Spectrum Brands Holdings Inc (SPB) 2010 Q3 法說會逐字稿

Good morning. My name is Andrea and I will be your conference operator. At this time, I would like to welcome everyone to Spectrum Brands third quarter fiscal 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, August 17, 2010. Thank you. I would now like to introduce Mr. John Wilson, General Counsel. Mr. Wilson, you may begin your conference.

Morning and welcome to the Spectrum Brands third quarter fiscal 2010 earnings call. My name is John Wilson, and I'm the General Counsel for Spectrum Brands, filling in for Carey Phelps, our Head of Investor Relations, who is unable to join us today. With me this morning are Dave Lumley, our Chief Executive Officer, Tony Genito, our Chief Financial Officer. Also available on the phone to answer questions are John Heil, President of our Global Pet Supplies segment, and Terry Polistina, President of our Small Appliances segment. Before we begin, let me remind you that our comments this morning include forward-looking statements including our outlook for the full year of fiscal 2010 and beyond. These statements 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 dated August 17, 2010, and our most recent SEC filings and Spectrum Brand, Inc.'s most recent 10-K. We assume no obligation to update any forward-looking statement. Additionally, please note that we will discuss certain non-GAAP financial measures during our remarks, including adjusted diluted earnings per share, adjusted EBITDA, free cash flow, and net sales excluding foreign exchange translation. Spectrum Brands management uses these metrics because it believes they, one, provide a means of analyzing the Company's current and future performance and identifying trends, and two, provide further insight into our operating performance because they eliminate certain items that are not comparable either from one period to the next or from one company to another.

Additionally, I should point out that 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 the Company's debt covenant compliance. Also, management believes that free cash flow is useful to both management and investors in their analysis of the Company's ability to service and repay its debt and meet its working capital requirements. Free cash flow should not be considered in isolation or as a substitute for pre-tax income or loss, net income or loss, cash provided by or used in operating activities or other statements of operations or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity. In addition, the calculation of free cash flow does not reflect cash used as service debt and therefore, does not reflect funds available for investment or discretionary use.

While Spectrum Brands management believe that these non-GAAP financial measures I just mentioned are useful, supplemental information, such adjusted results are not intended to replace the Company's GAAP financial results and should be read in conjunction with those GAAP results. I wanted to caution the audience that although net income is a GAAP measure from which adjusted EBITDA is derived, projected adjusted EBITDA results discussed during this call may differ significantly from net income results due to factors not included in the calculation of adjusted EBITDA. For completed quarters, we provided reconciliation of adjusted EBITDA to their comparable GAAP metrics in table four of our press release dated August 17, 2010, which has been furnished on a Form 8-K filed with the SEC. A copy of the 8-K is available on our website, www.spectrumbrands.com, under the "Investor Relations" section. We will provide reconciliations of net sales excluding foreign exchange during this call.

As reminder, in connection with the Company's emergence from Chapter 11 on August 28, 2009, we adopted fresh start reporting on August 30, 2009. At that time, the recorded amounts of the Company's assets and liabilities were adjusted to reflect their fair value. As a result, reported historical financial statements of the predecessor company are not comparable to those of the successor Company as the results encompass the results of on of operations on and after August 30, 2009. During the course of our comments today, unless we say otherwise, current year results relate to fiscal third quarter of 2010 while any references to prior year results for the fiscal third quarter of 2009. Also, unless we state otherwise, all results provided today for the quarter and for other periods are provided on a pro forma basis assuming that Russell Hobbs results of operation had been included in Spectrum's portfolio since the beginning of the respective period discussed. With that, I'll turn the call over to Dave.

Thanks, John, and thank you for joining us today. It's a very exciting time at Spectrum Brands. On June 16, we added the Russell Hobbs family of small appliance brands to our portfolio including well-known names such as George Foreman, Black & Decker, Toastmasters, Farberware, and LitterMaid. Together, we are a $3 billion global consumer products Company with compelling opportunities for growth and expansion as well as the potential for strong free cash flow generation. Our results of this past quarter which Tony will review with you in a moment were strong with a 4.6% top-line growth, including the Russell Hobbs business for the entire quarter, and nearly 11% top-line growth for the Spectrum legacy businesses, plus the Russell Hobbs businesses since our close of that transaction as compared with the year ago.

I'm confident our businesses are moving in the right direction, all utilizing the Spectrum value model to drive success. This model emphasizes providing value to the consumer with products that work as well or better than our competition for a lower cost while also providing higher retailer margins. We concentrate our efforts to win at the point of sale and on creating and maintaining a low-cost efficient operating structure that allows our top-line growth to contribute directly to our profitability. During the quarter, we continue to achieve market share gains in many of our key product categories. For example, our Home & Garden business was a resounding success with expanded promotions at our top three retailers, and strong double-digit sales growth for the quarter. We continue to expect the gain in both fiscal year 2010 adjusted EBITDA for this segment of over 20% versus fiscal 2009. Including our full-year results from the Russell Hobbs business lines, we continue to expect adjusted EBITDA for the full year fiscal 2010 of $430 million to $440 million with sales growth of 3% to 5%.

