Spectrum Brands Holdings Inc (SPB) 2012 Q1 法說會逐字稿

Good morning. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands fiscal 2012 first-quarter earnings 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, Friday, February 3, 2012. Thank you. I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may being your conference

Good morning and welcome to Spectrum Brands Holdings fiscal 2012 first-quarter earnings conference call and audio webcast. I am Dave Prichard, Vice President of Investor Relations for Spectrum Brands and moderator for our call today. 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 of Global Appliances; and John Heil, President of our Global Pet Supplies.

Our comments today include forward-looking statements, including our outlook for fiscal 2012 and beyond. Now 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 that outlined in our press release dated February 3, 2012, and our most recent SEC filings and Spectrum Brands Holdings' 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 in this call. Reconciliations on a GAAP basis for these measures are included in this morning's press release and 8-K filing, which will both be available on our website in the Investor Relations section. Now let me briefly review our GAAP results.

For the first quarter of fiscal 2012, the Company reported net income of $13.1 million or $0.25 per diluted income per share on average shares and common stock equivalents outstanding of 52.6 million. This compared to a net loss of $19.8 million or $0.39 per diluted loss per share in the year-ago quarter which was based upon average shares and common stock equivalents outstanding of 50.8 million. By segment for the first quarter of fiscal 2012, the Global Batteries and Appliances segment reported net income of $89.9 million versus $79.4 million a year earlier. The Global Pet Supplies segment reported net income of $13.2 million in fiscal 2012's first quarter versus net income of $13.4 million in fiscal 2011. Finally, the Home and Garden Business segment reported a net loss of $6.4 million in the first quarter of fiscal 2012 versus a net loss of $7.5 million in fiscal 2011.

With that, I am very pleased to turn the call over to our Chief Executive Officer, Dave Lumley.

Thanks, Dave; thanks for joining us today. We reported a solid first quarter this morning, putting us on target to deliver another year of improved results, strong free cash flow, significant debt paydown, and additional shareholder value creation. We posted solid EPS in the quarter, swinging from a net loss last year and, perhaps more importantly, achieved a third consecutive first-quarter record for adjusted EBITDA of $125 million, a 2% improvement versus 2011. Foreign exchange had a $2.8 million negative impact on our first-quarter adjusted EBITDA. Stringent expense controls, cost containment, and cost synergies across the Company were significant contributors to our record first-quarter EBITDA, as we made excellent progress in sizing our structure and product offerings to match the market needs.

Our lower net sales were a function of timing of retailer orders between our fiscal fourth and our fiscal first quarters this year versus the same quarters in 2010, as well as our previously-announced decision to eliminate unprofitable North American appliance promotions in the holiday season. When you compare the combined fourth quarter and first quarters of both 2011 and 2010, our net sales grew 2%. Given important distribution gains in all of our businesses, new product launches and line extensions and further geographic expansion, coupled with our first-quarter acquisitions of Black Flag and FURminator, we see our net sales growth accelerating as we move through fiscal 2012, especially in the last half of our fiscal year. For fiscal 2012, we continue to expect net sales to increase at or above the GDP, consistent with what we have said before about our revenue growth. Generally, low single digits. We see adjusted EBITDA increasing at a faster percentage rate, reflecting not only the leverage we get from higher sales, but also from our continuing cost reduction programs and many new higher margin products.

I want to emphasize that deleveraging and strengthening our balance sheet remains a top strategic and value-creation priority for our Company. Just like last year, we plan to use our strong free cash flow of an expected $200 million to continue to pay down debt in fiscal 2012, with payments occurring in the last two fiscal quarters of the year, consistent with the peak period of our cash flow generation. As a result, we continue to expect to achieve a leverage ratio of that 3.4 times or less by the end of fiscal 2012.

During the first quarter, we also executed on a major strategic priority to pursue targeted, bolt-on acquisitions, primarily in our Global Pet Supplies and Home and Garden divisions. We are excited about our acquisitions of the Black Flag TAT brand assets in November for our Home and Garden division and the FURminator pet grooming business in December, both of which are accretive acquisitions, offer compelling synergies and will accelerate our sales and EBITDA growth this year and beyond. We are hard at work integrating both these businesses and starting the process of achieving the many and major synergies that both deals provide.

We believe our Spectrum Value Model is a game changer. We remain pleased with how well it is working in this challenging environment of sluggish consumer spending, tighter retailer inventories, inflationary pressure, and rising commodity and Asian supply chain costs. Because our Spectrum Value Model resonates with retailers and consumers, we continue to generally outperform our competition in each category we are in. Our Spectrum Value Model delivers genuine value to the consumer with products that work as well or better than our competitors' for a lower cost. It also provides higher margins and lower acquisition costs to our retail customers, along with excellent category management. This we continue to believe will serve us well going forward.

