risk Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release and in our most recent forms 10-K and 10-Q. We assume no obligation to update any forward looking statements. You saw in our 8-K release on Friday and in our press release this morning that the Home & Garden segment is now being reported in continuing operations. To assist with your analysis we have added some tables to our earnings press release this morning that reflect selected financial data for fiscal 2007 by quarter and the first and second quarters of fiscal 2008 as if our Home & Garden business had always been part of continuing operations. This will provide you an apples to apples comparison with historical results.

Additionally, please note that we will discuss certain non-GAAP financial measures during our remarks including adjusted diluted earnings per share and adjusted EBITDA. The term adjusted EBITDA refers to a number that comprises EBITDA contributions from only continuing operations and excludes certain items that management believes are unusual in nature or not comparable between periods. In management's opinion each of these non-GAAP metrics provide incremental valuable information about our results of operation and serve as one additional means to analyze our financial performance. In addition, adjusted EBITDA can be a useful measure of a company's ability to service debt and is one of the measures used for determining debt compliance under the terms of our senior credit facility. Non-GAAP metrics, while useful supplemental information are not intended to replace the company's most comparable GAAP results and should be read in conjunction with those GAAP results. In Tables Three and Six of our press release we provide reconciliations of adjusted diluted EPS and adjusted EBITDA to GAAP results respectively. That press release is available on our website. Thank you for your attention to these details. At this point I will turn the call over to Kent.

Thanks Kerry. Good morning everyone and thank you for joining us on our Q2 earnings call. As you saw in our 8-K and in this morning's press release our Home & Garden segment will no longer be accounted for as a discontinued operation. Therefore all results we will discuss this morning refer to the results from continuing operations which include our Home & Garden business and for comparison purposes exclude the historical results from our Canadian Home & Garden division which was sold on November 1st, 2007. Let me assure you that this reclassification of Home & Garden should not be taken as a sign that our desire to explore strategic options including divesting certain assets is waivering. Rather, at this time we are not in active discussions with potential buyers from Home & Garden in large part due to tough credit market conditions. Therefore, with no active sales process under way, the timing or even probability of a transaction for Home & Garden is very uncertain. We are; however, still intent on finding the appropriate strategic alternative that allows us to reduce our current debt levels. We are optimistic that the current credit crisis has peaked and we are slowly seeing some signs of recovery. As we have said before, we currently have adequate liquidity to run our businesses. With that piece of business behind us let me move to our second quarter results.

Starting with our top line results. Led by strong growth in our women's personal care and companion pet product segments in a favorable currency impact of $27 million, we reported net sales of $647 million, a 2% increase over Q2, 2007. Partially off setting these positive trends was the impact of a sluggish U.S. economy and continuing tight inventory controls in the retail community. This is impacted sales in both our Home & Garden and North American battery business. More about that in a few minutes. More importantly, we delivered positive results in our primary area of focus, profitability. Adjusted EBITDA improved by $12 million or 23% over the second quarter of 2007. This marks the fourth consecutive quarter of double digit year over year improvement an achievement we are very proud of, particularly in light of the challenging retail environment and rising input costs facing our business. Our latest 12 month adjusted EBITDA now stands at $296 million, an increase of $61 million over the same measurement taken at the end of the second quarter of fiscal 2007. That's a strong 26% improvement and demonstrates that our initiatives are working.

Before diving into the details of the quarter, let me point out important facts to keep in mind as backdrops to all of our business segments results. I think you have seen these trends in published financial and economic data as well as recently released earnings reports for both retailers and other consumer product companies including our direct competitors. First, the less than robust U.S. economy is having an impact on foot traffic in stores. Obviously impacting retail sales and our sales growth across all business units. Second, we saw no improvement in the tight inventory controls being imposed by retailers, in many cases they have moved to a consumption based inventory model. While this trend is noticeable across all three of our segments it is most pronounced in our Home & Garden division where late break in the season, led to later than normal orders on the part of retailers. Store sets in this segment are now staged only weeks before projected demand. Also we are experiencing rising commodity prices and input cost increases in all of our business units. All three of our primary commodity inputs in Home & Garden urea, dap and potash are at all time highs and zinc for our battery business, while lower today than its peak in late 2006, is still higher than we have become accustomed to historically. As a result, where possible, we have used pricing as a means to mitigate these cost increases including two rounds of price increases in our Home & Garden division as well as pricing in pet this year.

Finally, the cost to do business is China has increased significantly in recent quarters. With the recent change in Chinese government back pack subsidies, new labor legislation, increased materials costs in China and the increased cost to transport our goods out of the Far East we are beginning to experience higher costs for products purchased in China. To counter these pressures, we've been and will continue to press for justifiable price increases and will continue our focus on improving our operating efficiencies and on reducing or eliminating any non value added costs in our businesses. To deal with these growing cost pressures we are taking additional steps to continue to make all of our businesses move profitable, including continuing to exit unprofitable or marginally profitable skews, product lines and customers. Increasing efficiencies associated with our shipments especially in Home & Garden by maximizing loads in each truck leaving our facilities. Increasing capital spending devoted to product cost production and operating efficiencies and to avoid any large and negative surprises we will continue to follow our disciplined hedging program for select commodities and currencies which Tony will update you on shortly.