Before I turn the call over to Tony to take you through our third quarter results, I would like to take a few minutes to discuss our newest operating segment, which you may or may not be completely familiar with. As I mentioned earlier, we added Small Appliance segment when we closed the Russell Hobbs transaction in mid-June, but you may not be aware of the strong attributes and benefits this brings to our portfolio. With approximately $800 million in annual revenues, $90 million to $92 million in annual projected adjusted EBITDA for fiscal 2010, an average margin of approximately 12%, we're very pleased to have completed a transaction to add the solid and well-known brand names that make up our new Small Appliance Division. Similar to the work Spectrum Brands has done since 2007, this is a business that for the past several years has been extremely focused on driving free cash flow and creating a strong, stable, and predictable business.

Over the past three years, Russell Hobbs eliminated duplicate offices and warehouses and cut excess headcount, including the elimination of over 800 positions or nearly 60% of its total headcount. In addition, as Spectrum has focused its attention on profitable growth, Terry Polistina and his team have eliminated over 80 brands and 1,000 SKUs which were unprofitable. The brands in our Small Appliance segment are top notch with market shares in the top three in most categories they participate in. We have number one shares in six categories with George Foreman, Black & Decker, and Breadman. And bringing this business under the Spectrum umbrella will only strengthen with our already solid customer relationships.

Consumer trends in this business are good. In fact, during the recession, as people are staying home, enjoying their stay-cation, and dining out less, the sales of these products have remained stable. Approximately 80% of our Small Appliance segment is kitchen products with major brands such as Black & Decker, George Foreman, Farberware, and Russell Hobbs complemented by some niche category brands such as Juiceman and Breadman. Like the rest of Spectrum brands family, our major customers here are the big box retailers. The second largest category was about 15% of the annual sales within our Small Appliance segment is home products which is primarily comprised of irons. Black & Decker Irons are number one in the US and Russell Hobbs Irons lead sales in the UK. Making up the remainder of the revenues for the Small Appliance segment are some pet and pest products marketed under the Black & Decker and Littermaid brand names, and some personal care products which should all be solid complements to Spectrum's existing product lines.

Now, let me provide just a little further color on the most notable brands within the small appliance category. Black & Decker has been the number one single brand in the kitchen electric category in the United States for many, many years since the Company acquired it from the from Black & Decker, the power tool company in 1998. We extended the license on these products for the third time in May 2010 and enjoy a very strong relationship with the company. Our second largest brand with an impressive 67% market share in indoor grills is George Foreman. Here we see an opportunity to not only hold onto the strong share we currently have but to also leverage the strong presence and brand name to further expand our healthy cooking options. Behind George Foreman is the Russell Hobbs brand which has been around since 1952 when the first electric kettle was invented. Here our products are more premium, higher end offerings with strong emphasis on design and trusted British heritage.

And finally, another brand I would like to highlight for you is Farberware. This brand enjoys a solid 100-year-old heritage and is known for quality classic styling, tradition, reliability and value. In April 2010, Russell Hobbs purchased the long-term rights to the Farberware brand through the execution of a new 200-year exclusive license. With the exception of Canada, this agreement provides the ability to use the Farberware brand name on portable kitchen electric retail products across the globe.

Hopefully that provides with you a solid overview of the strong brands and products we've added to our portfolio. Now let me turn the call over to Tony to discuss with you our third quarter results. Tony?

Thank you, Dave. It was another strong quarter for the Company led by a great home & garden season as well as over 20% growth in shaving and grooming for the quarter, consolidated net sales for the third quarter were up 4.6% over the same period of last year. Excluding a $5.6 million negative foreign exchange impact, third quarter sales were up 5.3%. For the quarter, we reported a GAAP net loss of $86.5 million, or $2.53 per share, which includes a number of items which we believe are not indicative of the Company's ongoing normalized operations. These net of tax items which total an adjustment of $111.4 million or $3.02 per share are explained in detail in this morning's press release and 8-K. Including these adjustments, we reported consolidated adjusted net income per share of $0.49. Adjusted EBITDA for the fiscal third quarter was $124.1 million, up 1.1% over the same period last year. Excluding $3.5 million of negative foreign exchange impact, adjusted EBITDA was up 3.9% reflecting our continued focus on creating a more efficient and cost effective operating structure.

Now I will turn to our segment level results. Starting with our Global Batteries & Personal Care segment, led by over 20% top-line growth for the quarter in the shaving and grooming product category, and over 20% top-line growth in the Latin American region, where we revamped our marketing efforts and they appear to be driving our strong results, segment level sales were $318.9 million for the third quarter, or up 7.5% over the same period last year. Excluding a negative foreign exchange impact of $4.1 million, sales were up 8.9%. Global battery sales were $194.4 million for the quarter, up 4.8% for the same period last year. Excluding a negative foreign exchange impact of $2.3 million, sales in global batteries were up 6% for the quarter. By region, despite continuing competitive pressures in North America, battery sales in this region were $84 million for the quarter, up 9.1% over the same period last year. This amount included a $400,000 positive impact from foreign exchange. We believe that consumers continue to appreciate the value and quality that we offer as we utilize the Spectrum value model.