Our Battery business continues its growth primarily because of our proven product performance strategy of last as long for less. Rayovac remains at its highest market share in this century in North America. We are pursuing new retail accounts in North America and broader shelf space at others and look forward to updating you all on our progress in the months ahead. Our Varta brand continues to grow in Europe paced by a solid rollout at Carrefour, the world's second-largest retailer, and further expansion in Eastern Europe. As we had expected, our Carrefour multi-year, branded battery partnership is also opening doors in Europe for other retail distribution wins. After a challenging fiscal 2011 in Latin America, primarily Brazil, due mainly to unusual competitive activities, we are executing on plans to improve our performance in 2012, now that the Latin American battery market has stabilized. We remain the number one battery player there with the best overall alkaline and zinc carbon performance in share. Our Global Hearing Aid Battery business continues to shine as we maintain a very solid, number one, worldwide market share position with growth continuing in the US, Europe and now Latin America. This business achieved its highest net sales ever for the first quarter, led by an aging population and increased awareness and diagnosis of hearing loss, global demographic support increased hearing aid use in the years ahead.

We see another solid year for our Remington personal care business as it continues to launch new products and line extensions and expand its market positions in the US, Europe and Australia and New Zealand. We are pleased with our early progress in the $2 billion US men's wet shave market in both handles and systems, as well as our success so far at entering the $1 billion US market for women's hair care accessories. Perhaps most exciting is the initial and very positive US consumer reception of our unique iLight Pro intimate hair removal system for women and men, with a launch imminent in the large market of Brazil. The major new initiative in our Remington business is now to rapidly expand and grow our consumables product line at a faster rate than our durables. iLight, hair care accessories and wet shave are the foundation to advancing this strategic initiative.

In North American home appliances we saw a good and solid holiday season. We successfully launched a new Farberware kitchen appliance line exclusively at a key US retailer with an emphasis on affordable elegance. We believe our Farberware coffee and tea maker, food processor and blender go toe-to-toe with other well-known brands and outperform many of them with more features, better pricing and higher end finishes.

Across the pond, Russell Hobbs regional rollout in Eastern Europe is gaining momentum in countries such as Poland, Russia, Hungary, Romania, and the Czech Republic. We are also growing share in Russell Hobbs' home market in the UK. Finally we have made new customer inroads in Brazil with George Foreman grills.

As I mentioned last quarter, while we are growing certain segments in geographies of our Small Appliance business, we will continue to aggressively phase out or replace low margin appliances here and abroad, such as we did in Europe last year. We continue to work with supply and retail partners to eliminate SKUs and brands where it makes sense to sustain our collective margins given the significant cost pressures from Asian suppliers.

In Global Pet Supplies, we see a stronger fiscal 2012 in sales and EBITDA, to be accelerated for sure by our late December acquisition of FURminator, the global leader in branded dog and cat grooming products. Pet should enjoy a strong second half driven by significant recent distribution wins, a full slate of new product launches in the second quarter in both aquatics and companion animal segments, successful pricing actions and accumulative positive impact of its US plant and distribution center integration initiatives.

Our Home and Garden division's first quarter of 2012 marked the 14th consecutive quarter of year-over-year adjusted EBITDA improvement. On the heels of an outstanding fiscal 2011, we expect even better results from Home and Garden in 2012, especially given any measure of more normal weather this spring. We have an array of exciting new products and distribution wins in place for this spring and a solid pipeline ready for 2013. The integration of Black Flag TAT business is progressing smoothly. The Black Flag and TAT brand assets are an excellent strategic fit for Home and Garden, strengthening its household insecticide portfolio and bringing significant channel growth opportunities and operations synergies. In short, Home and Garden continues to achieve retail distribution gains, combined with aggressive expense management and the over delivery of cost improvement programs. Like our Pet business, Home and Garden continues to selectively evaluate additional, tuck-in acquisition candidates as part of its multi-pronged growth strategy.

On the cost side, we continue to attack the significant commodity and Asian supplier cost increases affecting so many companies today and which we have talked about now for over a year. We've made good progress [and I'll say now], primarily in our Small Appliance business, through continuous improvement programs, integration and restructuring programs, retail wins and distribution gains, and select pricing actions. As I mentioned earlier, but a point worth emphasizing, we have taken a lot of cost out of our supply chain and out of our overhead and G&A to make sure we continue to maintain a very lean operating structure. At the same time, however, we are reinvesting in the business through capital expenditures and new product development and cost reduction initiatives, along with a 10% increase in R&D this year versus 2011. As a reminder, our annual target in each of our businesses is to reduce cost of goods sold by 3% to 5%.

We remain ahead of schedule with our Russell Hobbs integration program. As many of you know, we recently raised our annualized cost synergy projection to $35 million to $40 million from $30 million to $35 million and an earlier, original target of $25 million to $30 million. Plant and distribution center consolidation activities are moving along ahead of schedule in our Pet business and we have started to see additional savings through shared services in our new product development process. Accordingly, we have raised our annualized cost savings for Pet to $10 million to $15 million from $7 million to $11 million, to be realized by the end of 2012. When you combine the Russell Hobbs and Pet cost savings, we are forecasting annualized synergies of $45 million to $55 million by the end of 2012, a key element in our program to help offset higher Asian supply chain costs.

