Spectrum Brands Holdings Inc (SPB) 2011 Q1 法說會逐字稿

Good morning, I will be your conference operator today. At this time I like to welcome everyone to the Spectrum Brands first quarter fiscal 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there'll be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentleman, this conference is being recorded today, Thursday, February 10, 2011. Thank you. I would like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Thank you, Operator, and good morning welcome to Spectrum Brands fiscal 2011 first quarter earnings conference call and audio webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands and your moderator for today's call. With me this morning to lead the call are Dave Lumley, our Chief Executive Officer, and Tony Genito, our Chief Financial Officer. Also with us today for the Q&A session are Terry Polistina, President Global Appliances, and John Heil, our President of Global PET Supplies.

Now our comments today include forward-looking statements, including our outlook for fiscal 2011 and beyond. These statements are based upon 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 February 10, 2011, and our most recent SEC filing and Spectrum Brands Holdings most recent 10-K. We assume no obligation to update any forward-looking statements.

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, first, provide a means of analyzing the Company's current and future performance and identifying trends. And second, 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, adjusted EBITDA can also be a useful measure of a company's ability to serve it's debt and is one of the measures used for determining the Company's debt covenants 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 to meet it is 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 statement 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 to service debt and therefore does not reflect funds available for investment or discretionary uses.

While Spectrum Brands Management believes that these non-GAAP financial measures 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 want to caution the audience that although net income is the 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. Now in a press release dated February 10, 2011, which has been furnished on a Form 8-K filed with the SEC, we have provided the reconciliation to the following non-GAAP information in the tables indicated.

First, in table three, a complete reconciliation of diluted loss per share on a GAAP basis to adjusted diluted earnings per share. Second, in table four, a reconciliation of GAAP net income or loss for adjusted EBITDA for the three months ended January 2, 2011, versus the three months ended January 3, 2010, and the three months ended December 28, 2009.

And third, in table six, reconciliation of GAAP net come to adjusted EBITDA on a consolidated perspective basis for the 12 months ended September 30, 2011. And four, in table seven, a reconciliation of net cash provided from operating activities to free cash flow for the 12 months ended September 30, 2011. A copy of the 8-K is available on our website at www.spectrumbrands.com under the Investor Relations section. We will provide reconciliations of net sales excluding foreign exchange during this call.

Effective October 1, 2010, the Company's chief operating decision-maker decided to manage the businesses in three vertically integrated product-focused reporting segments. First, mobile battery appliances, which consists of the Company's worldwide battery, shaving and grooming, personal care, small electrical appliances in the kitchen and home product categories, and portable lighting business. Second, global PET supplies, which consist of the Company's worldwide pet supplies business. And third, the home and garden business, which consist of the Company's lawn and garden and insect control businesses.

This current reporting segment structure reflects the combination of the former global batteries and personal care segment with substantially all former small appliances segment, which consists of the Russell Hobbs businesses acquired on June 16, 2010, to form global batteries and appliances. In addition, certain pest control and pet products in the former small appliances segment have been reclassified into the home and garden business and global pet supplies segments, respectively. These reclassifications have been made for all periods presented.

Now let me take a moment to review our GAAP results. For the first quarter of fiscal 2011, the Company reported a GAAP net loss of $19.8 million, or $0.39 per diluted loss per share, compared with a net loss of $60.2 million, or $2.01 per diluted loss per share. In addition, the Company reported a GAAP net loss of $112.6 million for the first quarter of fiscal 2009.

Now by segments for the first quarter of fiscal 2011. The global batteries & appliances segment reported net income of $79.4 million versus $47.0 million a year earlier. The global pet supplies business segment reported net income of $13.4 million in fiscal 2011's first quarter versus net income of $300,000 in fiscal 2010. Finally, the Home and Garden business segment reported a net loss of $7.5 million in the first quarter of fiscal 2011 versus a net loss of $18.7 million in fiscal 2010.

During the course of our comments today, unless we say otherwise, current year results relate to the fiscal first quarter of 2011, while any references of prior-year results are for the first quarter of fiscal 2010. Also, unless we say otherwise, all results provided today for the quarter are provided on a pro forma basis assuming that Russell Hobbs' results of operations have been included in Spectrum's portfolio since the beginning of the respective period discussed. With that, I'm pleased now to turn the call over to our Chief Executive Officer, Dave Lumley.

Thanks, Dave. And thanks to all of you for joining us on the call this morning. I'm pleased to report Spectrum Brands is off of the solid start for fiscal 2011. Building upon momentum we created as we closed of fiscal 2010. The message I want to leave you with today is one of optimism and excitement about our future.

We are on track, we're ahead of schedule and one, the strategic development growth of our business; two, our financial results; three, the strengthening and the leveraging of our balance sheet; four, our across-the-board operating cost reductions; and five, our synergies and synergy estimates from those actions.

Earlier today reported record quarterly net sales and adjusted EBITDA for the first quarter of fiscal 2011 as we reconfirmed our full-year guidance which was given during our fiscal 2010 year-end call in early December. The takeaway from this is we are continuing to see very real success from a special value model.

This model, which is at the heart of our operating approach, focuses squarely on and enhancing retailer margin, introducing superior value, new products and [product line] extensions and rigorously reducing costs across our Company. All this to create the most efficient operating structure we can. This value model permeates all of our businesses.

Adjusted EBITDA for the first quarter of fiscal 2011 was a strong $123 million. That's nearly a 5% increase versus $117 million last year, and was led by improvements and the global batteries and appliances and Home and Garden business segments. When adjusted for the negative impact of foreign currency, the quarter-over-quarter growth was an impressive 12.5%.

Importantly, we also made two voluntary prepayments of $50 million and $20 million in the quarter to reduce our original $750 million senior-secured term loan to -- down to $680 million. This began a continuous and aggressive debt pay-down program to reach our target leverage of three times or less over the next two years. As we have said, we anticipate cumulative debt reduction on our term loan of at least $200 million during fiscal 2011. This would reduce the principal amount to a minimum of $550 million versus the original $750 million.