In Europe, where we were impacted by negative foreign exchange and where we continue to exit low margin private label SKUs, our battery sales declined to $65.7 million from $73 million for the third quarter of fiscal 2009. Excluding negative foreign exchange impacts of $3.1 million, sales declined 5.8% for the quarter. I should note that our continued exit of low margin private label battery sales is part of an ongoing effort to focus only on profitable growth. In fact, since its peak several years ago, we have voluntarily shrunk our private label battery product segment in Europe from close to 26% to less than 14% today. Meanwhile, our sales of VARTA branded alkaline batteries remains strong and profitable, a mix that we clearly like to see. For the quarter, sales of our branded alkaline batteries in Europe were up 13% over the third quarter fiscal 2009. As a result, profits in Europe were also up, a very positive sign that our strategies there are working.

Moving now to Latin America, our results in this region have noticeably strengthened in the last few quarters. Battery sales in this region were $44.7 million for the third quarter, up a strong 25.9% compared with the same period last year. Foreign exchange positively impacted these results by $500,000. It is apparent that mimicking our marketing strategy that has been so successful here in the US is also working for us in that region of the world. Consumers there will notice labels that proclaim that our products work as well or better than our competitors. And like they find here, we provide a lower price point per battery. This change in strategy to promote our value proposition has provided some positive momentum in this region which we are very pleased to see.

Turning now to our personal care products, as both Dave and I pointed out earlier, our shaving and grooming products led the way for Remington with strong double-digit growth for the quarter. Overall, Remington delivered net sales of $103.4 million for the third quarter, up 10.7% over the same period last year. Negatively impacting these results were $1.9 million of foreign exchange. Of note at Remington this quarter was that we continued to hold the number one foil shaver brand positioned here in the US and the overall success of our flex and pivot shaver as it continues to gain share in various regions across the globe. In addition, new technology such as our frizz therapy straighteners and fashion forward print designs for dryers and straighteners led to solid growth here in our US personal care market.

In Europe, our successful launch of the I-LIGHT at-home laser hair removal treatment product is helping to drive growth in key categories within Remington's European business and was the first to market in many countries in that region. Overall, I'm very pleased with our performance in the Global Batteries & Personal Care segment for the quarter. Our products are maintaining high levels of market share and our value positioning continues to drive sales. In addition, with our low-cost structure, strength in the top line has allowed us to enjoy benefits to the bottom line. For the quarter, adjusted EBITDA for this segment was $43.9 million as compared with $43.3 million for the same period last year. Excluding a negative foreign exchange impact of $2.6 million, adjusted EBITDA for the Global Batteries & Personal Care segment was up 7.5% over the third quarter of fiscal 2009.

Turning now to the Global Pet Supply segment, with an early pond season that materialized in the second quarter this year, and a generally soft overall pet category due to macroeconomic factors, this segment delivered net sales of $135.2 million for the quarter compared with $144.6 million for the same period last year. Foreign exchange negatively impacted these results by $1.2 million. While Nature's Miracle continued to deliver solid growth for the quarter, companion animal sales of our pet supply segment declined 6.8% for the third quarter fiscal 2009. This decline was due in part to less retail and promotional activities in this space coupled with some loss distribution in our grooming business.

The aquatics business was down 6.3% for the quarter compared with the same period last year driven by continued weakness in the hard goods product categories, coupled with continued overall softness in the aquatics category. Despite a sales decline, our successful efforts create a lower cost structure which included the closure and consolidation of some of our pet facilities, coupled with improved product mix resulted in adjusted EBITDA of $24.9 million for the quarter, which was flat with the same period of last year. Exchange only slightly impacted these results with a benefit of $400,000. As we continue to consolidate some of our operations and facilities within this business segment, we anticipate capturing an additional $7 million to $11 million in cost savings between now and the end of fiscal 2012.

Let me move now to Home & Garden segment where a positive momentum and solid POS trends that we reported on our second quarter call continued into the heart of the home and garden season. For the third quarter, this segment delivered very strong sales of $163.6 million, up 10.5% from $148 million for the same period last year, as we enjoyed solid promotional activity at all three of our top customers and solid distribution gains. The segment's top-line growth also drove the improved adjusted EBITDA for the quarter of $43.6 million, up from $41.3 million or 5.4% from the same period last year. And as Dave mentioned earlier, our expected full-year fiscal 2010 adjusted EBITDA for this segment which will capture the entire home & garden 2010 season is projected to show at least a 20% improvement over fiscal 2009.

