Spectrum Brands Holdings Inc (SPB) 2012 Q2 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands second-quarter fiscal 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question-and-answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, May 9, 2012. Thank you.

I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Thank you, operator, and good morning and welcome to Spectrum Brands Holdings fiscal 2012 second-quarter and first-half earnings conference call and audio webcast. I am Dave Prichard, Vice President of Investor Relations for Spectrum Brands and moderator for today's call.

With me this morning to lead the call are Dave Lumley, our Chief Executive Officer, and Tony Genito, or Chief Financial Officer. Also with us today as usual for the Q&A session are Terry Polistina, President, Global Appliances, and John Heil, President of Global Pet Supplies.

Now our comments today include forward-looking statements including our outlook for fiscal 2012 and beyond. These statements are based upon managements' current expectations, projections, and assumptions and are by nature uncertain. Actual results may differ materially.

So due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated May 9, 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 review our GAAP results very quickly. For the second quarter of fiscal 2012, the Company reported a net loss of $28.7 million or $0.56 per diluted loss per share on average shares and common stock equivalents outstanding of 51.5 million. This compared to a net loss of $50.2 million or $0.99 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 second quarter of fiscal 2012, the Global Batteries & Appliances segment reported net income of $35.6 million versus $35.5 million a year earlier. The Global Pet Supplies segment reported net income of $14.8 million in fiscal 2012's second quarter versus net income of $14.4 million in fiscal 2011. Finally, the Home & Garden segment reported net income of $21.2 million in the second quarter of fiscal 2012 versus net income of $14.2 million in fiscal 2011.

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

Thanks, Dave, and thank you all for joining us today. With our solid second-quarter results reported today, we remain on a path to deliver another year of growth and strong free cash flow in fiscal 2012.

In our second quarter, net sales grew 8%. Operating income increased 17% and adjusted EBITDA improved 9%, providing good momentum for what we believe will be even stronger performance in the second half of the year.

We are pleased that each of our three segments contributed to our solid second-quarter performance. We narrowed our diluted loss per share in the second quarter to $0.56 from $0.99 in 2011, while our adjusted earnings per share of $0.34 increased 48% compared to $0.23 last year. Most importantly, we achieved a third consecutive second-quarter record for adjusted EBITDA of approximately $102 million.

Boosting our second-quarter performance were our acquisitions of the Black Flag/TAT brands and FURminator pet grooming business, both completed in late 2011. These accretive acquisitions provide significant synergies and will accelerate our sales and EBITDA growth for the rest of this year and beyond.

Our second quarter also saw significant progress in improving and refining our capital structure. We strengthened our balance sheet, lowered our cost of capital, and increased our flexibility to create greater shareholder value with the replacement of our 12% PIK notes with 6.75% senior unsecured notes in March.

For fiscal 2012, we continue to expect net sales to increase at or above the rate of GDP consistent with what we have said before about our revenue growth generally single digits. We see adjusted EBITDA increasing at a faster percentage rate, reflecting not only the leverage from higher sales but also from cost reduction programs, expense controls, new and higher margin products, pricing, and our recent acquisitions.

We also expect higher free cash flow of at least $200 million and a swing to full-year net income in fiscal 2012 from a net loss in fiscal 2011.

We want to emphasize that deleveraging and strengthening our balance sheet remains a top strategic and value creation priority for our Company. 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 latter part of the fiscal year, consistent with the peak period of our cash flow generation. As a result, we continue to expect to achieve a total leverage ratio of 3.4 times or less by the end of fiscal 2012.

Turning to our Spectrum Value Model, we believe it is a game changer. Our model is resonating with more and more retailers and consumers in this prolonged and challenging environment of sluggish retail activity, tighter retail inventories, inflationary pressures, and rising commodity and Asian supply-chain costs.

We believe consumers are embracing our same performance for less price value brand proposition and are increasingly open to trial and brand conversion. As a result, we are generally outperforming our competition and categories as significant distribution gains across our divisions drive share increases and organic growth.

In short, our Spectrum Value Model delivers genuine value to the consumer with products that work as well as or better than our competitors' for a lower cost. It provides higher margins and lower acquisition costs to our retail customers, along with category growth.

The effectiveness of our model is evident in all of our businesses, which continue to grow primarily because of our proven product performance strategy of last as long for less. In batteries, for instance, key distribution gains have been secured here and abroad and continue to take place as we achieve wins at point-of-sale. But not through traditional consumer advertising but by employing a combination of new products and pricing and/or distribution gains. We reinvest our cost improvement success in batteries for enhanced product performance, point-of-sale and retailer gross margins. We are also investing in new battery capacity and performance in plants worldwide to support our present and future distribution wins.