In conclusion, one of our key strengths is that most of our products are nondiscretionary, non-premium priced, replacement products providing value, quality and performance to consumers in their everyday lives. As we continue to believe our Spectrum Value Model is the best retail strategy, especially in this continuing period of cautious consumer spending, higher commodity costs, higher inflationary pressures at all levels, manufacturing, retail and consumer levels. We also believe as more and more consumers try our products, our sales volume will continue to increase along with more distribution space in key retailers worldwide. We remain excited about Spectrum Brands' future and our prospects for an even better financial performance in fiscal 2012 and beyond. I would like to thank you and now move to Tony Genito for a brief financial review.

Thanks, Dave, and good morning, everyone. For the first quarter of 2012, our consolidated net sales of $849 million fell 1% compared with $861 million last year. As Dave noted, the decline was attributed to the timing of retail orders, primarily in batteries, between the fiscal fourth quarter of 2011 and first quarter of 2012 versus those same periods a year earlier, along with our decision to eliminate certain low margin North American promotions, primarily in kitchen appliances.

Our net sales were negatively impacted by $6 million of foreign exchange. First quarter total operating expenses of $200 million decreased $30 million or 13% from last year due to synergies being recognized following the merger with Russell Hobbs and savings from our global cost reduction initiatives, coupled with decreased acquisition and integration and restructuring costs of $9 million and $2 million, respectively.

Corporate expenses for the quarter were $9 million, a decrease from $11 million last year, driven by $1 million decrease in stock compensation expense and savings from our cost reduction initiatives. Due primarily to a continuation of strong expense controls and cost improvement initiatives, operating income in the first quarter of fiscal 2012 grew 21% to $84 million compared with $69 million last year. Operating income as a percentage of net sales improved to 10% versus 8% in fiscal 2011. We reported net income of $13 million or $0.25 per diluted share for the first quarter on average shares and common stock equivalents of 52.6 million compared with a net loss of $20 million or $0.39 per diluted loss per share in the year-ago quarter based upon average shares and common stock equivalents of 50.8 million.

Adjusted for certain items in both years' first quarters, which are presented in table 3 of this press release and which Management believes are not indicative of the Company's ongoing, normalized operations, the Company generated adjusted diluted earnings per share of $0.69, a non-GAAP number for the first quarter of fiscal 2012, an increase of 47% compared with $0.47 last year. We are pleased that for the third consecutive year, the Company delivered record first-quarter consolidated, adjusted EBITDA in fiscal 2012 of $125 million, a 2% increase versus $123 million in the prior year. Foreign exchange had a $3 million negative impact on adjusted EBITDA in the first quarter of fiscal 2012.

The Global Batteries and Appliances and Home and Garden segments both reported improved adjusted EBITDA in the first quarter. Adjusted EBITDA is a non-GAAP measurement of profitability, which the Company believes is a useful indicator of the operating health of the business and its trends. In the interest of allowing more time for your questions, I refer you to our earnings press release and tables for details on our first quarter segment results.

Let me review a few more items in our first-quarter financial statements. First-quarter interest expense was $41 million compared with $53 million last year. This variance was primarily due to lower principal and rates on our term loan and less non-cash amortization of deferred, original-issue discount and financing fees. You may recall that we refinanced our term loan in February of last year, which resulted in significant interest savings going forward. Based on the amount currently outstanding under our term loan of $523 million, the savings amounted to approximately $16 million per year. As part of that process, we wrote off approximately $34 million of non-cash, deferred items in fiscal 2011 related to the refinancing of our term loan and subsequent term loan prepayments. In addition, the $200 million of additional senior secured notes was in place for less than two months in this quarter.

Cash interest for the fiscal 2012 first quarter was approximately $49 million, compared with approximately $54 million for the same period last year. Cash payments for fiscal 2012 were lower, primarily due to lower principal and rates on our term loan. Tax expense for the fiscal 2012 quarter was $23 million compared with $35 million in fiscal 2011. Cash taxes for the fiscal 2012 first quarter were approximately $21 million compared with $12 million last year. Cash taxes were higher for fiscal 2012 due to higher profits in some of our foreign entities as well as various timing differences in payments over the year-over-year particularly in Germany. 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 2012.

Let's turn to a review of our solid liquidity position. We finished the first quarter of fiscal 2012 with approximately $11 million drawn on our $300 million, ABL working-capital facility, which was consistent with normal business seasonality and with a cash balance of about $74 million. As of the end of the quarter, total gross debt was $1.775 billion, which consisted of a senior secured term loan of $523 million, senior secured notes of $950 million, subordinated notes of $245 million, the working-capital facility draw of $11 million, and other debt, which is primarily foreign debt and capital leases, of $46 million. In addition, we had approximately $29 million of letters of credit outstanding.