With that serving as a backdrop, let me move into our segment results. Starting with global batteries and personal care, sales for the segment grew by 3.5% over last year to $308 million as a result of favorable foreign exchange of $22 million and global growth of the personal care segment of $16 million offset by lower battery sales. Global battery sales were $195.1 million down 1.4% versus last year due primarily to lower alkaline sales of $7.9 million or 8% largely offset by improved specialty battery sales. Specialty batteries include zinc carbon rechargeable and our micro batteries such as hearing aid batteries. The entire alkaline battery shortfall occurred in North America where the category declined about 3% due to economic conditions and inventory de stocking at selected retailers. Including our lights products total Rayovac sales declined 1.6% from last year.

European battery sales were up 3.3% in the quarter benefiting from positive foreign exchange affects, partially offset by the year-over-year shift from branded to private labels in Europe. However, we have seen no further erosion in our branded battery sales resulting from the shift and believe this trend is stabilized and may in fact be reversing. Combined battery and lighting product sales in Europe were up 3.7%. Latin America's battery sales were also up growing 7.3% over last year. As we told you on the last call we are now seeing the favorable impacts of the aggressive pricing we have taken in the region to recover higher input costs. The region is also benefiting from positive economic growth in many countries which is expected to continue for the balance of 2008. Taking a look at Remington results. Q2 global sales were $90.7 million an increase of 18.1% over last year. Driven by extremely robust results in personal care.

Women's hair care in particular continues to grow at a strong double digit rate in every geographic region. The strength of the Remington brand coupled with the continuous flow of appealing new products is driving this growth. On a year to date basis our personal care product line has grown to be almost as large as our shaving and grooming business. Shaving and grooming products on the other hand were a slight drag to the category for the quarter with sales 5% less than last year's level. The good news for this segment is their long awaited new line of rotary shavers begins shipping this summer. This is the most sophisticated rotary shaving system we've ever produced and we believe this product will get our men's shaving business back on track after two disappointing holiday seasons. We are also launching a major upgrade of our most popular grooming skew this fall which we expect will continue the drive the good results we have had in this fast growing segment.

Remington's North American sales for the quarter came in at $40.8 million or up 2% over last year driven by a double digit increase in personal care offset by some weakness in shaving/grooming as retailers wait for the new products to arrive. However, in international markets both our personal care and shaving and grooming product lines grew year-over-year with total Remington sales for Europe up 31% and Latin America up 67% as compared with last year. Turning to our global pet business again this quarter we are pleased with the performance of this segment where we delivered 4.1% overall sales growth. Net sales increased to $148.5 million up almost $6 million from last year in spite of soft retail conditions. In Q2 we experienced solid sales growth in international markets which is Europe and the Pacific Rim and in our companion animal products which were up 10% improving on the 6% growth we experienced in Q1. Our (inaudible) continues to be North American aquatics which was down about 8%. The good news is that beginning In Q3 we will have anniversaried the loss of aquatic equipment and consumable products at Wal-Mart due to the elimination of live fish at some of their stores. Sales in Europe which were up 20% over the same period last year are benefiting from the launch of our companion animal product line, expansion into eastern Europe, and, of course, favorable foreign exchange rates. Overall the trends for our pet supply business look good. When we look at this industry we continue to see great macro trends, all factors that should enable us to continue growing in spite of the economic slow down.

Turning to our Home & Garden business.I sit here today talking to you from beautiful sunny Atlanta, Georgia, where we have seen warm weather conditions for over a month now combined with enough rain to green up our lawns, hopefully indicating an end to the horrendous drought conditions we saw last year. As you are well aware, what helps drive growth in this business more than anything is good weather. While March was cooler and wetter than normal, April has been better in most of the country. This has resulted in about a one month layer start to the season. We saw a definite pick up in orders in late March and throughout April. So, we are still optimistic that 2008 will be a solid year for our Home & Garden segment.

Focusing only on our second quarter results, weather conditions throughout the quarter were not as strong as in recent weeks as cold temperatures, flooding and tornadoes hit various parts of the country. As I said, the season didn't really break until the latter part of March or early April. Therefore looking in isolation at our Q2 copying against a great weather month in March 2007 sales in our Home & Garden business declined a modest 1.8% to $191.1 million. This was due almost entirely to slow sales in January. To give you a sense of the dramatic seasonality in this business and the almost unbelievable ramp up in production and shipments to provide service to our customers, I'll share our monthly sales data for Q2. Beginning in January shipments were at $25 million. February grew to $60 million and our March shipments were well over $100 million. You can appreciate the challenges of responding to customer orders that are so dependent on weather patterns. We believe we are one of only two companies in our industry that can do this.

As a result of year-over-year growth and listing across our customer base and our new TV, radio and print ad campaigns which are focused on our national brands, we believe we are well positioned to capitalize on this year's growing seasons, which should produce positive results for us during the third quarter. POS for April was up strong double digits in virtually all product categories over last year's level which we believe has restored retailer confidence in the 2008 lawn and garden season. As a result of the rising input costs mentioned earlier, we have implemented two rounds of price increases in Home & Garden, leading up to this year's season with the largest increases in our fertilizer products which has been most impacted by rising commodity costs. However, as the value player in this category, we expect to benefit by offering the cautious consumer more value for his money, a value proposition that we believe should stimulate our business in these trying economic times. I'd like to also point out that our Home & Garden business is more diversify than our major competitor.

Over half of our revenue comes from the sale of high margin control products such as herbicides, pesticides or rodenticides and personal repellents. Sales of these products are weighted more than back half of the fiscal year an input cost increases for these products are much more consistent with general inflation not the unpresidented increases we are seeing in fertilizer raw materials. For your information, fertilizer products account for approximately one quarter of our revenue in the Home & Garden business. With that let me turn the call over to Tony to discuss some of the financial details.