In the US, Rayovac's share expansion continues in many new and existing accounts for all of our battery types from alkaline to rechargeable. Through an effective alkaline market segmentation strategy, our Varta brand is growing in Europe, winning major and very visible business in the past year. This is headlined of course by a contract won last year with the world's second-largest retailer, Carrefour, where our Varta and Rayovac brands are now set in their stores around the world as one of two branded batteries.

We continue to expand in Eastern Europe as well. As we have noted before, our Carrefour multiyear partnership has opened doors for us in Europe to secure other retail distribution wins such as we recently did with Tesco in Eastern Europe.

After a challenging fiscal 2011 in Latin America primarily Brazil, due to mainly very unusual competitive activities, the marketplace is stabilizing. We are seeing improvement in that region and our performance to date in fiscal 2012. We remain the number one battery player there with the best overall alkaline and zinc carbon performance share and have plans to solidify these positions in the months ahead.

We have also launched a major new battery business in Japan and are looking to expand throughout Asia soon.

Our global hearing aid battery business maintains a very solid number one worldwide market share with growth in the US and Europe. In Europe, we were recently recognized in the United Kingdom with the prestigious Queen's Award for continuous achievement in international markets. Led by an aging population and an increased awareness in diagnosis of hearing loss, global demographics support increased hearing aid use. In turn, we are investing in capacity and new technology to enhance our leading global position in this growing category to take advantage of these demographics.

Let me take a moment to comment on pricing. Whether it be in global pet, home and garden, appliances, or the battery market. For instance, in batteries, we have stayed the course with our strategy launched in 2007, same performance, less price. We have selectively priced at virtually every account and we have invested in point-of-sale to achieve increased shelf space and the resulting higher volumes that help expand market share for the retailer. Our goal is to help the retailer grow their category.

The factors that usually affect battery sales and margins are bonus packs, device usage, commodity cost increases, retailer space investments. Since batteries are largely an impulse buy, the more or less that a retailer puts on a store will have dramatic impact on the actual unit sales of batteries. There is also usually a negative impact of private label distribution decisions. And of course, improved battery performance.

These factors have now all been taken in consideration into our pricing strategy and that is what we are executing like we have since 2007.

Let's turn to our personal care division, Remington. Based upon its first-half performance including its 7% sales growth in the second quarter, we see another record year for Remington. Remington, which is driving growth in our total global appliance business, is winning in the marketplace on a global basis. It's being driven by new hair care products, a solid stream of more new products coming into the market, new market entries as well as the steady distribution gains. A major Remington initiative now is to expand our consumables products line at a faster rate than durables.

Women's hair care accessories are the latest addition to growing our higher-margin consumables business. We have experienced early success in the $800 million US market for women's hair care accessories at several key retailers and mass merchants. We look forward to continuing this in the year ahead.

In global home appliances, we are tracking ahead of last year despite Asian supply-chain cost pressures especially in North America. We have seen encouraging results from our Farberware kitchen appliance line launched last year at a key US retailer.

In Europe, market shares remain strong especially in the UK, with expansion continuing into newer markets of Eastern Europe such as Poland, Russia, Hungary, and Romania, where Russell Hobbs had literally no presence two years ago.

In Latin America, we have successfully launched Farberware as well, with positive results from retailers and consumers. The brand offers key attributes such as modern, bold design, unique features, and competitive price points. Early placements include Central America and Colombia.

In Global Pet Supplies, we see a stronger fiscal 2012 in sales and EBITDA, helped by our FURminator acquisition. Global Pet is also expected to have a strong second half driven by first-half distribution wins, new product launches in the second quarter in both aquatics and companion animal segments, several pricing actions, and the cumulative positive impact of our US plant and distribution center integration initiatives.

New companion animal launches are concentrated in the Nature's Miracle and Dingo lines and we have a host of new products launching in our Tetra aquatics line as well. We have been pleased with recent improved performance in our North American aquatics business, driven by investments to bring consumers into the space. We could also report that FURminator integration program is tracking well ahead of schedule.

Turn now to our Home & Garden division. Our Home & Garden division posted very strong results in the second quarter, with a 22% increase in net sales and a 42% increase in adjusted EBITDA. This is the 15th consecutive quarter of year-over-year adjusted EBITDA improvement for our Home & Garden business.

Favorable weather produced the earliest lawn and garden season in a long time. Our point-of-sale was exceptionally strong in March as retailers responded quickly with record orders.

This is a great example of our Spectrum Value Model at work. As always, weather will determine the duration and timing of the season but in April, POS and customer orders continued to track well.