And finally, let me move to our newest segment. The Small Appliances segment, as Dave discussed, consists of the brands and products that we added to our portfolio as part of the Russell Hobbs transaction. As with all of our numbers I provided so far today, the results for this segment that I'm going to discuss are as if Russell Hobbs had been part of us -- had been part of Spectrum Brands for the entire fiscal year. And for comparison purposes, I will provide their results for the quarter ended January 30, 2009 as well. For our fiscal third quarter, with strong growth in kitchen products, the Small Appliances segment delivered sales of $173.3 million, up from $167.0 million or 3.7% over the same period last year. With a focus on expanding our presence in the healthy cooking category and leveraging the strength of the George Foreman brand, increased promotional spending resulted in a decline in adjusted EBITDA for the Small Appliances segment to $19 million for the third quarter of fiscal 2010 compared with $20.7 million for the same period last year.

Before turning the call over to Dave for his closing remarks, let me address a few of the key details within our financial statements. As you know, our financial statements are prepared in accordance with GAAP, therefore as I note otherwise, the items I will now discuss include the results of Russell Hobbs for only the period from the close of the transaction on June 16, 2010, to the end of the quarter on July 4. With a strong home & garden season coupled with continuing solid market shares in many of our key product categories, the Company's gross profit for the quarter improved to $252.9 million, up 9.8% from $230.3 million for the same period last year. Had Russell Hobbs been part of our portfolio for all of both Q3 2009 and Q3 2010, gross profit would have improved approximately $15 million from $283.5 million, to $298.3 million.

Operating expenses for the third quarter were $193.3 million, up from $146.6 million for the same period last year. The increase of $46.7 million which was driven by several items including $9.8 million due to the addition of the Russell Hobbs portfolio, $15.5 million of legal and professional fees related to the Russell Hobbs transaction, $12 million of increased selling expenses driven by increased sales volume and many of our product categories leading to higher variable costs, $5 million of increased amortization associated with the revaluation of intangible assets in connection with our adoption of fresh start reporting, $2.8 million of incremental restrictive stock amortization, and $1.5 million primarily related to restructuring and related charges incurred as a result of the Russell Hobbs transaction. Corporate expenses for the quarter increased to $9.8 million compared with $8.2 million for the same period last year. This increase of $1.6 million was primarily due to $2.8 million of incremental restrictive stock amortization recorded during the third quarter of fiscal 2010 offset by decreased legal and professional fees.

Interest expense for the third quarter was $132.2 million compared to $48.6 million for the same period last year. The variance was primarily due to several unusual items totaling $82.1 million relating to the refinancing associated with the Russell Hobbs combination. This included $61.4 million of non-cash costs related to the write-off of unamortized net discounts and financing fees on the Company's previously existing debt that was paid off at the time of our closing of the Russell Hobbs transaction, $4.2 million in cash costs related to prepayment fees for the Company's ABL and supplemental loans that were paid off at the closing, $13 million of cash costs related to fees, primarily for the unused bridge loan and backstop commitments, and $3.5 million of cash costs primarily related to the early termination of an interest rate swap relating to our previously outstanding debt that was paid off at closing.

Cash interest for Q3 2010 excluding the unusual items noted above was approximately $40 million compared to approximately $10 million for Q3 2009. Cash payments for Q3 2009 were lower primarily due to interest payments on term debt being [stayed] during the pendency of our Chapter 11. Looking forward, including the $82 million of unusual items that I just discussed, we now expect full-year fiscal 2010 interest expense to approximate $275 million, and our cash interest for fiscal 2010 to approximate $115 million. The difference between interest expense and cash interest for fiscal 2010 is made up of the following -- the $82 million of unusual items I mentioned earlier, PIK interest on our 12% notes of $25 million, $25 million of amortization and financing fees and fair value adjustments primarily relating to our previously issued debt, and lastly, $28 million which relates to higher interest accruals at the end of fiscal 2010 versus fiscal 2009.

Tax expense for the quarter was $12.5 million compared with $7.9 million for the same period last year. Cash taxes for the quarter were $8.2 million compared with $4.6 million for the third quarter of fiscal 2009, as we experienced profit improvements in some of our foreign entities as well as various timing differences and payments year-over-year. As I have said previously, based on the level of NOLs we expect to be able to utilize, including those that were at the Russell Hobbs entity, we do not anticipate being a US federal taxpayer for at least the next five years. We will, however, continue to incur some foreign and state taxes. Cash taxes are expected to approximate $45 million to $50 million annually beginning with fiscal 2011.

Let me turn now to our liquidity. As we ended the third quarter with approximately $116 million in cash, at the end of the quarter approximately $1.563 billion was outstanding under our senior credit facilities which consists of a senior secured term note of $750 million and senior secured notes of $750 million. In addition, approximately $63 million was outstanding under our $300 million ABL working capital facility, which included cash drawn of $22 million and outstanding letters of credit of $41 million. We anticipate finishing our fiscal year on September 30, 2010, with a cash balance of approximately $75 million, zero cash drawn on our ABL facility, and with approximately $40 million committed under letters of credit.