Thanks, Kent. Good morning, everyone. Let me start with a quick review of those items that occurred during the second quarter that I would refer to as unusual. In light of the move of the Home & Garden segment back into continuing operations, there are a few housekeeping items that will be helpful to review with you. First, I would like to refer you to Tables Four, Five and Six of our press release. This expanded disclosure is intended to help you bridge the reclassification of Home & Garden as part of continuing operations. We are providing selected data for all of fiscal 2007 by quarter and the first and second quarters of 2008 to show the results included in our U.S. Home & Garden business as if it had always been included in our continuing operations. In addition, we have excluded the Canadian H&G business which we sold last November. This should help you in your analysis as all comparisons will then be on an apples to apples basis.

Second while being accounted for in discontinued operations since October 1, 2006 in accordance with generally accepted accounting principles, we had ceased recording depreciation and amortization associated with the Home & Garden business. As a result of our reclassification to continue in operations again in accordance with GAAP we have recorded a catch up in DNA of $17.1 million or $10.7 million net of tax, which reflects the five quarters impact and is shown as an unusual item in our press release. In addition keep in mind that the second quarter results from continuing operations of our H&G business also include D&A of $3.5 million or $2.3 million net of tax.

Third, GAAP prescribes that when assets are reclassified from held for sale to held and used, those assets are measured individually at the lower of their caring value prior to be classified as discontinued for their current fair value. We performed a fair value analysis of all of our Home & Garden assets and as a result during Q2 we recorded an impairment charge of $13.2 million or $8.3 million net of tax related to the write down of certain trade names. This impairment charge will not result in future cash expenditures. And finally in addition to the items I just mentioned we recorded $5.2 million or $3.5 million net of tax in restructuring and related charges in the quarter which primarily related to additional costs for our 20007 global realignment. With those items behind us let me move onto our income statement. The adjusted diluted loss per share before restructuring and related charges and other items was $0.14 compared to a loss of $0.30 per share last year.

Please refer to Table Three in our press release for a full reconciliation of our adjusted diluted loss per share to our GAAP loss per share. Loss profit for the quarter was $234.6 million up 4.8% over last years level of $223.8 million. Within cost of sales we incurred restructuring and related charges of about $200,000 this quarter related to head count reductions taken as part of our 2007 global realignment while we recorded $6.7 million in restructuring related charges in Q2 of fiscal 2007. Gross margin for the quarter was 36.3% versus 35.3% for the same period last year. Operating expenses for the second quarter were $222.9 million which included a non-cash and tangible asset impairment related to our H&G business of $13.2 million and restructure and related charges of $5.2 million. Last year's operating expenses for the second quarter were $420.3 million but included a non-cash $214 million impairment of goodwill, an $11.2 million of restructuring and related charges. Reported operating income for the quarter was $11.7 million as compared within an operating loss of $196.5 million last year. In addition to the improved operating results from our businesses, this increase in operating income was primarily due to significantly lower impairment charges this year versus last year. As Kent mentioned one area that we are particularly proud of is our growth in adjusted EBITDA. for the quarter, consolidated, adjusted EBITDA was $66.2 million, a 23% improvement over last year.

Moving onto segment profitability, our global batteries and personal care segment generated profits of $24.7 million and 11.8% increase over last year's results. Similar with last quarter the two major drivers of improvement were the cost savings associated with our global realignment and a 40 basis point improvement in gross margin which is due to more efficient operation of our manufacturing plants. Our global pet supply segment generated profit of $15.3 million as compared with $16.4 million last year, down 6.7%. This decrease was due to higher (inaudible) costs and foreign exchange affects. Price increases have already been implemented and should benefit our profit in the back half of the year. In Home & Garden we generated a segment loss of $500,000 as compared with profits of $14.8 million last year. Included in this year's expenses were $20.5 million related to higher depreciation and amortization. As I mentioned earlier, $17.1 million related to the five quarter catch up and $3.5 million related to the D&A that would normally be recorded in the quarter for the segment, none of which was included in 2007's numbers. Excluding the catch up, the improvement in operating profit was primarily due to product mix, price increases and cost controls we have implemented. Our distribution costs in Home and Garden improved this quarter despite higher fuel costs due to efficiency improvements we have made to consolidate shipments.

Before moving on, let me run down our hedge positions since commodity price increases are certainly impacting our cost to do business. Currently our hedge positions for our two largest commodity needs are as follows: for zinc we are currently hedged 75% for 2008 as an average price of $3,245 per metric ton. Average zinc prices last year were $3,181 per metric ton. The current spot price of zinc, which topped out in November, 2006, at about $4500 per metric ton, is now just over $2,100 per metric ton. Since we are ahead 75% for 2008 we will see some benefit from the lower spot prices in the second half of this year. However, the lower zinc prices will have a much larger impact on 2009. As an aside, we have hedged 49% of our forecasted zinc requirements for 2009 at an average price of $2,700 per metric ton. For urea we are currently hedged 53% for 2008 as an average price of $337 per ton. Also, we have purchased 36% or our 2008 requirements at market prices effectively locking in roughly 90% of our forecasted requirements at an average price per ton of approximately $375. Average urea prices last year were $243 per ton. Unfortunately the current spot price for urea is approximately $600 per ton which a record high, driven by worldwide demand.