New promotions and marketing programs are launching now to extend the season and to continue to drive share gains. We also 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 the Black Flag/TAT business is virtually complete and the acquisition is already paying dividends in this current season. In short, with favorable weather at its back, Home & Garden should benefit from continued real distribution gains combined with aggressive expense management and the over delivery of cost improvement programs offset commodity pressures. We expect another record year for this business in fiscal 2012.

On the cost side, hefty commodity and Asian supply-chain cost increases remain a headwind especially in our home appliance business as they are for so many of our suppliers, competitors, and retailers today. We expect this challenge to persist on into fiscal 2013.

However, we have made substantial progress in offsetting it, again fairly in our home appliance business through continuous improvement programs, integration, and restructuring programs, retail wins and distribution gains, select and continuing pricing actions, and increased dual sourcing both in and outside Asia. This is a big push for us as we intend to continue to develop a worldwide footprint of alternative sourcing to Asia.

We are expedienting global platform development in home appliances and leveraging core R&D to drive new claims and better product mix from our low-cost innovation approach. We are reinvesting in the business through capital expenditures and new product development and cost reduction initiatives along with a nearly 10% increase in research and development this year versus 2011.

As I have mentioned before, while we are growing certain segments and geographies of our small appliance business, we will continue to aggressively phase out or replace low-margin appliances here and abroad. We continue to work with our supply and retail partners to replace SKUs and brands where it makes sense to contain our collective margins, given the significant cost pressures from Asian suppliers.

Finally, as a reminder, our annual target in each of these businesses is to reduce cost of goods sold by 3% to 5%. We are achieving that in most cases.

Thank you and now I would like to turn it over to Tony, our CFO, for a financial review.

Thanks, Dave, and good morning. For the second quarter, consolidated net sales of $746 million increased 8% versus $694 million last year. Each of our three segments reported higher revenues, which included $14 million of net sales from the Black Flag/TAT brands and FURminator acquisitions, which were completed on November 1, 2011 and December 22, 2011 respectively.

Excluding net sales from the acquisitions, our second-quarter net sales increased 6%. Foreign exchange negatively impacted net sales by $9 million.

Our second-quarter gross profit improved $260 million versus $255 million last year; however, gross profit margins decreased to 34.8% from 36.8% as a result of a $14 million increase in commodity prices, Asian supply-chain costs, and changes in product mix.

Second-quarter total operating expenses of $205 million decreased $3 million or 1% from last year due to decreased stock compensation expense of $2 million coupled with the recognition of synergies related to the merger with Russell Hobbs and savings from our global cost reduction initiatives. Corporate expense of $15 million for the quarter was essentially unchanged.

Driven by the net sales increase and a continuation of strong expense controls, operating income in the second quarter of fiscal 2012 grew 17% to $55 million compared with $47 million last year. Operating income as a percentage of net sales improved to 7.4% versus 6.8% in fiscal 2011.

Our effective tax rates in the second quarter was 142% compared with 100% last year. Our book income tax rate is impacted by our high level of profits in foreign jurisdictions, which means we provide for foreign income taxes even while we have a book loss in the United States. Our US book loss results from substantially all of our debt and restructuring costs being incurred in our US entities and since there is a valuation allowance against US deferred tax assets, we are unable to book any financial statement benefit related to our US domestic losses. This impact is magnified by the tax amortization of certain domestic and definite lived intangible assets. We believe that our effective tax rate will be substantially closer to the US statutory rate of 35% in the last two quarters and estimate that our fiscal 2012 full-year rate should be in the range of 45% to 55%.

We reported a smaller net loss of $29 million or $0.56 per diluted loss per share for the second quarter of fiscal 2012 on average shares and common stock equivalents outstanding of 51.5 million compared with a net loss of $50 million last year or $0.99 per diluted loss per share with average shares and common stock equivalents outstanding of 50.8 million.

Included in this year's second-quarter net loss was interest expense of $27 million related to the replacement of our 12% PIK notes with $300 million of 6.75% senior unsecured notes in March. Excluding the $27 million of interest expense incurred in conjunction with the PIK note replacement and using a lower and more normalized effective tax rate, the Company would have reported net income and earnings per share in the second quarter.

Adjusted for certain items in both year's second quarters which are represented in Table 3 of today's earnings release and which management believes are not indicative of the Company's ongoing normalized operations, the Company generated adjusted diluted EPS of $0.34, a non-GAAP measure for the second quarter of fiscal 2012, an increase of 48% compared with $0.23 last year.