Now moving onto our free cash flow projections, we said during our July 27 Analyst Day presentation that considering the strong free cash flow potential of our businesses, we expect to generate between $155 million and $165 million in free cash flow for fiscal 2011, and $200 million plus for fiscal 2012. GAAP reconciliations for these projections are available in the appendix of the Analyst Day presentation which is available on our website. Our primary focus for this free cash flow will be to pay down debt as we aim to hit our target leverage of three times. Unlike the solid positive free cash flow projected in future years, fiscal 2010 will be impacted in large part by the cash costs associated with the Russell Hobbs transaction and the associated refinancing. Our fiscal 2010 free cash flow is now expected to be a use of approximately $100 million, calculated by assuming approximately $75 million in cash from operations, less $35 million in capital expenditures, and $141 million in cash costs related to the Russell Hobbs transaction.

While the cash provided by our operations is actually expected to be slightly higher than the numbers that we discussed on prior earnings calls, the full year projection of cash flow has gone down due to the $141 million of cash costs related to the Russell Hobbs transaction. These cash costs are comprised of the following -- $56 million of financing fees on our new debt which will be accounted for as a deferred financing fee and amortized interest expense over the life of the debt, $25 million of original issue discount on the new term debt and senior notes which will be charged to interest expense and a corresponding increase to the debt balance over the life of the debt, $22 million which was used to pay off the outstanding Russell Hobbs revolver at closing, $21 million in fees and expenses associated with the transaction, and $17 million of various cash charges related to the write-offs and prepayment penalties that I mentioned in my discussions of interest expense.

In summary, despite what I considered to be unusual items impacting our GAAP results, the operations of our businesses remain strong through the third quarter and I believe they will remain solid going forward. With a focus on delivering profitable growth and creating a low cost and efficient operating structure, our consolidated results provided growth in sales and adjusted EBITDA for the quarter. As we move into our final quarter of fiscal 2010, our businesses are well positioned to continue to deliver strong results and to deliver value to our shareholders. With that, I'll turn the call back over to Dave.

Thanks, Tony. As you have heard from Tony, the third quarter was a positive one for Spectrum Brands with improved top-line growth and adjusted EBITDA. We are very pleased with the success of our superior value brand strategy is driving. We're maintaining or growing share in most of our key product categories, and we're continuing to drive our cost structure down. As I talked about at the start of the call, during this quarter we successfully added the Russell Hobbs portfolio of widely respected brands to our offerings, and in the process significantly improved the financial profile of the Company.

Our integration efforts associated with this transaction are well underway. We're confident we can achieve the target we've set forth of delivering at least $25 million to $30 million in cost synergies over the next few years. In addition, we believe there are additional opportunities to capture revenue and new product development synergies as we begin leveraging each company's regional strengths in complementary categories.

Looking forward, despite fewer calendar days during the fourth quarter 2010 versus a year ago, differences in retailer shipment timing and some increases in commodity costs and foreign exchange fluctuations, we continue to expect full-year adjusted EBITDA of $430 million to $440 million for fiscal 2010, an improvement of at least 10% over fiscal 2009. Beyond 2010, we expect to enjoy strong free cash flow generation from our business units to pay down debt as we target three times leverage or less. Spectrum Brands is well positioned to continue its strong financial results of the global value proposition leader in our space.

While macroeconomic trends are likely to remain challenging, we believe that providing superior margins to our customers and offering consumers the same performance at a better price, or better performance at the same price, that most of our product categories will be a winning strategy as we move forward, providing the strong free cash flow generation that we believe our businesses are capable of delivering. With that, let me turn the call back to the operator to facilitate any questions you may have.

(Operator Instructions) Your first question comes from the line of Reza Vahabzadeh with Barclays Capital. Your line is open.

Good morning.

Good morning, Rez.

You talked about the third quarter sales which were strong in many of the segments, but then you talked about, Dave, retailer shipment timing differences in the fourth quarter. Can you elaborate on that and reconcile the third quarter with your comments on the fourth quarter as well?

Sure. We have six fewer shipment days, or total days in the fourth quarter, so that in itself is six days out of 90 days is significant. So some of that went in the third quarter. You have the same amount of days in every year. In addition, retailers are being a little more cautious about when they bring in inventory, and just because our year ends September 30, and for a lot of our businesses October, November, December is a big period of holiday sales, so that's simply what I meant.

And is six days that the fourth quarter is missing, was that all in the third quarter, or was that spread throughout the first three quarters?

That was spread throughout the quarters, but I believe that one day, Q1 was four days, so it was spread throughout the quarters, Reza.

Tony, what is the fourth quarter EBITDA that we are comparing to, including Russell Hobbs? What is 4Q 2009 pro forma EBITDA including Russell Hobbs?

I don't have that in front of me right now. Was that inside the Analyst Day presentation, I'm --

I'll take a look at it if that's what you think.

Well, let's see. Hold on a second. We're looking at for Q4, this is Russell Hobbs, $21.7 million.

It looks like the projected for EBITDA for Russell Hobbs, you want to know what it was for 2009, right, Reza?

Yes.

About $24.5 million, roughly.

Spectrum did $91 million, so the combined business did $110 million, roughly.

Let us confirm.

Yes, I don't want to necessarily --

We can get back to you. It should be --

It should be inside the Analyst Day, because I believe we had a reconciliation for the full year, $430 million to $440 million estimated results so we should -- it should be inside that appendix.