Regarding our cash flow projections, as we have previously stated, given the strong cash flow potential of our businesses, our goal is to generate at least $200 million of free cash flow for fiscal 2012. We expect capital expenditures to approximate $45 million in fiscal 2012, of which more than two-thirds represents investments in new product developments and cost reduction projects. As Dave mentioned, we expect to use our strong free cash flow to continue to pay down debt in fiscal '12, with payments occurring in the last two quarters of the year consistent with the peak period of our cash flow generation. As a result, we expect to achieve leverage of 3.4 times or less by the end of fiscal 2012. Finally, we clearly have our sights set on refinancing our $245 million of 12% PIK notes this summer when the initial call date occurs in August.

In summary, our first quarter was a solid start toward the improved results we expect to deliver in fiscal 2012. We expect to see top line growth in line with, or better than, GDP in fiscal 2012 with a rate-of-sales growth stronger in the second half of the year. We also expect a higher percentage increase in adjusted EBITDA. The two acquisitions we completed in the first quarter using the $200 million we raised in our mid-November senior notes tack-on offering will accelerate our adjusted EBITDA and sales growth in 2012, with the objective being to further reduce our leverage later in the year and especially on into 2013. Now back to Dave for a few closing remarks.

Thanks, Tony. We are 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, value-proposition leader in all of our spaces. We expect another year of improved sales and adjusted EBITDA in the fiscal 2012, along with net income, significant free cash flow and major debt paydown. We will continue with what we believe is a winning strategy for our businesses; providing superior margins to our customers and offering consumers the same performance at a better price, or better performance at the same price. We will move forward, continue to invest in our businesses, aggressively reduce our cost structure and offset rising supply chain costs.

We will continue to launch new products and product extensions, expand geographically, grow EBITDA and generate strong free cash flow for our shareholders. Spectrum Brands is well-positioned, seasonally and geographically, with diverse products and categories, and a growing portfolio of branded, well-known and trusted products. Our Spectrum Value Model is the key to our ability to continue to gain distribution and shelf space, win, then, at that point of sale and generally outperform our categories and competitors as the preferred, superior value brand. We are winning in a difficult global climate. Spectrum Brands believes we are truly on the move and posed for an even greater growth ahead. Thank you.

Thanks, Dave and Tony. Operator, would you now begin the Q&A session, please?

(Operator Instructions)

Your first question comes from the line of Bill Schmitz with Deutsche Bank. Your line is open.

Good morning. How do you feel about the battery price increase, the Duracell and Energizer one that just went in?

This is Dave Lumley. What do you mean how do we feel about it? (laughter)

Well, are you going to follow the price increase or you going to let it sit for a while and follow later or what's to be done there?

It was a necessary price increase based on raw material increases over the last two years. We think it's good for the category. We have also priced in many places ourselves so we think it's good for the category. It remains to be seen whether it will all stick in this consumer environment but I think it's a good move.

Okay. It seemed like you guys took a lot of market share this quarter in batteries, but I know you talked a little bit about the pull-forward of sales. Are we normalize now between retail sell-through and shipments?

Yes. I believe there is a significant hangover, especially with some of our competitors on those bonus packs, and it's taken a holiday to get through that. I would say, as we've talked before, by March it should be completely clean. I think it's very close now.

I think you are getting much closer now to a consumption model. So I think that's in good shape.

Okay, good. In terms of Latin America, does that mean some of the Japanese competitors who were being, what seems like, unbelievably price competitive down there, have they let up? Is that what's driving the category or are you seeing a big volume acceleration?

Yes, for those of you who really want to get into it, that's a very unique market because you have a lot of zinc carbon sales, where Panasonic is strong and us. And then you have the three traditional alkaline companies. It was like World War II; everyone got involved. So I think that's all calmed down.

There is some unusual promotional activities from two of the companies, because they are sponsoring World Cups and Olympics and things, so they have a lot going on down there. But I think we have finally stabilized there and I think you will see rational market this year. Plus, I think all the companies who had loaded product in for those promotions, that, the field inventory, has sold out.

Okay, great, Lastly, are there any appliances that are driving growth faster than anything else? Because there wasn't really anything cited in terms of individual SKUs or individual products.

I'll let Terry Polistina answer that. He's on the call. He runs our Appliance business.

Yes, I think in particular the Hero products we have coming out on the Remington side and the hair care line. And then we talked about it in the past where we thought when we put the businesses together we would see real geographic opportunities by leveraging the Spectrum Brands infrastructure in Eastern and Western Europe; and that was something that is starting to kick in for us.

Some geographic expansion and then really some nice Hero products on the Remington side. And then we've just recently launched the Farberware brand, which is a new, more mid-price-point brand, which was pretty good for us in the quarter; and we see that as a nice opportunity going forward.

So the trends of the personal-care stuff being pretty solid and maybe a little bit of sluggishness on the kitchen appliances probably continues?