We are pleased that for the third consecutive year, the Company delivered record second-quarter consolidated adjusted EBITDA in fiscal 2012 of $102 million, a 9% increase versus $93 million in the prior year. The improved adjusted EBITDA was driven by increases in our Home & Garden and Global Pet Supplies segments, which included a combined adjusted EBITDA of $5 million from the Black Flag/TAT brands and FURminator acquisitions.

Excluding the acquisition impact, the Company's adjusted EBITDA in the second quarter of 2012 increased 4%. 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 second-quarter segment results.

Now let me review a few more items in our second-quarter financial statements. Interest expense for the second quarter was $69 million compared with $72 million last year. This reduction was primarily due to lower unusual expenses related to the replacement of our 12% PIK notes in this year's second quarter compared with unusual expenses related to the refinancing of our term loan which occurred in the second quarter of last year. As a result of the replacement of our 12% PIK notes, we expect to save approximately $10 million annually in lower interest costs while improving the Company's strategic and financial flexibility for creating shareholder value.

Also contributing to the year-over-year variance in interest expense was higher expense this year for our incremental $200 million of senior secured notes issued in the first quarter of fiscal 2012 which was virtually offset by lower expense on our term loan and interest-rate swaps compared to last year.

In connection with replacing the PIK notes in the second quarter, we incurred $27 million of charges reflected as interest expense, which included $25 million of cash charges related to the call and tender premium and we wrote off $2 million of non-cash deferred financing fees related to the 12% PIK notes.

In fiscal 2011, we incurred $29 million of unusual charges related to the refinancing of our term loan including a cash prepayment premium of $5 million and the write-off of non-cash deferred financing fees of $15 million and unamortized original issue discount of $9 million.

Cash interest excluding the unusual items for fiscal 2012 and fiscal 2011 just mentioned was $28 million for fiscal 2012 compared with $37 million last year. Cash payments for fiscal 2012 were lower primarily due to timing of payments. Cash interest in fiscal 2012 is now expected to approximate $150 million.

Tax expense for the second quarter was $17 million compared with $25 million in fiscal 2011. Cash taxes for the second quarter were $10 million versus $6 million last year. Cash taxes were higher in fiscal 2012 due to higher profits in some of our foreign entities as well as various timing differences in payments year-over-year particularly in Germany.

As I 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. However, we will continue to incur foreign and a very small amount of state cash taxes. Cash taxes are now expected to be $55 million to $60 million in fiscal 2012, higher than our earlier expectation of $45 to $50 million due to our overall higher foreign profits and the timing of payments primarily in Germany.

As you may recall, our cash taxes in fiscal 2011 were $37 million, which was lower than our guidance of $45 million to $50 million and that was primarily because of the timing of payments -- tax payments in Germany.

I would like to take a moment to review our solid liquidity position. We finished the second quarter with $50 million drawn on our $300 million ABL working capital facility and that was consistent with our seasonal peak level at that time of the year and with a cash balance of about $52 million.

As of the end of the quarter, total gross debt was $1.878 billion, which consisted of a senior secured term loan of $523 million, senior secured notes of $950 million, senior unsecured notes of $300 million, and working capital facility draw on our ABL of $50 million and other debt which is primarily foreign debt and capital leases of $55 million. In addition, we had approximately $28 million of letters of credit outstanding.

Regarding our cash flow projections, given the strong cash flow potential of our businesses, our goal is to generate at least $200 million or approximately $4 per share of free cash flow for fiscal 2012. We expect capital expenditures to approximate $45 million in 2012, of which more than two-thirds will represent investments in new product development and cost reduction projects.

We expect to use our strong free cash flow to continue to delever during fiscal 2012 with payments occurring in the latter part of the fiscal year consistent with the peak period of our cash flow generation. As a result, we expect to achieve a total leverage ratio of 3.4 times or less by the end of fiscal 2012.

In conclusion, with our solid second quarter and first half performance, we remain on target to deliver another year of improved results in fiscal 2012.

Now back to Dave for a few closing remarks.

Thanks, Tony. As a global value proposition leader in our categories, we believe we are especially well-positioned to win in this very challenging global economy and climate of restrained consumer spending. We have a winning strategy for our businesses, providing superior margins and category growth to our customers and offering consumers the same performance at a better price or better performance at the same price in all of our products.

We will continue to invest in our businesses, maintain a very lean operating cost structure, work hard to offset rising Asian supply chain costs, continue to push continuous improvement globally, launch new products and product extensions, prune low-volume and low margin lines, expand geographically, grow our EBITDA, reduce debt, and generate strong free cash flow for our shareholders.

Thank you for joining us today.

Thanks to Dave and Tony. Operator, you may now begin the question-and-answer period please.