Got it. Dave, you touched on commodity costs affecting fourth quarter. Can you also elaborate on that? Seems like you've been able to address that in preceding quarters, but you highlighted that for the fourth quarter.

That's a good question. The commodities, whether it be raw materials, or -- that we buy directly for batteries, or for our plants, those commodities that go into our finished goods have gone from being something that we could manage to being a little bit higher now, especially in the battery business, as there are significant increases in a lot of those raw materials. And those are coming in play. And they are what they are, and they're higher, and they're having an impact. Also, all of you on the call, while we've done a very good job of hedging FX, and we continue to do so, there's significant difference between the Euro now than there was last year, and that will continue for the entire fourth quarter, first quarter.

And then which commodity costs are you referring to? Is it primarily zinc or other stuff as well?

There's several chemical things. Some of these letters will not mean anything to you, but besides zinc, there's other -- magnesium, or things like that, that go into batteries that are restrained on production and have higher costs in the world market, as well as, although it's not a commodity, transportation costs, container costs and all that are much different this year than last year for all businesses. So these are affecting all companies right now, and they're affecting us to the point that we haven't hedged or we cannot.

Just to add on to that, we focus in on zinc a lot because zinc is historically a commodity that is used in battery manufacturing, and we're able to hedge that, and we do a very good job as I think everybody on the call is aware that we have a very disciplined hedging program when it comes to our zinc purchases. But there are other commodities, whether they be raw material inputs into the manufacturing process of our products, which again we manufacture around the world, and as well as Dave said, fuel costs, which is a commodity, obviously, but one that may not necessarily go directly into our production but impacts our transportation and shipping costs. But with that being said, where we can hedge, namely zinc, we do.

Foreign exchange, obviously, I know we're talking about commodities here, but we hedge that as well from a transactional standpoint. But one of the chief reasons why we have such an aggressive cost improvement program within our manufacturing operations processes, exactly for this reason, because there's a lot of things that I will say go bump in the night. Nothing is ever linear in business, as we're all well aware, and we are always looking for ways to be more cost effective, whether it be more efficient in our manufacturing processes and also within our administrative type expenses, our back room and the related SG&A and various categories. So we're always looking for ways to try and be smarter and more efficient and more effective to adjust for these things that are constantly coming down the pipe.

Thank you much.

Okay. Next?

Your next question comes from the line of Bill Chappell with SunTrust. Your line is open.

Good morning.

Good morning.

Just couple questions on margins and trying to understand them. Certainly the top line is impressive across the different lines, but especially on the personal care and battery line, it looks like EBITDA margin was down on a year-over-year basis. And if I actually take the accelerated D&A out, EBIT was down maybe close to 200, 300 basis points year-over-year, so I'm just trying to understand what I'm missing in terms of if there are issues in profitability or if there's some one-time charges or something baked in that.

Bill, this is Tony. I would have to go back and look at the numbers, but quite honestly, when you extract out, and I think I heard you say you extracted out the fresh start impacts, our margins are actually looking pretty good. I don't know if I agree with the 200 to 300 basis points that you mentioned.

I'm just looking at the numbers. It looks like most EBITDA growth year-over-year growth came from higher D&A.

That's from an operating expense standpoint, obviously higher D&A is as a result of our fresh start reporting, that's absolutely correct. Just to give you a general sense, on a quarterly impact basis, per quarter, we're looking at about $5 million of incremental depreciation in our gross profit margin and about $5 million in our operating expenses for the amortization side of long-lived intangible assets. So it's about $10 million a quarter that we're incurring on a consolidated basis that's directly as a result of fresh start, and obviously that's for the third -- second, third, and fourth quarters. In the first quarter we had that impact as well as the impact of the write-up of inventories that rolled through in the first quarter, which was an additional $34 million, which really blew up our GAAP gross profit margin in the first quarter so there should be -- are you adjusting it for a total of $10 million per quarter?

Yes. No, I'm just looking at the numbers that have been reported, so that's why I'm trying to understand. Again, I understand that there's EBITDA growth, but it seams like most of that came from the D&A growth, instead of the EBIT. I mean, I can ask more off-line. I guess it's more of a general question, are you comfortable with the profit margins and should they improve as we go forward, or have you largely done most of the cost cutting of the core business?

This is Dave Lumley. I think in light of everything that's going on in the battery business, I think everyone should be very enthused with our margins. If you consider that all the battery companies have added approximately 20% of product for no price for this year, to the majority of our battery packs, plus increased commodities with no pricing, I think you'll see that ours is doing pretty well. We also did some investment this year in our business after the bankruptcy. So I'm very bullish as we go forward as we well discussed and the direction the battery business may go. But you can feel very confident about our margins. It's very stable cash business. It's a very stable, good business, one we're gaining share in. So I think you will -- your real question is, am I concerned? No. Should it get better? Yes.

So in the next few quarters I should see year-over-year margin improvement.

You should.