As we have mentioned on previous calls, we typically cannot hedge urea beyond six to nine months forward due to the illiquidity of the market for this commodity. Given the volatility in cost for urea and other key raw material input to our fertilizer business it is difficult to predict the cost impact on 2009 at this time. Moving on, second quarter corporate expenses were $9.2 million slashed by almost half of last year's $17.9 million. Last year corporate expenses included a $4 million charge in the second quarter of 2007 related to the write off of professional fees incurred in connection with the failed attempt to sell the Home & Garden business. The remainder of the variance is driven by cost savings, primarily lower executive compensation expense and other corporate overhead expense reductions. Interest expense for the quarter was $58.3 million compared to $85.2 million last year. However, let me remind you that we completed our major debt refinancing at the end of the second quarter 2007 resulting in a one time pretax charge of $36.2 million in Q2, '07. This included a prepayment penalty of $11.6 million associated with the refinancing of our senior credit facility and the write off of debt issuance cost of $24.6 million. We have now anniversaried this event.

For the full year fiscal 2008 we anticipate total interest expense of approximately $230 million and the average interest rate for the year to be approximately 8.6%. Second quarter depreciation and amortization expense was $35.5 million which included D&A of $7.8 million for global batteries and personal care, $5.6 million for global pet, $3.5 million for Home & Garden and $1.4 million at corporate. Also included in total D&A for the quarter was an accumulative pretax catch up of $17.1 million related to the reclassification of the H&G segment into continued operations. As a reminder, no D&A was recorded for Home & Garden for the five quarters while it was classified as discontinued operations. Turning now to cash flow. Through the end of the second quarter, our year to date cash flow from operating activities was a use of $136 million. We have made capital expenditures of $11 million for the six-month period and have received proceeds from the disposition of our Canadian Home & Garden asset of $15 million.

Turning to our balance sheet and liquidity position. At the end of the quarter we had $81 million of cash on hand and our ABL facility was joined down by $151 million. While we normally hit our peak draw in April, due to the late start of the Home & Garden season, we are just now experiencing our peak. During the next two quarters we expect that our cash flow will turn positive allowing us to end the year with no, or a minimum draw on the ABL. Additionally we expect our full year cash flow to be neutral to slightly negative at the cash interest of $225 million cash restructuring of $33 million, CapEx of $30 million and cash taxes of $20 million. Outstanding net debt at quarter end was approximately $2.562 billion. Our senior leverage ratio was 5.03 times well within the 6.25 times maximum ratio allowed under the terms of our credit facility Total leverage was 8.5 times. In summary, given the rising distribution and commodity costs coupled with retailers tight controls over inventory we are relatively pleased with our second quarter results particularly from a profitability perspective. Our global restructuring initiatives are clearly working. We have consistently delivered increased year over year EBITDA for the last four consecutive quarters. And, as we have said before, profitable growth will continue to be a primary objective for us going forward. I will now turn the call back over to Kent for his concluding remarks.

Thanks Tony. I think Spectrum Brands has clearly demonstrated in its improved adjusted EBITDA performance that our new focus on profitable growth is working. Four straight quarters of double digit year-over-year increases is a solid trend, especially in light of the challenging economy in retail marketplace. We promise to deliver the impact of our $50 million restructuring cost savings to the bottom line and we have, albeit with some erosion due to unexpected and unprecedented, at least in the last 20 years, cost inflation. We promise to focus on profitable growth, not growth at any cost, and we have accomplished that many segments of our business and are committed to do that in every segment and product line in our portfolio.

We are exiting unprofitable or marginally profitable businesses around the world and that is having a dampening affect on top line growth. However, it is paying off in better operating margins in all of our businesses we will continue to run our businesses prudently seeking to recover or mitigate unavoidable cost increases through thoughtful price increases without jeopardizing the important value positioning we have in most of our businesses. We will continue to work with suppliers, especially our key partners who supply us with finished goods to improve the cost effectiveness of the entire supply chain from product design to delivery to our customers. Unfortunately, the increases in raw materials and energy costs are beyond our control. However, the efforts to mitigate these will be relentless. Reality tells me we are in the cycle of cost increases and inflation for at least the near term. With the right organization structure, the right management team, the ability to focus on the key success drivers in the marketplace and in our supply chains, I'm confident we can continue the positive energy momentum we have achieved over the past 12 months. Remember when the going gets tough, the tough get going.

On a final note. I am disappointed we have not been able to deliver on our commitment to sell an asset to reduce our debt and delever our capital structure. I don't think anyone saw what was coming at us in early 2007. The good news is there are many indicators that the worse of the credit crunch is behind us. Many global financial institutions have taken their bad medicine, taken steps to shore up their capital structures and hopefully in the near future get back to business. I'm more optimistic than I have been in some time. The conditions in credit markets will improve to a point where we can deliver on the strategic imperative in the near future. On that note I will open the call to your questions. Operator?

(OPERATOR INSTRUCTIONS) The speaker's request that you please limit your question to one with one follow-up, please. Our first question comes from William Chappell

Morning, Bill, are you there?

I'm here.

Okay.

I guess on the divestiture program you said there are no longer active discussions for the garden business. Can you tell us if there are any active discussions for any of the businesses at this point?

I think you saw a press release that was put out by a major hedge fund that they wanted to take a look at one of our businesses. Clearly, they are not -- they did not look at our Home & Garden business. Let me finish on that point, that there is some activity still under way, some discussions that are ongoing but at this stage of the game there is really nothing I can tell you beyond that, nothing to report. So if and when anything should materialize, clearly we would make a public disclosure. For right now that is the only activity under way.

My follow-up on the fertilizer side, can you tell us -- we heard last night that Scotts said they might be losing share are you seeing significant market share gains in that category and can you give us any idea of what urea is in terms of your commodity cost as part of cost goods sold?