(Operator Instructions). Bill Schmitz, Deutsche Bank.

Good morning. What was the debt to EBITDA for the trailing 12 months?

It's about 4 times.

Four times, okay. And then is there any way to sort of disaggregate volume and price mix from the top line in the quarter?

This is Dave Lumley. Could you give me a little example of what you mean -- (multiple speakers)?

How much of the growth in the quarter was just case volume this year versus last year and how much was pricing and then maybe the mix impact together, those two? So like a volume number versus an increase in case volume and then how much pricing impact at the quarter?

I could say in general that would be hard for us by business. I would say that you have some of our acquisitions in there and then you have legitimate distribution gains. Most of our pricing is coming in the second half. So I would say most of that is either the acquired volume or our distribution gains resulting in more shipments. But the pricing is all -- almost all of it is coming in the second half, which will help address our margins.

Got you, that's very helpful. What's the plan with the appliance business? I know you said you were going to try to get out of that sort of opening price point or do what you can. Does that mean Black & Decker is at risk or do you just want to just take the price point at Black & Decker up higher?

Well, no, no, no. We are committed to our brands. What we are saying is that we did a lot of promotions when there weren't so many Asian cost increases built into the product. Those really aren't possible anymore. Literally some of those promoted prices now, they are still prices at a price lower than the acquisition cost of the product.

So Terry Polistina is here. He can tell you a little bit about it.

Yes, I think it's right. Our focus is on the profitability of the businesses and so rather than just driving hard the top line, which we absolutely can do with our great brands, we're focused on striking that balance of everyday cost and respectable profitability across the line. So you will see a softer top line but you will see margin improvement over the future of this business.

Got you, just one last one on batteries. When will we start seeing the Wal-Mart distribution gains?

Well, we don't talk about individual retailers but all you have to do is walk in the stores and what's there is there.

Yes, I think Nielsen and IRI are going to start giving us Wal-Mart data in a couple months.

Yes, the Nielsens will reflect new retailers at the end of next month I think. So at the end of June you should see a whole different landscape of the way that retailers are ranked and the suppliers are ranked in the United States.

When we get that data, will we kind of get close to that sort of 17.5% battery share you guys talk about?

Yes.

Okay, thanks so much. I appreciate the time.

Yes, Nielsen does it (multiple speakers)

Dan Oppenheim, Credit Suisse.

Thanks very much. Was wondering if you can talk on the topic in terms of the market share in batteries looking at the growth in North America. When you think about market share, just wondering what the goals are for that right now and not necessarily in any specific retailers but how you are thinking about sort of the opportunities in terms of shelf space there over the course of this year and this next year?

This is Dave Lumley. We have our internal goal to hit a certain market share but we've had that goal for six years and we are about 70% there. We continue to have I believe market share opportunities because in North America, Rayovac is not in all of the top 10 retailers. There was a time we were in two or three of them. We're in about six or seven of them now and I think soon we have a chance to be in almost all of them.

There's a few contracts out there at two of the big, big retailers that would preclude that until those contracts are up. So I would say we're about 70% to our goal. I think we still have room to grow based on the fact that there are some stores we are not in and that is really what we are pushing for. I also believe that those opportunities will come more and more for the top three battery companies, which we are one of, as the attractiveness of private label for retailer continues to become more and more a risk for them due to the Asian supply, currency, container costs, etc., etc.

Thanks. I guess wondering in terms of the Remington side, you've talked a lot in terms of getting some more of the consumables especially on the men's side. What sort of timing should we think about in terms of just seeing much more new products coming out

I will Terry answer that.

It's more on the women's side than the men's side and the timing is you are seeing stuff now. As an example, Dave spoke about it in the prepared remarks, we had a very successful launch in our hair care accessories just this quarter, which is a category again brand new to the quarter that we are very excited about over the next few quarters and years to come. So it's happening as we speak and our goal is to really have a proportion of our overall appliance business be consumables compared to 100% durables as it was a couple of quarters ago.

Thanks very much.

Lee Giordano, Imperial Capital.

Thank you. Good morning, everyone. Can you talk about your acquisition strategy going forward, what kind of opportunities you are seeing in the marketplace and also what categories you are focused on as you look to grow the business? Thanks.

Sure, our strategy is to pursue small to medium tuck-ins that we continue to concentrate on Pet and Home & Garden. We have a few opportunities right now in both of those. We are pursuing them now. They would continue to be along the lines of the Black Flag, FURminator. People have asked, well, what are the sales? Well the sales typically are $30 million, $40 million, $50 million, $60 million and they tend to have good EBITDA. But more importantly, they can be integrated quickly and provide significant more EBITDA.