Let's talk about our first quarter performance, which Tony will review in even more detail, but it was solid. We reported a 2.4% net sales growth after including the Russell Hobbs businesses for the first quarter of 2010, and the 4% growth when adjusted for the negative impact of foreign currency.

Leading the net sales growth were our global battery and personal care categories, which posted increases of 3% and 10% in the first quarter. In particular, Remington sales reached an all-time high quarterly level, as the business saw significant market share gains in key categories based on new product introductions and distribution gains.

In fact, Remington was the fastest-growing hair care brand and the number one hair straightener in food, drug and mass retail outlets in both dollars and units and the United States market for the fourth fiscal quarter of 2010. This according to Nielsen. Remington was also the number two hair appliance brand in food, drug, mass market retail outlets, showing the fastest growth in certain categories in both dollars and units in the US market for the same fourth quarter of 2010.

Our worldwide battery business continues to grow with its product performance strategy of lasts as long for less. In North America, we have reached a record level of alkaline share with our value proposition. In Europe and elsewhere, we remain a significant player in all key markets for the solid number two position. In Latin America we remained the number one battery player with the best overall alkaline (inaudible) carbon performance. Finally, which also are the number one worldwide market share leader in hearing aid batteries.

We are still dedicated to develop new programs for batteries to ensure we continue to win at point-of-sale with value performance. In addition, we are committed to our global new product development approach with continuous cost improvement to drive ongoing cost reduction and offset rising commodity cost inflations. In summary, we will continue to aggressively support our battery businesses as an integral part of our strategy.

We also enjoyed a good North American holiday season for our battery and personal care products, highlighted by excellent in-store placement and promotions. In the process, we maintained or grew our market share with our pledge of providing the same performance at a lower price or providing better performance for the same price. This is coupled with our ever-present focus on winning at point-of-sale.

This is also the result of a collaboration with our key customers and key placement wins achieved many months ago for the 2010 holiday period. Again, we believe our Spectrum value model, with its focus on point-of-sale, consumer value and retailer margins is the key to the success we had during the Christmas season.

We're also very pleased with the pace of the integration of Russell Hobbs and continued to be confidant in achieving, and more likely exceeding, the $25 million to $30 million level of cost synergies we have projected over the next several years. Additional opportunities are also present to capture revenue and new product development synergies as we begin leveraging each country's regional (stengths and compentencies-- technical difficulties) categories.

We're also excited about our opportunities to improve prove Russell Hobbs' supply chain and cost activities. To that end, we are starting to see some initial progress already in Eastern Europe using our battery and personal care platforms we have established there. Such revenue and supply chain opportunities are not included in the $25 million to $30 million of forecasted [goods to Russell Hobbs].

Now in addition to Russell Hobbs we have significant integrations also occurring at this time in our global pet business, where we continue to forecast annualized cost savings of $7 million to $11 million over the next several years as the business consolidates plants, systems and distribution centers.

So combined the projected Russell Hobbs synergies of $25 million to $30 million with the pet cost savings of $7 million to $11 million, we are forecasting total synergies from these restructurings and consolidations of $32 million to $40 million, and likely more over the next two years.

Was have also completed the relocation of our corporate headquarters from Atlanta, Georgia, to Madison, Wisconsin. And the consolidation of distribution centers, offices and our headquarters for home and garden business from Atlanta to St. Louis. In short, Spectrum Brands now has a streamlined organization, one that is totally aligned along global business units, connected through a global shared services platform.

In addition to organic growth in our business segments and a focus on driving more volume through our plants to improve capacity utilization, we will continue to look for small creative bolt-on acquisitions for Pet and Home and Garden divisions and the months ahead. Our [Burdola] wild bird seed acquisition for Pet in December for $12.5 million is an excellent example of what I'm talking about.

As we moved Spectrum Brands into a promising new era, we have a clear road map and a multi-year strategy in place, along with a tested Management team with demonstrated accomplishments and experience in their industries. Our Spectrum Brands vision is clear; to be the leader in retailer metrics, with superior value consumer products for everyday use.

I want to stress Spectrum Brands has compelling opportunities for continued market share growth around the world, along with corresponding increases in EBITDA. We have the means now to generate strong free cash flow. This free cash flow is built on a diversified revenue stream, attractive margins, the top one, two or three global market positions, all with trusted, extendable and enduring brand names and in categories with strong distribution revenue.

I'll close with one final point about fiscal 2011. Our guidance for this year is not built upon expectations for meaningful consumer spending rebound or economic recovery. We are also well aware of rising costs, especially coming from Asia and the suppliers there.

But a key strength for our Company is that most of our products are non-discretionary. Replacement products providing value, quality performance to consumers in everyday living. This, along with our Spectrum value model, to us is a winning proposition. Let me turn it over now to Tony for a detailed financial review.

Thanks, Dave, and good morning, everyone. I'm pleased to say that we've continued our momentum from fiscal 2010 by completing a solid fiscal 2011 first quarter. This positions our Company well for further operating and financial progress for the rest of this fiscal year.

The Company reported consolidated GAAP net sales of $861 million for the first quarter of fiscal 2011, up 45.5% from $592 million in the year-ago quarter. An addition of Russell Hobbs businesses as of June 16, 2010, and solid (inaudible -- -technical difficulties) batteries from Remington which we refer to as personal care, drove the net sales increase. These results were negatively impacted by $14 million of foreign exchange.

When we included the fiscal 2010 first quarter results for Russell Hobbs, net sales for 2011's first quarter of $861 million increased 2.4% versus $841 million last year. Excluding the negative foreign exchange impact, net sells increased of 4.1% in the first quarter of fiscal 2011 versus last year's first quarter. The Company's gross profit for the first quarter improved $299 million, an increase of 62.2% from $185 million for the same period last year.