Then just going -- same line, if I look at the Russell Hobbs business, from what I can tell, it looks like the margins are relatively flat year-over-year. Was most of the cost cutting done a year ago, and so we're in a transition phase before you get the next line of synergies, or should I see year-over-year improvement as we go into the bigger holiday season?

Well, I'll let Terry answer that. But I think that we're in dramatic integration situation now. They're coming out with a lot of work. Because they have a lot of exciting new products. Terry Polistina, why don't you jump in on this one?

Yes, I think the big cost cutting that's going to move forward will be from the integration of the Spectrum Brands. Everything we've done in the past is done and finished, but we have a lot of cost reduction efforts associated with the integration of Spectrum Brands and Russell Hobbs. And Dave said on the prepared remarks that we're very, very confident in achieving those cost synergies, which will help our overall EBITDA margins. The other thing that are impacting our margins that are keeping us relatively flat to what you were describing is the big investment that we have in George Foreman healthy cooking promotion and advertising activities, and that's really probably the biggest offset that you are seeing, is keeping our margins flat.

Okay. Just one last one, on the top line, on the battery business. In the US sales, certainly impressive, especially with the higher pack counts. I'm just trying to understand, is that just continued consumer takeaway at existing accounts, or were there any new account wins in the past six months that might translate going into the holiday season?

Yes, we're growing at a lot of different accounts, and we also have strength in channels that aren't reported by Nielsen, like in our industrial channel and our hearing aid battery channel, as well as our general battery categories through different accounts that we have made pretty good inroads in. Those of you, as you know, who -- cover the battery industry realize this is not a quick process when you put batteries in or batteries come out. Typically it takes years. So we're making very good progress on that. So it's just not one or two accounts. It's a slow but steady process, and as I've said before, I'm very optimistic about the battery business. As long as there's more people in the world using more devices, they're going to need batteries.

So it's safe to say you've got both same-store sales growth as well as new accounts contributing to that top line.

Yes, and we talk a lot, Bill, about the battery business. We have to report shipments to you. But we run our battery business on take-away, not load in shipment numbers, and that's what we focus on. We focus very much on having fast turns and very little inventory at retailers. So ours tends to be a consumption model.

Great, thanks so much.

Your next question comes from the line of Hamed Khorsand with BWS Financial. Your line is open.

Hi good morning. Just two questions here. One is, do you have some preset timeline as to how you would be applying your free cash flow to paying down debt or is it just purely opportunistic?

The timeline is going to be as we generate that free cash flow which as we've publicly stated, 2011 and forward, we will be in a positive free cash flow position, somewhere between $155 million and $165 million next year, and $200-plus million going forward 2012 and beyond. From a timeline standpoint, as that cash flow is generated, we will be using it to -- our primary focus will be on delevering the Company and getting to a leverage ratio target in the, say, three times area which would be consistent with our peer group. So from a timing standpoint, it's going to be as that cash is generated, we will be paying down debt. In fact, during the fourth quarter of this year, we're looking to do that exactly.

Okay. My other question is related to inventory. Could you give us a sense as now with Russell Hobbs,what inventory structure you will be having, especially going into calendar Q4, your fiscal first quarter?

I'll let Terry answer that but I'm not sure what you mean. You mean the inventory in the field, or our inventory?

Yes, your inventory build and how much you would be carrying into Q1 from Q4 and --

Let me try and take a stab at that -- maybe where you are going with this. Our business has some seasonality to it. We know that similar to the batteries and personal care business, the Russell Hobbs business has a seasonal peak during the holiday season that would be in this quarter that we're coming in, we're seeing that peak starting to materialize. We have a second peak, obviously, in the Home & Garden business in the spring timeframe, that peak being April to May timeframe. I would say that typically the build-up of inventories and has its conversion into receivables and then ultimate cash collection occurs for our battery and -- Battery Remington and Russell Hobbs business in our fourth quarter reaching into our first quarter of the fiscal year.

So that would be building inventory, say in September, October and then collecting cash ultimately in January. I would say that the draw -- the working capital needs is probably about a peak of $80 million at that point, so it's not that significant. Obviously from our -- with our refinancing and having put in place a $300 million ABL, we will be in strong liquidity position going forward, and I will also say that the higher peak is going to be the working capital needs of the Home & Garden business in the spring timeframe. And that's probably about $100 million to $110 million of peak need and again, well within a comfortable zone for us, at least based on the numbers that we've run for our modeling purposes going forward.

Again, in a very strong, liquid position and again, as I mentioned in my prepared remarks, the beauty of it -- of the businesses that are low is from a working capital need is at the end of our fiscal year, September 30, and we will be completely out of the revolver from a cash draw standpoint. The only thing outstanding would be any letters of credit we have against the ABL facility. So from a liquidity standpoint we consider ourselves in a very good position. But does that help you? I'm not sure if that was your specific question.

Yes, that helps. Thank you.

Your final question comes from the line of Mary Gilbert with Imperial Capital. Your line is open.

Good morning. Could you discuss on the pet side of the business some of the -- we're seeing some weak trends obviously on the aquatic side related to the bigger ticket items, and then also on the companion pet side where there might have been some loss distribution? Can you talk about how we might see that shifting going forward?