Again, in Pet, when we say Pet, we mean companion animal type products to help us balance aquatics and they will all have to be accretive as we go forward.

So we continue to do that. I think that you will see the amount of synergies and growth that these two acquisitions will give us this year and beyond will help drive our EBITDA and drive our debt down faster than if we wouldn't have done them.

Great, secondly in Europe, have you seen any signs of a slowdown in consumer spending given the economic weakness over there or does the economic weakness actually benefit US consumers who are seeking more value?

Well, it's a little of both. Our products being replacement products, lower costs, we have not felt any big impact plus we have been very cautious in certain countries over there with certain retailers. But nevertheless, there are some ups and downs. For instance, John Heil can tell you in aquatics, it is a little softer than normal -- John, if you want to jump in.

It has been a little softer in some of the large central European countries, Germany as an example. But on the other hand, our Eastern European business is still very strong and our growth on companion in Europe is doing well. So that is kind of offsetting it but certainly in aquatics in Germany, it has been a little soft for the last couple of months.

Terry, Terry's business they are driving into Eastern Europe like I said, so they're helping to offset some of that. So it's a pretty solid business for us. A lot of opportunity again because we have distribution opportunities. We planned on the euro being about where it is, so --

And our FURminator acquisition in Europe is a nice opportunity for us as well, given our platform over there was significantly better than what they had in terms of distribution.

And Terry, if consumables can go over there soon.

I would say on a comp country-by-country basis, we see the exact same sluggishness, although our products are doing very well because of the model. But where we have growth opportunities in Eastern and Western Europe because of the infrastructure and the home business in particular had never been in those, so there's a lot of growth there. Then as we add the consumables that are being developed in North America and start to push those out in other regions like Eastern and Western Europe, UK, Latin America, Australia, there's really a lot of runway for growth in that category in particular.

Great. Thanks a lot.

Bill Chappell, SunTrust.

Good morning. Just want to go back to North American battery and just try to understand the 2% growth in the quarter. With the market share gains you talked about and especially at Wal-Mart and actually not following the price increase in full that Energizer and Duracell had, I would thought it would've been a better performance because it seems more in line with your peers in terms of growth.

Well, most of our distribution gains set in April and May and June, so there is part of that. Two, we did price our products, Bill. In fact, we priced our products before they introduced theirs because we remove more batteries from all of our packs than they did. We also priced our other products. So we do have pricing in there.

However, we tend to invest early on in these things to get our displays up and our merchandising and get these products going, so all of that has had an impact. Can we manage the battery business on a long-term basis? We used to be at 9 share. We're at 17 now. I think that's pretty good growth. We anticipate to continue to go in that way.

So I think you'll see our battery business continue to improve over the next three to six months as these sets go into place at all these retailers that we have had a chance to go into.

For instance take Carrefour for instance. We won that business a year ago but it took nine months to flush out all the other inventories, set it, and we had to invest upfront to do that. In fact in Brazil, we just finally got it set.

So it's kind of like when you win a line review or when you're -- pricing for instance, when you take pricing of a supplier say we took pricing but in most cases there is a 90-day to 120-day notice period. There's mix changes. There's promotional changes. So all these things tends to lag, which is why when we were talking about Asian price increases in appliances, you get all of those and they all go into inventory long before you get them from the retailer. Right?

So all these things tend to lag and then you tend to have a better end. It's unfortunate, but in this type of world -- that's the best way I can explain it.

So I should expectant battery trends to improve and pricing to be more apparent as we go forward?

Should.

Okay. Switching gears to -- you commented several times and you have in the past about the inflation out of China and the cost there and I'm just trying to understand where that falls. Certainly I understand it's having an impact on gross margin but if you look at -- or if I look at the appliance business where I would think there's the greatest amount of pressure, EBITDA margins are pretty flat year-over-year. So where are you seeing that? Does that have a chance to kind of eat into the $50 million of cost savings that you are seeing so it's -- how does that play out?

Absolutely. When you look at over half of our cost increases in China are hitting our appliance business and over half of those are hitting it right in North America because the two or three big retailers that drive that business have very competitive pricing.

So why you are seeing our appliance business flat rather than down at the moment is the enormous synergies we have been able to put together for the last two years, which we've been reporting, which are now on their way to well over $40 million. So those synergies and those cost improvement is what's going in there.

But synergies don't last forever and that's why pricing is necessary, so that's why it was going on there.

In the other businesses, most of the cost increases are in purchased goods from Asia, so in batteries that would be more in rechargeables or flashlights. In pet, it would be more of things like in Dingo bones that are tied in China and aquatic equipment. Home & Garden it would be in some of our liquid traps and candles and things like that. So there we have been able to price more effectively but not completely. Again update lag to the retailer by the time they take price, so that is why you see those things.