Yes, I think the kitchen appliance side around the globe will still be GDP type of growth, but our strategy is to focus in on more profitable businesses. So I think that's where you are seeing a little bit of us trimming on some of the lower margin promotions going forward.

Great. Thanks, David and Terry, I appreciate it.

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

Good morning. Just trying to understand a little bit more about the pull-forward, especially on the Battery business and the impact on this quarter. Can you quantify that? I'm trying to understand, would you have missed the 2011 goals had you not benefited from this pull-forward or was it just not that meaningful?

This is Dave Lumley. Several retailers -- and I think you heard this on the other calls -- wanted the batteries shipped in September this year. They wanted it set up earlier. It's less than $10 million. We wouldn't have missed last year, but it's still affected year-on-year in North America.

With us, we also had the Latin America situation where we had significantly less batteries going in this quarter as we had to ramp our factories back up, because it had been down so long, so we did not catch those sales. We're getting them now. So those two things added together with the battery story.

The bigger story was, as we've discussed at length, our decision six months ago, which would take you through the fourth quarter and first quarter, not to participate and up to tens of millions of dollars of small appliance promotions that were all saying they were low margin would be an aspirational goal.

That's really what drove the sales this quarter. We could have shipped those and lost several million of EBITDA and had a nice top line, but that's really not our strategy.

Okay. I don't believe you have disclosed what the recent acquisitions add in terms of EBITDA this year. So I'm just trying to understand how that plays into your cash flow forecast, since I think you reiterated most of the guidance, but those things have happened in between.

Yes. This is Tony. Yes, we really haven't given specific guidance on that, Bill.

But what I can tell you is that with respect to the Black Flag acquisition, we are very pleased with where we are to date on that from an integration standpoint. Basically, it is virtually done with the exception of us just bringing a few other products because of registration timings, which would be brought into the factory, into our factory, by the end of this summer.

In the case of FURminator, very, very pleased where we are so far. John Heil and his team have a very detailed integration planned that is in place; and they will be implementing that over the next several months. Again, very, very happy with that.

I think that we will see clearly growth this year as a result of those acquisitions that will contribute to our EBITDA, as well as our free cash flow generation. I guess really stay tuned as to what it does.

This is Dave Lumley. Let me put it another way for you. Did we need those two acquisitions to make our $200 million in cash flow? No.

But in effect by maintaining guidance, you're not actually lowering the base business in terms of your expectations now?

No.

I'm just trying to understand, since you're just reiterating guidance, but you've made two acquisitions interquarter, how I should factor that in?

Yes, I think those will be why we say cash flow $200 million plus.

Yes.

That's why we say GDP, at least GDP, that's why we say EBITDA better than that. We just want to get them integrated. We want to make sure everything goes right. We don't want to do anything wrong, so we see them all as upside to the guidance.

Switching to currency, can you give us any guidelines on current spot rates, what the impact would be to top and EBITDA for 2012?

Wow.

Is it negative 3; is it negative 5?

It's kind of a tough one to answer, Bill, only because with our global business, about 15% of our business is in the euro for a time. I'm sure that's what you're focused on right now.

If you look at where the euro was for the first quarter, on average it was at 1.35. What the average was for last year was 1.36 for the euro. Right now, the euro's spot rates are about 1.32.

I don't see it as being a significant impact on our business considering that the euro represents about 15% of our consolidated revenues. So, I would not see it as a material impact on sales; and I think the impact on our profits would be relatively de minimis that we would be able to overcome that impact at those rates right now.

Did you primarily talk about -- this current quarter obviously gets tougher comps as we get to June and September.

Yes, again, I don't have crystal balls to where the rates will be, but I'm just looking at a spot rate of 1.32 today, if that was to be extrapolated into the remaining quarters. As I said, I don't see it as being a large impact. It will be an impact, but not a large one.

Okay. Last one on the acquisitions and debt, I understand I think your goal -- you are currently, from what we can tell, because I don't have the EBITDA of the acquisitions -- at 4.4 times leverage and the goal to get that down to 3.4 by year-end. That's obviously exclusive of making other acquisitions, issuing more debt; is that correct?

I don't know. You lost me at the 4.4 leverage. If I take our LTM EBITDA and divide it by our gross debt of -- take $1.775 billion and divide it into 460, you come out with about $3.8 million on a gross basis. What we said is that we plan on being at 3.4 or lower by the end of this fiscal year. So we do anticipate in the latter half's, typical with our normal cash flow generation timing, to generate cash flow. And with that cash flow, continue to resume our focus on paying down debt.

Okay. I understand it's lamitus. I'm trying to understand, I as soon you're looking at other acquisitions. You may issue more debt; that 3.4 goal is exclusive of that?

Right, the 3.4 is what I know today, correct. Or what we know today, I should say. If some extremely, very interesting acquisition was to come by between now and the end of the fiscal year and we were to jump on that, then we would recalculate those numbers, but right now that's based on what we know today, Bill, you're absolutely right.