Total operating expenses for the first quarter were $230 million up from $166 million for the comparable quarter last year. The increase of about $65 million was driven by, one, $49 million related to the addition of Russell Hobbs' businesses, and two, $14 million primarily related to acquisition and integration-related charges incurred in connection with the Russell Hobbs transaction.

Corporate expenses for the quarter were $11 million, down slightly from $12 million for the same period last year. As a percentage of consolidated net sales, corporate expense for the first quarter was 1.3% versus 2% for the 2010 first quarter. This reduction in expense was driven by synergy savings from the move of our world headquarters from Atlanta to Madison. For the first quarter of fiscal 2011, the Company reported a GAAP net loss of $20 million, or $0.39 per diluted loss per share, versus a net loss of $60 million, or $2.01 per diluted loss per share in 2010.

After adjusting both year for certain items, Management believes they're not indicative of the Company's ongoing normalized operations. The Company generated adjusted diluted earnings per share of $0.47, a non-GAAP number, for the first quarter of 2011 compared with adjusted diluted earnings per share of $0.42 in fiscal 2010's first quarter.

These adjustments, which aggregated $0.86 and $2.43 per diluted share in the first quarters of 2011 and 2010, respectively, are spelled out in detail in table three of the earnings release. So in the interest of time I won't to go into them here.

2011's first quarter consolidated adjusted EBITDA was $123 million. This was a healthy 4.5% increase versus the very strong consolidated adjusted EBITDA for the first quarter of fiscal 2010 of $117 million, which includes the results of Russell Hobbs as if combined with Spectrum Brands as of the beginning of last year's first quarter.

Foreign exchange had a $9 million negative impact on adjusted EBITDA in the first quarter of 2011. Excluding the negative foreign exchange impact , adjusted EBITDA grew 12.5% in the first quarter of 2011 versus the first quarter of 2010. So we are off to a good start toward achieving our target of adjusted EBITDA of $455 million to $465 million in fiscal 2011.

We are very pleased with these results and we believe they reflect the momentum of our businesses, especially considering that our adjusted EBITDA in the first quarter of fiscal 2009, which, again, after adjusted for the results of Russell Hobbs, was $74 million. I know you can do the math, but that translates into an increase of 65.8% and our adjusted EBITDA from the first quarter of fiscal 2009 to our fiscal 2011 first quarter.

Now review our first quarter segment results. Led by solid top-line growth in worldwide battery and personal care product categories, the global batteries and appliances segment reported fiscal 2011 first quarter net sales of $697 million versus $429 million in the first quarter last year. First quarter 2011 segment sales were negatively impacted by $12 million of foreign exchange.

Including the Russell Hobbs businesses as if combined with Spectrum in last year's first quarter, the segments 2011 first quarter net sales of $697 million increased 3.7% versus $672 million a year earlier. First-quarter global battery sales were $274 million paced by a strong North American performance, compared with $266 million a year earlier, or a 3% increase. Foreign exchange negatively impacted these results by $9 million.

Despite continued competitive pressures in North American, battery sales grew 15.2%, or $126 million with market share continuing to grow. European battery sales for the quarter, which were negatively impacted by $7 million of foreign exchange, and where the Company continued its continued its voluntary exit of low-margin, private-label sales, were $97 million compared with $104 million during the same period last year.

Because of our continuing focus on profitable growth despite a (inaudible - technical difficulties) top-line in the region as a whole compared with a year ago, Europe's branded battery business saw an improvement in sales and profits.

Finally, in Latin America, battery sales were $48 million for the first quarter, a decline of 3.6% versus $50 million in the comparable period last year. Foreign exchange negatively impacted Latin American battery sales by $3 million.

Reflecting growth across all geographic regions, net sells for the global personal care product category, [for the] Remington branded products, rose a strong 10.3% to $180 million in the first quarter of fiscal 2011, a record quarterly level, versus the $163 million for the same period last year. The net sales growth was attributed to a combination of new product introductions, line extensions, and expanded in-store promotions. Foreign exchange negatively impacted these results by $4 million.

The small electrical appliances products unit of the global batteries and appliances segment, consisting predominantly of the Russell Hobbs businesses, reported net sales in the first quarter of fiscal 2011 of $243 million, unchanged from the previous year's quarter, after including the Russell Hobbs businesses with Spectrum in that quarter. Continuing softness in North American was partially offset by higher international sales, primarily in Europe. Foreign exchange positively impacted this product category's net sales by $1 million.

With segment net income of $79 million, the global batteries and appliances segment recorded adjusted EBITDA of $111 million for the first quarter of fiscal 2011, an increase of 4.1% versus adjusted EBITDA of $106 million in the year-earlier quarter when segment net income was $47 million. Excluding a negative foreign exchange impact of $8 million, adjusted EBITDA for this segment improved 11.9% over the first quarter of fiscal 2010.

Turning out to global pet supplies, this business segment reported net sales of $137 million for the first quarter of fiscal 2011, which was flat with the comparable year-ago period. The reclassification of certain pet products into the global pet supplies segment from the former small appliances segment accounted for a net sales increase of $4 million in the fiscal 2011 first quarter. However this was offset by continuing softness in the North American aquatics category due to macroeconomic factors. Foreign exchange negatively impacted these results by $2 million.

Net income for this segment was $13 million for the first quarter of fiscal 2011 versus $300,000 in the prior year's quarter. As a result of product mix and modest remaining expenses from the Companion annual recall that we discussed in the fourth quarter of fiscal 2010, adjusted EBITDA of $22 million for this segment and the first quarter declined from $24 million in the same period last year.

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. We expect to see a meaningful part of these savings start to appear in the second half of fiscal 2011.

The Home and Garden business segment reported net sales of $28 million for the first quarter of fiscal 2011, an increase of 4.6% from $26 million for the same period last year. This was primarily the result of the reclassification of certain pest control products into the Home and Garden business segment from our former small appliances segment.