Now, as pricing comes in in the second half, and I believe Asia, while it will continue to price up, will not -- I don't think they can maintain at this level and stay competitive, but it's going to take suppliers, all of us to find alternative sources, which we are doing.

For instance in our Home & Garden, one of our major businesses, we found a great new supplier in the Dominican Republic and that is making a big difference. In the Pet business, we found a major new supplier in Cambodia which runs off the US dollar who actually have a lower cost and are just as effective.

So I think that anyone in the consumer packaged goods business and frankly most businesses in America that import things from Asia is going to have margin pressure. And it's going to stay here until prices either stick and/or we do all the things we've talked about.

In batteries, we don't have plants in China. We made the decision to keep plants in Wisconsin, England, Germany, Guatemala, Brazil, so there the issue would be more the commodities that go in those batteries, the zinc and magnesium ore. And that's tending to ease a bit. Now ease a bit means it's kind of like the price of gasoline. It's easing a bit at $4 a gallon. Used to be $1 a gallon, right.

So easing a bit on last year is a nice statement but five years ago, magnesium ore and zinc was like $1 gas. So those costs are built in yet you will notice the price of batteries have not kept pace with that as well.

And then at the end of my little discussion here is in most retailers in America you have a direct reduction of volume for price increase. And so that also happens.

That helps. Then just one last follow-up. On the acquisitions, just maybe some clarification. If I look at the FURminator sales for the quarter, if I annualize that, that comes out to about $32 million and I think you had said it was a $40 million plus business and growing. So am I looking at that right? Should I just say based on these numbers that Black Flag is roughly a $25 million business? Thanks.

I will let John answer FURminator and then we will talk about Black Flag.

The FURminator sales on a run rate, Bill, will be at the $40 million rate, that is correct. But it's also a seasonal business so we came out of the lower quarter -- the last quarter was a lower seasonal and the next two quarters are higher seasonal.

Regarding Black Flag --

Black Flag was about $27 million up to $30 million of sales in total for prior year.

Yes, so one of the reasons we're getting Black Flag placed a lot more in the food and drug channel, where we had a harder time competing with our Hot Shot brand because Hot Shot is so dominant at three of the other big retailers. So that is encouraging but more importantly, it takes about a year because of the registrations in the Home & Garden business to be able to really do the things you want to do so I would expect to see a lot better sales of Black Flag in the next fiscal year.

Great, thanks for taking my questions.

Hamed Khorsand, BWS Financial.

Good morning, guys. Just one question. On the debt balance, I know you guys have been saying $200 million reduction from fiscal year but debt has increased more than $200 million this year. So are you basically telling us to look it at more from a leverage ratio than a net decline ratio?

Yes, just some clarification there. First what we talked is a $200 million plus of cash flow generation during the course of the year. Obviously when we talked about debt reduction, we said that we would end the year from a leverage standpoint at or below where we started the year. If you recall, we ended at 3.4 times leverage so we anticipate being at or below 3.4 times leverage at the end of this fiscal year. So that's the clarification.

As to the debt going up, yes, we did the tack on of the $200 million of senior secured notes back in November and that was effectively to fund the acquisitions of FURminator and Black Flag and we did slightly increase from $245 million the PIK note balance to $300 million. Driving that was as you are well aware, this is the high point of our working capital need when we refi-ed that PIK note or replaced the PIK notes. So we basically had taken the funds to replace those, which was the tender call premium of about $25 million.

And then since we were able to -- we were looking initially at $275 million, we were able actually to upsize that to get a very competitive rate at 6.75%, so effectively by borrowing that additional $25 million, which gives us a lot more flexibility obviously and as the CFO, I just love flexibility when it comes to cash, basically we are able to borrow that money effectively for free versus the rates that we would have gotten had we borrowed at the 6.75% balance.

So effectively to answer your question, we've always talked about $200 million of cash flow generation and we've always talked about our leverage ratio being after below 3.4 times at the end of the year, which again we remain committed to.

Yes, but what I'm trying to get to is that -- I understand you are trying to get to 3.4 times but from a standpoint of valuation of the stock itself and just trying to manage growth, wouldn't it be more worthwhile to reduce your debt balance on a net term basis than just purely on leverage ratios?

We focus on leverage, so obviously the cash flow generation that we make we are committed to delevering the balance sheet, as we have said, to the extent that we can. So I don't know how else to put it from a standpoint of where we go forward.

All right, thank you.

Reza Vahabzadeh, Barclays.