Okay, thanks.

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

Good morning, guys. Continuing on this conversation about the debt here and acquisition strategy. Last fiscal year you guys generated $220 million of free cash flow. This year you are guiding at $200 million free cash flow, but at the same time, you've issued $200 million of new debt. So it doesn't seem like you are moving away from the deleveraging scenario you've been talking about.

This is Tony. I'm sorry, last year we generated $191 million of free cash flow, Hamed, not $220 million. We paid down $225 million of term debt.

And again just to refresh everyone's memory, that was driven by two factors. One is the cash flow generation that we achieved last year of $190 million plus. In addition to that, we had higher cash balances starting the year from the prior year, which we had consciously said that we wanted to reduce those balances as we exited further from the Chapter XI that we had three years ago, that we would be able to utilize some of that cash and pay down debt, which is what we did.

So, just to get the numbers straight, it was $191 million of free cash flow generation last year and term debt of $225 million. We've said again, reiterated our guidance, that we plan on, our goal is to, generate free cash flow of at least $200 million. And again, our primary focus -- and I think I picked up in your question, you are correct, we have not taken our eye off the ball in the sense that we are focused on deleveraging.

Again, we did the $9.5 million, $200 million tack-on back in mid-November; and the purpose of that was to fund the acquisitions that we consummated. And again, as we generate the free cash flow this year, we will be focused on paying down debt.

Okay. As far as the product strategy goes and moving away from the low margin business, how much of that is going to show up in gross margin and how much of it is going to show up on the operating line?

This is Dave Lumley, and I'll also let Terry jump in. Most of those are promotions, and they don't have much gross margin, so those are virtually very difficult to do when you have the type of cost increases that are coming out of Asia. So it's more or less margin -- negative margin avoidance, would be a better way to say it, to help maintain our margin, yes. I don't know, Terry, if you want to add anything?

Yes, no, I think that's right. If you didn't have the low-margin stuff, it would help your gross margin moving forward, so you have lower sales and better gross margins from the core business.

Okay. My last question is a follow-up, how much do we expect to see as far as going forward goes as far as these discontinuation promotions, as an impact on revenue?

This is Dave Lumley. I would say that I think that since we have now done it, that it should not go down anymore unless there is significantly more cost increases. You have to just wait and see when you see what the cost of the good is when you go to the promotion.

The small appliance business does a significant amount of revenue in this area. It has been a loss leader for years for retailers and manufacturers, but right now those things cost so much, you're going to have to price them higher. So I would not anticipate dramatic reductions in the future.

But if the costs keep going up, then you're going to have to price up. So we will see.

Okay. Thank you.

Your next question comes from Reza Vahabzadeh with Barclays Capital. Your line is open.

Good morning. On kitchen appliances, to round that conversation out a bit, are you seeing any discipline in that category right now? Obviously input costs, as in sourcing costs, are what they are. And obviously you are taking some action in terms of both cost savings and SKU rationalization. Are you seeing that from other competitors as well?

I'll let Terry answer that. I'll only say on a macro basis, it is moving in that direction. This is also an industry where there is some significant private label brands even though you know the brand name; and you are going to see prices move here; and you are going to see it happen soon. Terry, you want to jump in?

Yes, I won't speak for the other competitors, but I would say the same thing Dave said. The costs are continuing to rise. We're going to be disciplined about dealing with it and focusing in on the profitability of this business; and we'd hope other competitors are also paying attention to rising costs and create or do the same thing they need to do to their business. But I couldn't tell you if they are or aren't at this point.

Okay. As far as overall sell-through across your product lines, can you make some comments on that, excluding shipment's timing from fourth quarter to first quarter or second quarter? Obviously overall sales trends for the fourth quarter at least in North America were mixed, but what did you see in your particular product lines?

You mean overall?

Yes.

In virtually every category of ours, we saw positive POS comps versus the year before, especially when you look at what's called selling to your space. So let's say you had 20 slots on the shelf and everyone else totaled 60 slots. Selling your space would mean that you would sell at a rate that would be equal to better than anyone else selling for those slots. And that's what we have been coming to experience now.

So if you are on the shelf side-by-side and you have light performance and a lower acquisition price -- and that's really the key here that I think a lot of people missed. It's lower acquisition price too. Just because you might sell -- we are not in the car business. You sell a Mercedes for 20% off, they're still not going to buy it, because they can't afford the acquisition price.

We have been seeing very, very good movement in this area, outselling our space with positive POS in almost every situation we're in. And I think that's because of this lower acquisition price movement by the consumer. If they had a pag of $20 to spend or $100 to spend, and 10% to 15% of that now is being consumed by, what I would call, non- value items, gasoline, milk, bread, et cetera, they have less to spend.

So they have to find a way to still get the same goods they had before, but with the same amount of money. In fact, maybe even less money, because health care costs more; everything costs more. So the answer to your question is yes, we are pretty positive.