Sure. John Heil, do you want to take that?

Sure. First, on the aquatic side, we had a second quarter, third quarter shift essentially for the year for aquatics. Globally we're flat for the year, but we had an early pond season in Europe. Pond's a very large part of our European business and our aquatics business in the second quarter was up 6.9% overall and we were down 6.3% in the third quarter so that's two-thirds of our business aquatics in the second quarter and third quarter offset each other so we're essentially flat for the year. Consumption on aquatics by part of the world is flat to down slightly, and we're doing just fine, frankly. Our performance is good from a share perspective on an account level and a category. We're doing better on the consumables than on the equipment.

High cost equipment, sales are down everywhere because of economic issues. People aren't spending is money for very large aquariums and equipment, but consumables is actually doing quite well. On companion, a different situation. We did lose some business. We lost some grooming business at a large account in North America, and that's about half of the loss that we had in the quarter versus a year ago. We're also anniversarying a very difficult quarter. A year ago, the third quarter was up a little over 8%. So on a year-over-year basis, we were anniversarying one of our fastest growing quarters. So those two combinations would explain the companion animal side.

Okay. Are there -- have you identified any opportunities to offset that lost business from that major account with new accounts?

We have picked up some additional grooming business at other smaller accounts, but not to offset the size of the account that we lost, no.

Okay, great.

So I will be facing that for the next two quarters actually.

Okay. Thank you.

Mary, this is Tony. Just an add on, I know you talked about sales, but I think one of the positive things that we saw with our pet business this quarter is albeit there was a drop in sales for reasons that John mentioned. We're very pleased with the fact that John has -- and his team has done a great job of initiating a variety of projects that have allowed us to streamline the organization at least begin that process in earnest, and we're seeing the EBITDA, even with a decline in sales this quarter, EBITDA held flat with last year, and we're bullish on the opportunities that lie ahead. As I mentioned in the prepared remarks, and we talked about this on Analyst Day as well, $7 million to $11 million of opportunity falling directly to the bottom line as a result of some of the actions that John and his team are taking today and soon to be taking to achieve that prize.

Additionally, we are, like Dave mentioned earlier, on another one of his businesses, we're being very careful on managing our mix -- our product and geography mix. You look at the gross profit performance. A good portion of that is also driven by selling the more profitable items and letting some of the less profitable items fall away.

Okay, Got It. So, yes, in other words, for example, the grooming business that you lost, was that related to that or no?

No, that one was not. That one was an account that we just lost the business. It was a much lower bid and we decided to take a pass on it.

Okay. Got it. That's very helpful. Also, just going back to the battery business, and following up on an earlier question, the strength and the sales was pretty incredible, wasn't it, given the fact that you're essentially giving away batteries and yet you're still getting the strength. I wondered, could you give us an idea of what percent or what portion of the sales represented comp sales growth within existing accounts? And then what represented either new accounts, and then also, are you getting additional expansion with any existing accounts? Can you give us a little more granularity on that?

I can give you a flavor. I can't give you all those numbers off the top of my head. I can tell you in general that our take-away sales have tended to be flat to up single digits in most accounts in a market that's down, anywhere from 2% to 10%. I can tell that you that we've had a good portion of our sales are take-away shipments. I would say the next portion is some new accounts, and finally, some of the other sales of those things are wins in the battery business in general. I think a lot of people tend to think of the battery business only as alkaline batteries. We've had very good growth in rechargeables and other -- and hearing aids, and things like that where we tend to be stronger in this area where the batteries are being promoted and these larger packs on alkaline. So that has helped us very much so in North America.

Then worldwide, the shift to emphasizing our VARTA brand, and de-emphasizing the private labels and I guess, I've explained to you guys, in Europe -- in America, private label is just one price. It's the open price point. In Europe, there are four layers of private label pricing. So as we've exited two, almost three of those layers and moved it more to a VARTA branded product, we've done better. So you add all that together, it's how the whole battery business is doing. But in North America, it's mostly take-away at some new accounts, and then at some a lot better distribution gains on the non-alkaline batteries as well.

Okay, yes, it sounds to me, okay, that the alkaline battery is the part where you're saying that it's flat to up, and that a big piece reflects the strength in rechargeables and hearing aids, which is intriguing. Are you seeing a big pick-up in rechargeables, given a focus on going green or anything like that? Because you talked about on the Analyst Day that there's still a big focus on convenience and immediacy with batteries.

Not seeing the type of pick-up in rechargeables, like I said that at Analyst Day that people would like to think there are. In our case, we have taken a more aggressive pricing value proposal with rechargeables, which has been one of the biggest barriers to entry for the users, despite the convenience was that it also costs more at times to get into it. So I think you're seeing that being the biggest change, that the consumers are actually trying it. And as well as they're looking for an alternative to a higher priced lithium battery option for their cameras.

Got it. That's very helpful. Thank you.

Okay, all right.

Ladies and gentlemen, we have run out of allotted time. I would like to thank everyone for your participation in today's conference call. This concludes the program. You may now disconnect.