Let me remind you that the first quarter of the fiscal year is generally a period of internal inventory building in advance of Home and Garden's major selling season, which is typically in the spring and summer months. In fact, first quarter net sales (inaudible - technical difficulties) 9% of full-year net sales.

Home and Garden reported a first quarter net loss of $8 million, which is nonetheless a significant improvement compared with a net loss of $19 million in 2010's first quarter. As a result of operational excellence initiatives, including strong cost controls, Home and Garden improved its adjusted EBITDA by 12.8% to a loss of $3 million in the first quarter of fiscal 2011 from a $4 million loss in the same period last year.

Let me review a few more items in our first quarter financial statements. Interest expense for the first quarter of fiscal 2011 was $53 million, compared with $50 million for the same period last year. This variance was primarily due to the increased debt that was acquired in connection with the merger with Russell Hobbs, as well as an increased principal balance on a our 12% [PIP] notes. Cash interest for the fiscal 2011 first quarter was approximately $54 million, compared with approximately $24 million for the same period last year.

Cash payments for fiscal 2011 were higher primarily due to timing as a result of the change in our capital structure. Tax expense for the fiscal 2011 quarter was $35 million compared (inaudible - technical difficulties) last year. Cash taxes for the 2011 first quarter were approximately $12 million, compared with $7 million for the same period last year. Cash taxes were higher for fiscal 2011 due to higher profit in some of our foreign entities, the inclusion of Russell Hobbs in 2011 versus the same period 2010, as well as various timing differences in payments year-over-year.

As I've said before, based upon the level of NOLs we expect to be able to utilize, we do not anticipate being a US Federal taxpayer for at least the next five years. We will, however, continue to incur foreign and a very small amount of state cash taxes. Cash taxes are expected to be approximately $45 million to $50 million in fiscal 2011.

Now let's turn to a review of our solid liquidity position. We finished the first quarter of fiscal 2011 with approximately $44 million drawn on our $300 million ABL working capital facility, consistent with normal business seasonality, and with the cash balance of about $83 million. At the end of the quarter, total gross debt was $1.756 billion, which consisted of a senior-secured term loan of $680 million, senior-secured notes of $750 million, subordinated notes of $245 million, a working capital facility draw of $44 million and other debt, primarily foreign, of $37 million. In addition, we had approximately $36 million of letters of credit outstanding.

Regarding our cash flow projections, as we've previously stated, given the strong cash flow potential of our businesses, we expect to generate between $155 million and $165 of a free cash flow for fiscal 2011, and more than $200 million for fiscal 2012 and beyond. We still expect capital expenditures to approximate $40 million in fiscal 2011, of which more than two-thirds represents investments in new product development (inaudible - technical difficulties) projects.

As Dave mentioned, given are very solid adjusted EBITDA in 2010 and our strong liquidity position, we are pleased to have made voluntary pre-payments which totaled $70 million during the first quarter to reduce our $750 million senior-secured term loan to $680 million. This is the start implementing our primary corporate financial objective, using our strong free cash flow to aggressively pay down debt and thereby reaching our target leverage of three times or less in the next two years.

As part of that plan, we are targeting a cumulative debt reduction of at least $200 million in fiscal 2011. Let me point out that the difference between our $200 million cumulative debt reduction target in fiscal 2011 and our estimated free cash flow of $155 million and $165 million is due to a reduction in our cash balance.

As most of you know, on February 1, we completed the refinancing of our existing $680 million senior-secured term loan at a lower interest rate, which we believe reflected improved credit market conditions and the Company's strong performance and favorable outlook.

This new facility, issued at par and due June 2016, reduces our interest rate spread by 250 basis points and our LIBOR floor by 50 basis points for a total 300-basis-point savings. At today's interest rates, and assuming a $681 million term loan balance, this pricing would reduce the Company's annual cash interest expense by more than $20 million.

In connection with the refinancing, the Company expects to record a pre-tax charge of approximately $43 million, of which nearly $36 million is non-cash in the second quarter of fiscal 2011, ending April 3, 2011. This charge primarily represents the write-off of deferred financing fees and original-issued discount associated with the financing back in June.

In summary, our first quarter performance confirms our expectation of continuing operating and financial momentum in fiscal 2011. To reiterate, we expect to see top-line growth of 3% to 4% in fiscal 2011. We're also expecting increased adjusted EBITA this year, $455 million to $465 million, and we continue project that free cash flow will reach $155 million to $165 million in fiscal 2011, and at least $200 million in fiscal 2012 and beyond.

This will allow us to set the stage for additional voluntary debt repayment, even as we continue to expand our businesses with new product development, line extensions and increased in-store placements while we create a low-cost and efficient operating structure.

Finally, we've targeted an additional $1 billion of enterprise value over the next several years, specifically by the end of fiscal 2013, if not sooner. We see this resulting from a combination of continuing growth and adjusted EBITDA and aggressive debt reduction.

We believe the combination of the two should enable us to reach the target of $1 billion of enterprise value. Our Management team is focused on delivering greater shareholder value and growth and the quarters and years ahead. Let me now turn it back to Dave for a few closing remarks before the

Thanks, Tony. We're excited about Spectrum Brands' outlook for value creation both in the short-term and over the long-term. Our Company continues to be well-positioned for strong financial results as a global, superior value proposition leader. As our earnings release said, and as Tony described, we expect another year of improved sales in fiscal 2011 and significant increases in adjusted EBITDA, free cash flow, along with more than $200 million of debt reduction. This will lead to an even stronger balance sheet and significantly reduced leverage over the next several years.