If you take urea, potash and dap, those three together, they are the major raw material ingredients that go into fertilizer, I can't tell you, but I'm sure it is the majority of the cost of sales. Just want to remind you that fertilizer while it is an important product line to us is only about 25% of our revenue I believe it is a much bigger percentage of the revenue of Scott's so it is potentially a much big issue for them. In terms of --

Market share gains?

Yeah, I'm just thinking about that. There are lies, damn lies and market share statistics. Our management says that we are-- I'll use the term out pacing the category with our key customers. So that tells me that things are going fairly well for our fertilizer business this year. We think that may be somewhat due to the fact that consumers may be trading down from the expensive premium brands to value brands and we think that is a good thing. We think they will discover when they do that that our product is just as good as that premium brand and they may not necessarily need to go back to paying the higher prices in the future.

Okay, great. Thank you.

Thanks, Bill.

Our next question comes from Connie Maneaty

Morning. HI. First question is when do you envision an end to all the charges that we can start looking at the company as a company as opposed to an accounting puzzle?

I wish I could answer that question. We are trying, Connie, but GAAP is very prescriptive in terms of its requirements and because of the dynamic nature of the company first a number of years of acquisitions and integration and purchase accounting and then moving businesses in and out of continuing operations and the reality is at some point here we are going to sell an asset and we have to deal with that. It does make it very difficult to understand our business and I'm as frustrated as you are. It is difficult for us sometimes to present financial information to make it helpful to understand what is going on. I think we have tried to do some of that with the schedules we have attached to the press release and some of the materials that is on our website now.

Yeah, I think we all appreciate having the historic pro forma data. But, I was just hoping that with the reclassification maybe we have seen the worst or the most of the charges and things would be minor going forward.

I would think so. One of the things I have said is a lot of the -- certainly we are not going to be doing any acquisitions in the near term and all of that purchase accounting. I have said also we have done major restructuring in this business. We feel we are in the right structure now and the right place, and we have that behind us. And we may have some small projects that come up in the future, but I think as the quarters go by we will have much purer numbers to see how the business is really performing. We have tried to give you an indication of what we call adjusted EBITDA which we think at, this stage of the life of this company, the most meaningful statistic relative to how the ongoing operations is performing and hopefully you find that useful.

One follow-up question as you think about strategic alternatives we are all assuming that the one that makes the most sense is the divestiture. But, are there other strategic alternatives that you are considering structural changes or anything like that?

We have and obviously with the difficulties in credit markets the inability of acquirers to obtain the kind of leverage that they have historically had, multiples of contracted -- it makes it a much bigger challenge to sell an asset for what I continue to say needs to be a full and fair value in a significantly deleveraging transaction. We haven't been able to get there yet. We are still committed to trying to do that. Obviously we don't want to continue ad infinitum with the amount of leverage that we have. We have been actively talking to our advisers and evaluating various other steps to potentially reduce the leverage of the company and improve the capital structure. We are thinking about it. There have been no decisions taken to date. But, certainly they are on the table and under active consideration.

What do those alternatives include if not a divestiture.

Well, one of the things we talk about -- there is a laundry list of things that advisers throw up as things that companies do and I'm not saying we would do any one of these. Raising new equity for the business in a pure equity offering or some kind of a rights offering. Perhaps an equity for debt swap of some kind, those are a couple of things that have been talked about.

Obviously with the very depressed level of our equity right now that's not the most attractive way to fix the balance sheet, but, they are things that we do have to think about and at some point in time one of those things might bubble to the surface. Again what we are trying to do is to rebuild confidence in the underlying businesses here by demonstrating and improving performance. Hopefully at some point in time we will get some benefit from that in terms of the equity value of our company and will make it--- call it more feasible than potentially to consider some of these other activities in terms of fixing our balance sheet. Thank you.

Our next question comes from Joe Altobello

Good morning, Joe.

Hey guys, good morning, how are you. First question I want to go back to Home & Garden very quickly, you guys obviously said you took two price increases this year one preseason and one mid season did you see any pick up or prebuying on the part of retailers ahead of the mid season price increase this quarter.

No, not really. They were very very disciplined about only placing orders when they see consumer demand and take away. So, they're not--- In fact, our numbers say that Home & Garden inventory at retail is down 10% at the end of Q2 versus where it was a year ago. They are truly controlling inventories down to historically low levels.

So the number we saw in second quarter was pretty much a clean number in terms of the top line?

Absolutely.

In terms of pricing for next year Scott's mentioned last night they were going to look at (inaudible) pricing it is sort of an interesting dynamic where the industry leader is waiting for the private label competitor to see what they were going to do. I was curious if you were looking at price increases for next year as well.

In 2007 we led the industry with both rounds of price increases. We will be aggressive. We think it is a mandate for us that if costs have increased dramatically we are not in the business of not creating value for our shareholders and like in so many other parts of the consumer economy whether it is milk or bread or fuel or whatever it is, the consumer is going to end up having to pay for the true ongoing costs of the various goods that he purchases. So we will be very aggressive about pricing up our products to recover our cost increases.

Okay and then lastly, on zinc and batteries, with zinc costs pulling back pretty aggressively the past weeks and months here, what happens to those costs? Do they get spent by competitors in terms of promotion, does it drop to the bottom line? How have other pull backs in the zinc costs been experiencing in the sector.