So retailer inventories for your products and in your categories are in reasonable shape?

Very good. We try to operate on a gen ROI basis or on a consumption model with the minimum amount of inventory. So as it sells, we ship. And retailers try to achieve this as well.

I would say that if anything we are in a low inventory position, because most retailers' fiscal year just ended at the end of January. So that's why I'm very bullish on our shipments between now and the end of the year. You take our POS, our distribution gains and the low inventory position. We are very excited about the rest of the year, especially the second half of our fiscal year, remember, that means through the end of September.

Right. As far as distribution gains, as you noted in your comments, just to be clear on that, these distribution gains are taking place in which categories?

All of them. The highest ones in Pet. Very strong in Home and Garden. Very strong in Remington across the board. Very strong in appliances, small kitchen appliances, except for North America where we talked about.

And batteries have been doing very well worldwide. So I think you're going to see a very good trend as we go forward.

Yes.

Okay. If I may ask one last question, as far as cash taxes and cash restructuring expenses, can you repeat those numbers, please, Tony?

Sure. Cash taxes we said were going to be about $45 million to $50 million for this fiscal year, which is consistent with where we typically fall out. And we haven't given a hard number yet on cash restructuring and integration charges. But, with the various programs we have in place, we're probably looking at about $35 million to $40 million, in that neighborhood.

Thank you much.

Your next question comes from the line of Karru Martinson with Deutsche Bank. Your line is open.

Good morning.

Good morning, Karru, how are you doing?

I'm doing all right. So the $45 million to $55 million in synergy savings, just so we're clear, that's a run rate level that you expect to be at when we exit the year, correct?

That is the cumulative, correct. At the end of this year, we'll have completed the various projects that have been initiated between Pet and the Russell Hobbs and within the Spectrum businesses. And yes, that is what the all-in accumulative impact will be on our go-forward basis.

We are experiencing a lot warmer winter than normal and I was wondering how that is impacting your Home and Garden in terms of early shipments and how is the shelf space looking for the spring start of the season?

It's good. It's helping a little bit below the Mason Dixon Line, your Texas and Florida. The tale of the tape is March, so we just have to wait and see what the weather is like in March. We do have significant distribution gains in place and they will be on the shelf, so we just have to hope that the groundhog was right, and that March is a good month.

Karru, as you are well aware our Home and Garden business -- our first fiscal quarter represents less than 10% of the revenues of that business. That being said, the POSs Dave mentioned to date has been very, very positive for this period in time. Our products are selling very well.

And as Dave said earlier to the last question about shelf space and going forward, we are very excited with our placements that we will have for the 2012 season. So I guess stay tuned because the Home and Garden business will really be dictated by the month of March, April, May, June.

Okay. When you guys talked about growing EBITDA at a faster rate in sales, you referenced some new higher margin products. I was wondering if you could provide a little color, what types of products are we looking at here, and perhaps some examples. When will they be on the shelf?

The consumables part of our Remington business, the i-LIGHT Pro with its replaceable bulb, its intense pulsed-light technology, think of i-LIGHT really as a razor, razor blade. One for the base units there, they continue to replace the bulbs. Wet shave and wet goods for us, even though we are very small in it, it's a huge category, very profitable category. Hair accessories is the same.

These are disproportionately higher margins than the durable business. This is a really good new mix for us and also should help us better compete with many of our competitors who have both durables and consumables in this space. The growth of certain parts of our Battery business around the world and segments within are doing better, especially things like hearing aids, certain rechargeable batteries are better than others, than, let's say, zinc carbon batteries, which have a disproportionate amount of zinc in it.

I think in the Pet business, John, you may want to jump in with some of the new products that you've put out there, especially even in aquatics, which is very, very high margin to start with. I'll let John jump in for a minute.

Yes, we have had some really nice success with some of our new aquatics kitchen combos with the LED lighting; and that has generated some excitement in the category and has spurred some growth in our food and chemical business, which is very profitable for us, so that has been really good.

We have had some good success in Nature's Miracle with some new line extensions. Our new acquisition FURminator will be really a very positive impact on our overall margin structure going forward.

Right. That's why a lot of people ask a lot of questions about that. That is a very, very good business.

And then, in our Home and Garden which starts as very strong margin to start with, our dramatic and accelerated growth in the bed bug category, which is all liquid-based, from virtually a few million dollars to significant amounts, is really driving the margins; and that is in full distribution this year.

And again I would like to thank all of you guys from New York and Boston for helping drive this business. Just keep traveling and bringing those suitcases home and that will keep it going for us. New York is our number 1 market. So, those are some examples.

Thanks for that. Just lastly on aquatics, we've weathered a couple of years of downtrends in North America; it seems to be turning around. What are you saying when it comes to some of the big retailers like Wal-Mart and shelf space outlook for that category?