More importantly we will persist in what we believe is a winning strategy for our businesses. Providing superior margins for our customers, and offering consumers products with the same performance at a better price, or better performance as the same price as leading brands. We will move forward, continuing to invest in all of our businesses, reduce our cost structure, launch to products and product extensions, expand geographically, but more importantly, grow EBITDA and pay down debt. Grow EBITDA and pay down debt. And we'll do this by generating strong free cash flow for our shareholders. Thank you all for tuning in, we're now ready for your questions.

Okay, Operator, if you could now begin the Q&A session please.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. If this question comes from the line of Bill Chappell from SunTrust. Your line is now open.

Just wanted to, I guess first dive into kind of the outlook and maybe what you are seeing on the battery side in terms of the price rollback that everybody's, or I guess the price increases that everybody is taking this quarter. When do you expect that to benefit your bottom line?

And then a second question on commodities in general, I don't know if you really quantified what you see as far as the commodity basket increasing year-over-year and how hedged you are, I know certainly on zinc and some other things you are, but on some of the other items where you stand?

This is Dave Lumley. I will answer batteries, I will make a comment on commodities and then I will let Tony talk about the hedges that we have on materials, as well as financial hedges. I think that the outlook for batteries, especially in the second half of this year, is much better than it's been over the last 18 months. There is pricing and the market by the leading companies on some of the battery brands -- I mean battery types, 9 volt, Cs and Ds.

The change in strategy of more batteries by all the three leading battery companies is changing back to what I consider to be a more normal and balanced approach. But I think -- we know it will take probably the first half of this calendar year for all that field inventory to sell-through. And that field inventory is being heavily discounted to sell-through. But by the second half of the year, I think that this will be a much stronger picture for everybody, in those terms.

I think the other thing that I want to continue to stress to all of you is that the battery business, from a cell usage, meaning the total cells that were consumed last year were flat to the year before, they weren't down. Batteries tend to be consumed by usage, as long there's more people and devices, the battery business is okay. All that happened last year is that a lot of people gave 20% more batteries away, so that took down unit, pack sizes, sales and it took down dollar sales. But I think we're going to see a more return to rationality as we go forward. So I think that's cautiously optimistic outlook.

Now in terms of commodities, we are at three business segments, five different -- four or five different types of business, all of them have a different story. I think in batteries there's zinc and other chemicals, materials that costs are up, no doubt about it, and that affects all the battery companies. Some of the pricing you see out there should deal with a lot of it, I think less batteries will deal with a lot of it in the packs. So I think the battery business will be okay. We will have to wait and see.

Our other businesses, Home and Garden and pet are pretty well-balanced. They don't buy as much from Asian suppliers. You think about our appliance business and that is going to have an impact. It is going to have an impact on our Russell Hobbs, our Black & Decker and that, and it is going to have an impact on every single other appliance and personal care maker because they all come out of the same place.

So pricing is probably going to cut into that market next year as we move along, and more consolidation. So everyone is preparing for that. Now regarding -- we spend a lot of time on hedges and materials and financial, and Tony, you may want to talk about that.

Sure, so that's -- I'd be glad to, Dave. And hey, good morning, Bill, by the way.

Good morning.

From a hedging standpoint, before I get into the specifics, it's probably good to frame the picture, too, here. I think most people know this but I will reiterate it again. And that is there's no one single commodity that quite honestly keeps me up at night.

For instance, zinc, we constantly focus on zinc, but zinc represents about 1.5% of our consolidated cost of sales. And as Dave said, there's other chemicals out there that prices fluctuate and we see periods where they're going up and they're coming down and they do have a loose negative correlation to currency, which also impacts us since we are a global Company.

But for everybody's sake on the phone, we do have a very disciplined hedging program, we do have zinc, which is a component in the manufacture of batteries. It is a very disciplined program, as I said, we have a rolling six-quarter average that we put in a certain layer every quarter, so it becomes almost like dollar averaging, and right now we are currently hedged over 70% of our projected purchases for 2011, and about 50% for 2012.

So we look to layer in a fixed amount as I said, and then if we see an opportunity, again this is not to play to market, this is really just to take a variable off the table, if we see an opportunity where the prices seem to be dipping, we might put a discretionary additional hedge on top of the fixed amount that we have for our policy.

With respect to currency, about 70% again, of our currencies have been hedged for 2011, and about 25% for 2012. I think it's also important to note that we feel pretty good about 2011 because, just as a little tidbit, the appliance business, which is part of the global batteries and personal care -- Global Batteries and Appliances segment, the appliance business which is obviously the former Russell Hobbs, and the Remington business, about 40%-plus of the EBITDA of that business is behind us through the first quarter.

So that's basically, quote unquote, in the bank. So that's a good thing. Again, we continue to hedge currencies and a very disciplined process that we've instituted and we feel pretty about that. The business is a complex business, there's a lot of moving parts, a global business, like I said.

So typically we've got commodity impacts, we've got foreign exchange impacts, there is a loose correlation between those two, as I said, usually they inverse to one another. So with all the moving parts, though, we feel that we can to manage through the white waters ahead. And like Dave said, what's impacting us is impacting every other company out there as well.

Sure. Just two quick follow-ups on that. I assume your unchanged top-line guidance basically is not assuming any price increases taken this year though, it sounds like that's likely. And then also on the battery side, would you expect the March quarter to be pretty, for lack of better words, ugly as you see discounting pushing out, plus is there some kind of hangover? Instead of selling one pack of 12 last year, you're selling one pack of 15, so the pantries are fuller than normal?

To the first point, pricing in some markets is going up, we are gaining pricing in some global markets and some segments everywhere, and some are more difficult. As I originally said, Bill, all you have to do is open the Sunday circular and you can see the discount, the discounting. And I think that -- I think it is flushing through, and everyone is motivated to do that. And I think, like I said the first half of this calendar year this thing will flush through and the second half, should be a return to normalcy. That's what it looks like.

Okay.

Hey, Operator, next question, please.

You next question comes from the line of Reza Vahabzadeh from Barclays Capital. You're line is now open.