I can't speak to my competitors. I can tell you that while we've got good news relative to zinc the reality is there are other areas of costs that are increasing, that are eroding those benefits, most recently we saw and I think you have seen one of our competitors talk about the run up in the cost of nickel that goes into rechargeable and other kinds of batteries. More recently we have seen manganese go up in terms of cost in the commodity markets. And that is another key metal that goes into the manufacturing of batteries. I don't see at least from my company that all of that lower zinc cost is going to flow to the bottom line. I think some of it is clearly gong to be eroded by other inflationary cost increases in the input cost in batteries.

Got it. Okay. Thank you.

Our next question comes from Bill Schmitz

Good morning, Bill

Good morning. Hey, can we spend a little bit of time on North America batteries? Can you separate the retailer inventory destocking and the weakened consumer demand based on the economic situation in the U.S. And then also, the number of weeks of inventory if you know in the trade right now and also what it has been historically.

It is very hard to separate what is consumer take away. I think the statistics in Nielsen says that the total category was down about 3%. We saw our business actually down a lot more than that in North America. We actually lost some share during the quarter. So the combination of weak consumer take away, we had some share erosion and then retailer pull back on inventory were all contributors to our lower sales and that was strictly on our output segments. I reported earlier, fortunately some of our other kinds of batteries are doing fairly well and off setting a lot of that weakness in the alkaline battery business.

In terms of the exact week's figure, I can tell you it's single digits. I don't know the exact number. But we do believe they went out of the holiday season with higher battery inventories than they like and that really caused the pressure on sell end during Q2. We believe at the end of the of Q2 the inventory weeks on hand battery inventory in the retail community is back to a level that is where they would like it to be. So hopefully going forward for the rest of the year will be more of a true consumption model they will be replenishing as the consumers take the products off the shelves.

I know it's a big volume game in batteries in terms of manufacturing variances, are you back to the production schedules you were at prior to the inventory restocking in the quarter.

Yeah, we are. Actually the plant in Europe and the plant in North America are running full shifts now and I think we hinted at this. We have actually been able to increase operating efficiencies in those plants. Part of that has come because we've also reduced production in China and we have chosen to load up our western plants here to optimize our manufacturing costs there. So yeah, our plants are running very efficiently right now.

And did you lose any private label contracts in the quarter?

Not by-- in Europe there is an ongoing desire to walk away from or to phase out of these unprofitable or marginally profitable contracts. I think over the course of this year we will ultimately exit somewhere between 25 and $30 million worth of that business. So that's an ongoing process.

Okay. Great. Thank you very much.

Our next question comes from [Carla Casella]

Hi, couple questions, one on the -- are you seeing any impact on the lawn and garden side of the Scott's recalls in terms of better bargaining power with clients or any additional shelf space in other product areas.

No, I think this is a relatively new phenomena. My understanding is that it is -- the particular skews that are affected here are not huge volumes. Obviously wherever their product is off the shelf we will benefit because we don't have a competitor sitting there next to us and I can't give you any specific figure. I don't think it will have a dramatic impact on our business. I think it is more a reputational issue for Scott's than it is a loss of revenue in the short-term.

Great. On the China side of the business, is there any plans to change -- are there other places where you can store some product and at what percentage right now, you're getting from China of your product?

We purchase finished goods from China primarily for our Remington product line. Virtually all of Remington shaving, grooming and personal care products are sourced in China and the other major product line that comes from that part of the world are all of our flashlights that are sold around the world. Yes, what we are doing is two things. Looking potentially for other suppliers in country in China since we already have an infrastructure there. We have a Far Eastern office based in China of sourcing people, purchasing people, quality people, logistics people, et cetera. We have knowledge of how to do business there.

We are working with our suppliers, I think one of the things I alluded to is also in terms of product development finding ways to engineer costs out of the products in ta collaborative fashion is another activity. And then in some cases we are beginning to scout other countries in the region but that is a longer term process and in many cases you are just changing one problem in one country for a different problem in another country. It is not always the easiest thing to do. And then finally, what we have found particularly in batteries, we are actually able to produce batteries in Germany and Wisconsin today at about the same total cost as it costs to produce batteries in China. We have actually -- instead of ramping up production in China, we have ramped it back down and moved a lot of that production back into our western facilities. It is a war that you fight on all fronts and we will continue to do that.

Okay. Great, thank you.

Our next question comes from Jason Gere

Good morning, Jason.

Good morning. Just I guess two questions, one can you just kind of talk in the framework with the cost savings initiatives out there between the restructuring, maybe anything else that is kind of in the pipeline and with that I guess what percentage of pricing is going to cover cost inflation for -- I guess over the next, let's say three quarters if possible?

In terms of restructuring the big impact we are benefiting from now was the complete corporate reorganization that took place in January of '07 and I think we are getting virtually all of the benefit of that flowing into our business as we speak. There is not a big increment yet to be realized there. In terms of future cost savings activities, we are looking at investing some capital and potentially realigning some of our manufacturing activities so there are opportunities there that we have identified in the range of 5 to $10 million of potential cost savings that could flow our way in our global battery business over the next two years. There are some consolidation rationalization projects none of them huge, but a number of small, what I call blocking and tackling projects that we've identified and will be implementing in our global pet supply business that have a 5 to 7, maybe $8 million in potential benefits again that we would realize over the next 18 to 24 months and as I mentioned earlier all the effort that we are going through in the Far East to find ways to either control cost growth of our source products or find lower cost way of acquiring those products.