Sure. We have actually had a pretty good run on aquatics now for about two quarters; and on a go-forward basis we feel good about some of the new listings we have. And it has been driven by some innovation on our part with these new kitchen combos, typically smaller in size, LED lighting, different sizes and shapes. The retailers have embraced that and they have added some additional promotional activity. And the larger retailers in North America are showing a positive POS for the first time in a while; and we are just very excited about and trying to keep it going.

Thank you very much, guys.

Your next question comes from the line of Carla Casella with JPMorgan. Your line is open.

Thanks for taking the question. You talked about a great lineup of new product introductions for second quarter, specifically in Pet. How much will the advertising increase be in that quarter or is it more generally spread across the year?

John, you may want to address that. We use the word advertising here at Spectrum as everything we spend to sell it out the door. So, John, do you want to address that a little bit?

We have a lot of new listings. We don't have a lot of new advertising I guess in the traditional sense. So we've picked up some major listings in our grooming business, in our oder business. We picked up some major new listings, as I was saying on the earlier call, on our kitchen combos, which we're very excited about. And we've had some new products and new line extensions in our Dingo line, which are new and innovative and creative and have added some excitement to that business.

So a combination of multiple categories, multiple new listings at our major retailers; and promotions around that is really what we are excited about.

My question is more -- is it focused in the second quarter around the launch or do you set the listings evenly out through the year?

The listings are flowing into the marketplace during the second quarter. So, I am talking about when they ship to the retailer. Then the retailer has to put them on the shelf. And by the time they go through the system, they are set up and in place late second quarter, early third quarter.

John, those typically last six months, nine months before the next set. That's I think maybe what she meant.

Yes.

Great. JCPenney announced a major change in pricing strategy. Can you talk about your relationship with Penny and if you expect that to change at all, go in there, changing pricing stamps. Or if it affects the way you deal with them in terms of either listings or markdown support or any of your business with them?

Most of our business with JCPenney is in the appliance area and you know that our people are very excited when they read something like that, because a lot of retailers say they want to be everyday low price; and they want to provide low pricing, but they struggle to get there. So I applaud JCPenney; that's where the market is. Terry, maybe you want to talk a little bit about JCPenney.

Yes, no, it is an opportunity, because it's much more in line with the Spectrum Value Model; and we will continue to pursue that as we are much more aligned with their go-forward strategy than what their strategy has been in the past.

Okay. One quick question, you talked about gaining share in the Home and Garden, getting retail distribution gains. Does that imply you are getting share? And if you are, who are you typically taking it from or is it coming from different categories?

Well, you'd have to go business-by-business. In our Battery business, there was a time we were only 9 share. And alkaline at about 12 overall. And now we are about double that in both numbers. And that really just comes from gaining some distribution where we weren't before; and we are getting trials across the board among all the people who sell batteries.

I think in relationship to Remington, again we are entering new categories on the consumables, but the share we have taken is against the traditional competitors in men's and women's there. And you just go across the board that way.

Sometimes we're taking it from private labels as retailers are realizing they can't sustain that anymore with the Asian supply chain costs. In Home and Garden we have three principal competitors. They take some share from us, we take some from them.

But again, entering into -- take Home and Garden, for instance with Black Flag, we've been relatively weak in the food and drug market. And one of our competitors, very strong. Now we have a viable alternative. That was very important, so that's a big place to gain share.

So I think as we enter Eastern Europe, we really weren't in there, except for batteries, and now Remington and appliances are charging in there. In appliances, there's 30 people.

So I think it's not where you can say, oh gosh, they're taking it from these four guys. It's just price-point driven. And if we have the product at the right price point, then whoever isn't there is moved somewhere else or moved out.

Would you say you are better or worse penetrated in the dollar stores than some of your competitors?

By category, in some cases we are not in there at all; and in others, we have been in there a long time. We just got a significant win in that category with Remington and we constantly push the other ones. So we are growing in there, those categories right now. Because there is a lot of movement around in that value category in the dollar stores and of course with the other big retailers; and I think a lot of them are realizing that you've got to provide products for those price points if you want those people to come into your store.

See, if no one comes in your store, it doesn't matter; you have no sales, right? I know it sounds funny, but I think the retailers around the world are dawning on this.

You could have seen the new announcement Carrefour. Most of us here on this call think only about the United States, but they are the world's second-largest retailer. Their announcement basically was, we've got to get to value. They have a new CEO.

As JCPenney, we've got to get to value. I can go right down the list with other retailers; we've got to get to value. That's where we are.

Okay, great thanks so much.

Carla, thank you. We will be happy to follow up off-line if you'd like today or next week. We appreciate that. I think we have reached the top of the hour. With that, I do want to thank Dave and Tony as well as Terry and John; and at this point we will now close down our first quarter conference call.

On behalf of Spectrum Brands, we do want to thank all of you for participating in our earnings conference call this morning. We will certainly talk with you again next quarter. Everybody have a great day and a very good weekend. Thanks again.

Operator, we are now finished. Thank you.

You're welcomed. This concludes today's conference call. You may now disconnect.