Hey, Reza.

Good morning. You talked about the pet -- North America business batteries gaining share in sales, if you can just talk about what is driving that, is it shelf space, new customers or expanding shelf space at the existing customer? And then on the other hand, pet sales were lower year-over-year as were Russell Hobbs in North America. Can you just talk about those three segments' sales trends?

This is Dave Lumley, I will address batteries, and then we're fortunate to have our Presidents of those two divisions, pet and Russ Hobbs, and they can give you a brief answer to those sales issues. Our battery sales increases are for the most part across-the-board sales and distribution gains within our existing customers. We are in mass-market, we are in home centers, we spend a lot of attention on the industrial channel and the hearing aid battery channel with audiologists, we're a little different there than others.

And we made a concentrated effort to try to grow all those, we've also been able to open up some new business that we haven't gotten before in the food and drug channel and some other mass merchants. This isn't just the United States, we've just had some major recent wins that we cannot disclose yet but we will soon, in Europe and Latin America in the battery business. So it is a concentrated effort on our part to continue to move our value proposition to the retailer in the battery business. So it is pretty much even across-the-board.

Remember, our share in the United States is much less than the two leaders. So for us every point of gain is much more dramatic, whereas in Latin America we are the leader, we've gained a couple points this year but that's on a basis of a high share, the same in Europe.

You add all that together in this environment, and it is pretty good, and I think it goes back to our fact that our batteries last as long as the premium price batteries but you get a better value, you either get a few more batteries or you get a better price. Maybe, John Heil, you'd like to talk about pet for a moment?

Sure, let me break it down into a few different parts. First, as I mentioned on the last call, we'd lost some distribution on our companion animal business. The quarter -- the first quarter is the third quarter that we have of that loss and the next quarter will be the last quarter, and we will have an anniversaried it. So I'm still dealing with that, which is having a negative impact on my companion animal business.

Without that particular loss of distribution, our companion animal business is actually up versus year ago and doing very nicely, and we feel good about the rest of the year.

In Europe and rest of the world, our volume is up modestly. Europe is doing quite well on the companion animal, aquatics is flat, rest of the world, other than Europe, is pretty much the same. Our North American aquatics business is dealing with a soft category.

And we are finding customer-by-customer differences, some customers are up and some are off but overall, net-net, the industry on aquatics continues to be down versus a year ago, and that's a large part of our portfolio.

Terry, you want to talk about appliances in North America and overall sales?

Yes, first of all, Dave mentioned in the opening remarks how well the personal care business did and I think that's a direct reflection of the Spectrum Brands' globalization of that category. And we're going to copy with pride the same thing in the home side of the business.

But around the globe we did very, very well. In personal care very strong internationally, and home, the one soft spot would've been in the United States, and as John said we had a little bit of lost distribution prior to the merger that we've recently got back, so we are feeling very good about growing in the future. But that probably was our one weak spot around the globe, was North America, or in particular, the US home business.

I guess the one follow-up on Bill's question, besides zinc, Tony mentioned that's a small ingredient cost for you, but besides zinc, what are the other larger commodity costs that you spend time thinking about?

Actually that's a great question, Reza. There really isn't a lot. There's other chemicals, for instance, there's EMD, which is manganese ore, that's about the same percentage of zinc on a consumable basis.

For batteries.

Batteries. But after that -- of course there's a steel, there's gas prices, oil prices, the packaging matures and of course fuel costs, transportation costs themselves. But there is not one of those items that represents something that's a deal breaker.

Maybe the best way to analogize it is if you think of our former fertilizer growing media business. We had three commodities that went into the bags. It was diammonium phosphate, or DAP, potash and urea. And basically it was (inaudible) commodity. So I lost a lot of sleep back when we had the FGM business, because everyday you'd want to know what the price of urea, unfortunately it was tripling or quadrupling in that year, that last year we had that business.

But there's no commodity that we have that really moves the needle from the standpoint of, boy, we've got to watch that and that's going to shape the way that business is going to go. Obviously there's commodities that go into all of our products, and they have impacts, but I will say that they are slight impacts as opposed to something -- a mammoth move like the commodity prices of urea, DAP or potash.

Yes, this is Dave Lumley. I think that's an important point for the products that Spectrum Brands sells. There is no overriding giant one commodity. Like he said, fertilizer, you can think of the plastics industry, there are certain companies that 40%, 50%, 60% of their cost of goods is resin, right. That's a real problem.

So I think the bigger issue for all companies today is the rising inflation in China and how that is rolling into an overall cost increase for all companies that source from that Asian country, whether it is the duties, the inflation, the labor, the freight, the commodities and even that country's inward turn towards taking care of their own market growth. So that is something that I think that companies who do a good job will do a good job in the next couple years and those who don't are in for quite a surprise.

Thank you.

Operator, next question.

Your next question comes from the line of Torin Eastburn from CJS Securities. Your line is now open.

Good morning.

Hey, Torin.

My first question is on personal care and the shavers. That industry has been strong, your performance within the industry has been strong, what's your outlook, both for the industry going forward and what are the things that you think you can do to continue?

So this is Dave Lumley, and then I will have Terry jump in, Terry just inherited the shaver business. Are you talking about men's electric shavers, or are you talking about shaving in general, Torin?

Mostly the whole personal care segment.

Okay. Well, we have a joke around here, we don't know too many women or men who leave their house without cutting, shaping their hair and shaving. So we feel pretty good about that. That goes back to we talked about non-discretionary products for everyday use.

I think what you're seeing is that the price increases in Wet Shave for the handle and the blade are so pronounced over the last three to five years. You go back and see what it costs five years ago and what it costs today, it's quite dramatic. In fact, you can buy our best selling rotary shaver for $39 and the payback is about two or three months versus electric shavers. Really kind of hilarious, if you think about it.