So, we're back to what what I call traditional value engineering, cost improvement, cost reduction kinds of activities across all of our businesses that, each one in total you can probably add those up, there is maybe $20 million between all the activities we have identified across all of our businesses that we could be going after here for the next two years. In terms of pricing, we have priced up our pet business over the last four to six months. We are starting to see the benefit of that. There is typically a lag between when you announce a price increase and it actually begins flowing into your margin. We are beginning to see that. We should see somewhere in the order of about $6 million worth of that price increase flowing in the back half of this year. We are studying and projecting cost increases in each one of our businesses and we will be aggressive at stepping up and implementing price increases to try to get even or ahead of the cost increase that is we are experiencing. There is more pricing in store for us probably before the end of the calendar year in the pet business.

Clearly as we get into line reviews in our Home & Garden business that will start later this month and go through the summer. We will be discussing price increases there for next year. In our global battery of our personal care business, that's a business where typically we have not been the price leader other than in Latin America where we are the market share leader, fortunately there overall the favorable zinc impacts will offset a lot of the other cost pressures that we have. I think the industry may need to take some pricing there as well and certainly we would want to participate in that if that comes to pass.

It sounds like maybe over the next four quarters or so 75% of your price inflations should be captured by pricing. Is that a fair assumption?

That's very hard to quote that precise a statistic.

Okay. Second question just on Remington in North America. If we could talk-- obviously that is more of a non-staple type product or more discretionary versus-- than some of your other categories. Can you talk about, certainly Father's Day coming up is one of your big periods here. Can you talk about what you are seeing up there on the North American side with consumers kind of shying away from maybe more of those discretionary type products right now?

One of the good things about our Remington business, our battery business and Home & Garden virtually everyone of our businesses is we are selling products at what I call modest price points. If you look at our women's personal product care lines which are a whole variety of products, I would say the majority of the products we sell are priced under $40. Many of them are 15, 20, $30 price points. You are not talking about huge purchases here.

Even in the men's shaving and grooming product line you have to remember that Remington has always been positioned as the value alternative to the very expensive Braun product and to Phillips which has products that cover the mid tier as well as upper tier as well. So, again I think, the majority of our shaving and grooming products are priced under-- at least in shaving under $70, in grooming under $30. Again, being the value positioned player in most of the businesses that is we compete in and selling products that are at, I think, modest or reasonable price points should protect us from some of the economic slow down that is having a big impact in other categories.

Right. But are consumers buying those type of products? I agree with you. You are priced at the right level. Would that-- maybe what your competitors are doing right now, Braun and Norelco?

If you look at the Remington business our personal care business in North America was up 18%.

It is off the charts.

It's off the charts. So, that's the category that is driven by the right product and the right distribution and we are seeing continuing strong growth around the world in the women's personal care business, our men's shaving and grooming is growing in Europe. We have a modest decline in men's shaving in North America this quarter but it is not a big quarter for the sale of those products anyway. So, no, we are not seeing a negative impact on our Remington product line.

Jason, this is Tony, just real quick for the quarter our personal care grew -- our personal care sales grew 47%. Personal care is primarily the women's hair care area 47% in dollars and even if you excluded the impact of exchange which is favorable, we grew 37% in the quarter in personal care. Shaving and grooming-- keep in mind that included in that is the grooming piece which obviously when you look at the Remington business today versus where it was say three years ago,even-- it is probably more focused on personal care and grooming than shaving right now and that's where our strong growth is coming from. And lastly, just as the discretionary products you raised a very valid point, but living in a household with a wife and three daughters, I don't know if they consider those discretionary purchases based on what I hear.

Well, thank you very much for the clarification. Thanks guys.

Our next question comes from [Mike Shretgat]

Good morning, Mike..

Good morning. Just a question--- was wondering, I think you had said in previous calls that will Wal-Mart was already fairly lean on inventory of batteries. Can you talk about, maybe ex-Wal- Mart, what you saw in inventory restocking there and how that has changed.. You said that the retailers are really at unprecedented levels of inventory I guess on the shelf and the time they need to order where they want inventory in. Can you just talk about-- Is that sustainable do you think given what I can imagine the costs must be of many deliveries in very short time frames and the cost of gas and how that is impacting things?

Companies such as ours, major consumer product companies have built the capability in terms of our business model to respond very quickly to the needs of our key customers. We build inventory to forecast. We don't build it to order. We build it to forecast. We have it sitting in our distribution center. We hope we have built the right mix of products. They place orders and we typically ship within 24 to 48 hours and they get the product average delivery time is two to four days. The sophisticated retailer now understands that their key suppliers have that kind of capability. They demand that level of customer service from it. We have built a business model and an infrastructure that enable us to do that consistently.

That has enabled the retailer to reduce the level of inventory he has in his system. Because he knows that when he gets down to a certain level he can rely on people such as Spectrum Brands to get the product there, to get it into his stores and on the shelf. That's really one of the enablers of the retail community being able to do a better job of managing inventories within their system.

Okay, and just one other question. With regards to the cost of zinc and the cost urea how are those two balancing themselves out I guess if zinc is coming down but urea is going up, how much of a decline in zinc can you-- will offset this increasing what seems to be a significant increase in urea

I don't think you should think about it in terms of balancing. We like to think about we have three distinctly different businesses. And, in terms of balancing, I think as I alluded to while zinc is coming down in terms of an input cost in our battery business, we have other cos pressures that are mitigating some of those benefits, so-- there may be a balancing within the battery business.

Totally separately our Home & Garden business-- again I said about 25% of our revenue comes from fertilizer. We are seeing dramatic cost increases in the raw material inputs to the fertilizer business but the way, in that business we are dealing with that is very aggressively pricing up our product to make sure we recover those cost increases. So, I think it is better to think about them separately and each business is dealing with their cost input issues appropriately for their business model, their customer set, their competitive set.