So I think what you're getting is men who are more attuned to personal grooming. Not only a shaver, but all these grooming devices that we sell, beards, or two-day growth, or trimming body hair, and all those type of things, and the wet goods that goes with it, and the accessories. And on the women's side same thing, the cost of going to a salon is being -- instead of going every week it could be every other week. As they can get devices, whether it is a straightener, curling iron, dryer and some of the accessories that go with this, the wet goods that go with this.

So a little bit more do-it -your-own, a little bit of price shock from what I would call the wet shave, the ladies business. Even though they are doing well in pockets, but not overall, you think about where most people shop and the large mass merchants, price points are important, and total outlie of how much money you're going to spend is important. We live in a world today where some people only buy the gas they need for the next couple days, they don't put $100 of gas in their car. So the same thing is true here.

So I think it is just better products that perform better. One of the reasons we're selling more shavers is we came out with a new product that flicks and flexes and pivots and it works better. Same with the grooming thing. And on the women's side, faster products that straighten their hair and dry their hair faster and do things they didn't do before.

So product innovation, better price point, more do-it-yourself, a little more attention to it. A lot of the big mass merchants are paying more attention on, especially the women's side beauty, as they see that opportunity, and the wet goods thing. So it is kind of a fusion of all those things. And, Terry, do you want to add anything to that?

No, I think you captured it. The product pipeline that we have that's come out, certainly personal care side of the business, doesn't keep me up at night as far as where we are going to grow in my segment, so I feel good about the growth that's going to come out of PC.

Okay. Sorry, go ahead.

No, I was saying, does that answer your question?

Yes, it does. In the home business, I would imagine you're -- Home and Garden, I'm sorry, you're getting close to receiving orders for the selling season if not trying to get them already, what is the outlook really as it is for Home and Garden?

Last year there was an usual early launch to Home and Garden business. There was some great weather, there was tremendous enthusiasm, everyone's shipped a lot early, everyone sold a lot early, and everyone extrapolated that and we were going to sell twice as much, right? It was a very good year, but it all balanced back out, it was up.

This year I think the industry has to over-comp that in the early months. But nevertheless, there continues to be strength at big mass merchants and particular home centers in North America of people taking care of their lawns and spending more time in the backyard. You are right, all the orders and the decisions were made long ago, you have to build that all winter, which is partially why you lose money in the first quarter because you don't ship anything, you (inaudible).

But with very strong orders, very strongest distribution gains. I anticipate a very, very robust Home and Garden season again, and I believe that our Home and Garden division, now that it is singularly focused on selling herbicides and pesticides in a bottle or can, for the most part. We have a joke that we kill things, and when you kill things that people don't like you make a lot of money, and we are confident that everyone is going to do that, the retailer and the companies.

I think we're going to have a very, very good Home and Garden season. That's what I think, I cannot guarantee that. We don't know. If it rains for four weeks straight then that would be another problem. We'll just have to wait until the mosquitoes come out later.

Okay, thank you.

Operator, next question, please.

Your next questions comes from the bite of Hamed Khorsand from BWS Financial. Your line is open.

Yes, two quick questions. On a quarterly basis do you think Q1 sales was the peak for the year?

I think if you were to look at an historical trend of our sales, now obviously you'd adjust that for Russell Hobbs to make the comparison, you'd see that the first quarter -- our first fiscal quarter does represent typically the single largest quarter. But we do have a strong third quarter, as well, because of the Home and Garden season. There's a lot of sales that's straddled between the month of March and then April, May, June, as well. But typically, I would say that our first fiscal quarter would be the height of sales dollars.

Okay. My other question is what are you doing to gain traction at big retailers who only carry the top two battery brands and then a store brand name?

We work very hard to show them what other opportunities they would have if they carried our brand. I don't mean to be funny on that. I think that the battery business is one that for some retailers is very important and some it is not so important. Okay? And what I mean is that some of them are more focused on different segments in their store.

In our case, we believe we have a compelling proposition now for them, and that is that you can have a product that lasts as long as the two leaders, has a better value, lower inventory costs to bring in, and we present it and we go in and we do research and we show it, just like any other company would. And I think that we are slowly converting them as they go along.

Batteries are something that usually are very profitable for a retailer, but they have to decide they want to be in the business. Meaning they have to give it enough space, batteries are 60% or 70% impulse, so they have to decide and give that space. That sometimes is more of that issue than it is how many brands they carry.

And then of course you have some retailers who are very -- they come in and out of private label in this category, and that is something that I think is a big opportunity for the brands (inaudible) as we go forward, especially a Company like Rayovac, because the private labels are looking for someone to source directly, and anything from China right now is extremely risky.

And cost and delivery, performance, returns there's a lot going on there that what could appear to be a cost savings move, by the time those batteries are delivered in three to five months between currency and input costs and freight costs, it will be a big surprise.

And of course, any returns or problems you have with those batteries, because China has yet to build a battery that performs as well as the batteries provided by the top three that are made in the United States of America from a performance standpoint.

So I think it is a combination of all those things, and every retailer is different. I would say that we are making headway in almost every one we are in. Some have long-term contracts, and those things come -- you have to wait until those expire and a lot of that is happening right now and in coming years. So I think you're going to continue to see a very competitive landscape in the batteries, but one of opportunity for a performance-brand.

Operator, think we have time for one and maybe two more questions. So next question, please.

Your next question comes from the line of Mary Gilbert from Imperial Capital, Your line is now open.

Good morning.

Good morning.

Kind of following up on some of the things that you brought up, it sounded like in Home and Garden you are seeing expanded distribution, and I just wondered, by segment, what is the status of shelf space in terms of expansion opportunities, and also with regard to Russell Hobbs and the integration into emerging markets?

Okay, well, a detailed question and long drawn, we might be better to do that offline.

Okay.