Would you say that the gross margins are-- are they lower in lawn and garden than in battery?

Yes, they are on average, but I would tell you that our gross margins in our fertilizer and growing media business have actually increased in spite of the dramatic cost increases we have experienced because we got out of ahead of it in terms of the size of the price increases that we were able to secure this year.

Good. Thank you.

Our next question is from Reza Vahabzadeh

Good morning.

Just a couple of housekeeping items if I may, Tony, when do you expect working capital to be for the year in terms of use or source or free cash flow. And also, how did the European battery business do on a local currency basis in the quarter?

With respect to working capital, basically, as I said in my prepared remarks, we are expecting our total cash flow, as we've been saying, to be either neutral to slightly negative. Cash flow at this point in time I think overall will be a net use of cash but I think that, , again as I said on the last call I believe I see some opportunity to improve that in the second half of this year. So it almost in a phrase would be a use of a slight use is my

For working capital?

Yes, sir.

And European batteries.

Just a moment. We are looking that up for you.

Thank you.

I can't find it. Tell me where it is. In Euros batteries in Europe for the quarter were down about 2 million Euros. A slight decline in local currency.

In the U.S. battery business, Kent, have you seen any change in competitive for promotional intensity in recent months versus prior year and how do you see consumption trends pan out for the rest of the year? Thank you.

We did see one of the major competitors had a very aggressive promotion during the holidays. That affected us clearly. The good news in the current quarter is that that promotion came to an end. It was a relatively what I call normal period, January through March is not a big quarter for the sale of batteries. There is not a huge amount of promotional activity that goes on this quarter.

Going forward, we saw about a 3% decline in dollar sales in the last quarter according to Nielsen. I would caution people that Nielsen is now only covering less than half of the outlets where batteries are sold. People tend to forget that. We do have panel data for Wal-Mart which sometimes is suspect in the short-term. But I think our projection for the consumption of batteries in North America call it mid to longer term is basically a flat category. As you have seen over the last year it has been in terms of unit volume relatively flat and the dollar growth that we saw in '07 was all driven by pricing. Keep my fingers crossed maybe we will have that kind of experience going forward into ' 09.

Thank you much.

Our next question comes from Bob Whitenhall

Good morning, Bob.

Are you guys expecting a substantial sales increase actually in the second half in your Home & Garden just due to the absence of the drought?

Normally the quarter we are in now, Q3, is the biggest quarter of the year. April, May, June is where you make the majority of sales and the overwhelming majority of the profit for the year and basically, weather conditions are a heck of a lot better this year. We have had a lot of rain. So the drought seems to have subsided in the southeast. Although here in metropolitan Atlanta we still have watering restrictions, but many of the communities outside of Atlanta, they have lifted the watering restrictions which is good news. We have actually seen in the southeast pretty good growth this past quarter and expecting that to continue as we go through Q3. So, we are pretty optimistic that we should have a good Q3.

I remember last year you had manufacturing variances which led to higher cost of goods sold because your inventory was non-normal. From a production standpoint and putting aside pricing and higher potash and urea costs, how big is that delta between your--- if you put aside pricing and inflation and your raw materials, year-over-year what is the size of that variance that we could expect?

That's a level of granularity I don't think I'm prepared to comment on today.

Okay, would you say it's sizable.

No.

One final question, you guys, Tony thanks for putting these numbers out clearer. Your 225 cash interest, CapEx of 30, 33 of cash restructuring?

Yes.

Just to clarify you said cash flow neutral to slightly negative. Does that include the $15 million of new grow asset sale proceeds?

Yes.

Great. Thanks a lot, guys.

Our next question comes from William Chappell

A follow-up on the battery sector. Can you talk about as we have moved into April, do you see any benefit from the Disney licenses and from trade down? Do you expect market share to be stable in the U.S. as we move through the rest of the year?

Well, we actually lost a little bit of share this year. Disney is now in the parks but all the other promotional activities surrounding our license are just getting cranked up. We view that as a positive influence on the business going forward. It is a three-year agreement. We are only into it one quarter now, or maybe two quarters in earnest, and we certainly hope that will help contribute to some-- recapture some of the share we lost this quarter.

In terms of pricing on the battery side, do you really need to wait for the -- I know you are at a price discount right now-- do you need to wait for the competitors to raise prices or could you close the price gap and still have decent volumes.

We think that the price gap we have in the market is where we need to be. I think we talked about in the past the value brand if you want the consumer to believe that we are as good as those two premium guys, a 15 to 20% price gap is believable. If the price gap gets too big, like 25 or 30%, they begin to view us as a price brand and it has a negative impact on our business. We like the positioning that we are in right now. In North America with-- call it approximately a 10 share in the industry, we are certainly not the guerrilla that can lead a price increase. We would have to wait for some industry activity and if there was pricing up, we would certainly want to follow that to maintain the price gaps that we have.

Europe is an economy where, private label is still an issue. It sells at a huge discount to the branded product. So we don't view pricing as being a-- call it near term option there. It is more us finding ways to reduce our manufacturing cost and operate more efficiently. In Latin America as the industry leader in many of the markets down there, we have historically been the price leader and are priced aggressively in many cases multiple times in the year. We did a lot of pricing last year, margins have actually expanded in Latin America in our battery business. We are at a pause right now and don't see to a need to do pricing in Latin America in the short-term but certainly as costs continue to grow we will re-visit that decision.

Thanks for the clarity.

There are no further questions. I would like to thank everyone for joining today's conference call. Have a great morning and afternoon. You may now disconnect.