Think of Home and Garden though in three segments. You have the controls, which are mostly outside; you have household, which is mostly pest inside your house; and then you have repellents. Right? If you think about it, I think our Home and Garden addition which it's legacy name was United Industries, with its Cutter brands, Repel brand and Spectracide brand, it really competes against two major competitors with some -- and they each possess one really, really well-known brand name, and they have large shares. And so I think our distribution gains and our opportunities, they are still good.

Whenever you have people who have over 30% or 40% share in a category, there should be opportunity in that category. So I think all three of our categories have really good room for growth, and that's not only against the competitor, but more importantly in channels. Right. There's the home center channel, there's the mass merchant channel, there's the food and drug channel, right? And we have room for growth in all those. So I would say that's bullish, and we can talk more about that offline. Russell Hobbs, I will let Terry talk about first and then I will come back.

Yes, I would say, because of the merger, we became from a middle-of-the-pack guy to very, very near the top of worldwide market share in small domestic appliances, and so that helps us become more relevant. The Spectrum infrastructure that we gained is allowing us to have I think very, very good distribution opportunities.

Dave alluded to it at the very beginning, but we've already started to ship into eight countries in Eastern Europe, which probably would've taken me 10 years to get to on a stand-alone basis, and we have other examples of that around the globe with personal care coming into some of the locations that we had strength. So I think there's actually very good distribution expansion opportunities for the appliance business over the next few years.

Mary, this is Dave Lumley. What Terry is referring to is we made, despite our financial challenges over the last three years, we made a significant bet and investment to build our Eastern European business through our battery platform. We brought Remington in there, and now we can bring appliances right in there. And it is a really good significant part of sales and a good infrastructure we have in place.

I'm talking whether it is Russia, Poland, Hungary, Romania, Czech Republic, doesn't matter, Turkey, we went in and we got distribution, we did all that work. So that's -- when we say we have opportunities to go Eastern Europe, we've already done that with two business segments, that's why we are very confident and Terry's so bullish on that.

As we said, Mary, the $25 million to $30 million of synergy savings, which we've announced and we feel really, really good about those, that does not include any opportunities coming from revenue enhancements that Terry and Dave just described.

Okay, this is incremental, this isn't built into your total guidance for the year? The EBITDA guidance, that doesn't incorporate the entrance into some of these emerging markets, is that correct?

That's correct.

Okay. Also, following up on that, you reiterated your free cash flow guidance, you've attained interest savings and then you've also talked about additional savings because we're really looking at $32 million to $40 million now over the next two years. Are those being offset? Because there was no increase in -- sorry.

Let me answer that one, Mary. With respect -- let's take the first one. With respect to the interest savings, yes, we will have, on an ongoing basis if we held the debt at $680 million, which, of course, we want to make payments on that debt, but let's hold interest rates and the debt at $680 million, we're going to save $20 million, over $20 million, a year.

However, this year, there's obviously a cost to do that. We had a call premium of 1% which is the $6.8 million, or close to $7 million, that's the -- you recall I mentioned about a $43 million charge that we'll take in the second quarter of which $36 million was non-cash. That's the write-off of the deferred (inaudible) and the OID that was related to the original issuance of the debt. However we do have that $7 million cash payment.

But my point is, is that considering the time of the year we did the repricing and the out-of-pocket costs, it is basically being pushed. It is actually about $1 million to $2 million negative cash-wise this year, but we're still holding our guidance because we can make that up. We are a large Company and as I constantly say, we have a lot of moving parts, that we can offset that.

So that's it with the -- that's the answer on the interest side of things. You had mentioned about the synergies, what we mentioned inside the prepared remarks were the $25 million to $30 million related to the Russell Hobbs transaction and we talked about the pet savings. All we did is we are saying we've always had those in our projections back from the get-go. So that was not a new, we just added those two numbers together to give you an order of magnitude of the kinds of savings that we're going after.

But they were always inside -- they weren't really new numbers, is my point. Okay, and how should we look at changes in working capital this year? Is that going to be an increase, given inflation?

Even though the business will be increasing, we talked about a 3% to 4% increase on the top-line, what we are -- I think the best assumption to use is that working capital will remain relatively flat because we'll have some savings in there. Okay.

Okay. Thank you.

Okay, Operator, I think we have time for one more question and then we will close down the call, if there is one question left.

Your last question comes from the line of Karru Martinson from Deutsche Bank. Your line is now open.

Good morning.

Good morning, Karru. How are you doing?

Doing all right, making it in under the wire, here.

Hey, good man.

Did you guys give what the market share for batteries is in North America?

No, we didn't. But actually the market share -- we've got Karru on the line here asking have we released what the new market share is for batteries in North America. I don't think we've publicly released that, but I don't know if we want to it is Nielsen data.

The minute it is published next week, they'll be able to see it, if they subscribe to Nielsen. I would just say that we are in the high-teens.

Okay. And when we look at the inventory at retail, are we still in the that six to eight weeks of inventory, or do you feel that that has built up here through the holiday season?

I think it is different for each battery company. I can speak to ours, ours is in line with what the retailer (inaudible).

Okay. In terms of the softness in the home category for small appliances in North America, is there any change afoot to address that or is this more of a broader industry issue that you guys just have to wait through?

Okay, Terry, this is -- we're going to cut it off. Why don't you answer that one, and then I think we are going to wrap up.

Okay. Yes, I think what we are doing to address it as a Company is bringing out more performance for the same, as Dave said, as far as the Spectrum value model. We actually see some nice improvement in the back half of the year in our products and placement. So just speaking from our side of the equation, I think it is looking much better in the back half of the year for us.

Thank you very much, guys.

Thanks, Karru.

Listen, everyone, thank you very much. David?

I just want to say again, on behalf of Dave Lumley and Tony Genito, Terry Polistina and John Heil, again, thanks to all of you for joining us on today's Spectrum Brands first quarter 2011 earnings conference call. And we will talk to you again next quarter, and have a good day. Thank you.

Thank you.

This concludes today's conference call, you may now disconnect.