Actually if [Elizabeth Gilton] in for Reza today. I just wanted to ask about the Latin American battery market. Can you give us an update on the competitive situation there?

We've talked a lot about it. I think the battery market has stabilized. The extra bonus packs are out of the marketplace in the United States. I think there's still some of that going on in some of the other countries around the world but I believe we will see that stabilize as well. The business has got unit growth worldwide.

I'm sorry, just specifically about Latin America though. Sorry if I didn't say that earlier.

No, you didn't say that. Okay, so Latin America, what's going on in Latin America is interesting. There is a shift from the lower-cost zinc carbon to alkaline in the cities but not in the rural areas. There has been an ongoing price war for about two years that the competitors down there are a bit different. In Brazil, the leaders are Rayovac and Panasonic with the other two name brands in the cities on the alkaline business. That is the biggest market down there.

You have a World Cup and Olympics going in there so you have that normal activity continuing there for perhaps not the right reasons. A lot of corporate sponsorships -- so a lot of activity. So I believe that that market will continue to be up and down the rest of this year but total stabilization should return next year. But again, it's the smallest of the three battery markets worldwide for everybody.

Okay, great. Thank you.

It looks like we have one more question here before we close it out at the top of the hour, operator.

Karru Martinson, Deutsche Bank.

Good morning. When we look at Garden, traditionally I think with the divestitures that you did in the years past, this has been more of a late summer product for controls and everything else. Do you feel that you guys pulled forward some sales here and then you will have a little bit of a catch up as we go forward or do you feel that this is just kind of the overall strength of the market?

In our case it is just the strength of the market and it is a lot of distribution we have now in the chemical side we didn't have before. We almost have 70% more distribution than we had three years ago at the big three.

And I think these distribution gains and just more foot traffic drove more sales of our products during this period. The performance of that division if you were to study it over the last three years is really good and I think it's just built on the Spectrum Value Model where we develop products that are (inaudible) as much as competition. We promote them a lot. We invest a lot of money in big merchandise. We are second only to the leader in the industry that works with the big three all the time, big three retailers.

So clearly it's our distribution gains and a little better foot traffic. The foot traffic goes in to buy a lot of the bag goods early because it's like a four step process. And we do have -- our controls do benefit from the early weather, but I believe this is real and I think -- I don't believe there is very little pull forward in ours. Remember we sell mostly chemicals so things that kill bugs in the house and bugs in the yard and now with some of that rain in Texas this year, which just happened, you'd anticipate a better repellent season, which is a very big part of our business and we are the leader in outdoor foggers and indoor foggers.

So I think you're going to see continued movement for that. I think it's a good, strong business that has a very good future.

Okay, how do you feel about inventory at retail right now?

Not bad. The retailers have become very good at managing their store inventory. For the most part the days are gone of loading in inventory. Once in a while they might buy a little bit before price increase and create kind of artificial shipments for a quarter for a supplier but not so much besides that.

It's something they watch all the time, so I would be surprised if there is over inventory. There might be of certain brands or products that didn't sell as well that were supposed to be promoted or something. They run a very tight ship almost consumption model and they're all getting very good at it.

Okay, just switching gears a little bit over to Global Pet Supplies, aquatics recovering a little bit here at a major customer. Have we bottomed out on that and now we are turning the corner? Or are we kind of just the expectation is that we will kind of continue along at these levels?

Dave Lumley: I think the good news is that a number of our key retailers partnered with us on some new products, some new product concepts, some innovation, and we work together collaboratively to provide some promotional merchandising activities and the consumer responded positively. So some of our desktop tanks and kits we put together, some of our new LED products, some of our new food and chemical products resonated with the consumer and the retailers were delighted by the performance. So as long as we continue the momentum, I would feel good about our ability to keep the aquatics business on a better profile than it has been the last couple of years.

Okay. In terms of the hair care accessories, what's the scale of the launch and the rollout that you have done in that business segment? Are we talking two or three SKUs or where do you see that business growing to?

No, no, 75 SKUs.

Okay, that's now fully rolled out to all of your retailers?

Just starting. It just started this quarter. It's got a lot of -- it really does have from zero to -- I don't want to give numbers. That's Tony's, but millions of dollars in the future. It's going to be a nice business for us.

Yes, we don't talk about certain retailers but there's one with a big red circle that if you go in their stores, you will be able to see them all.

Okay. Thank you. Thank you for that heads-up. I appreciate it, guys. Take care.

Thanks very much and thanks to all of you. We have now reached the top of the hour and I do want to again thank Dave and Tony of course as well as Terry and John and we're now going to close down our second-quarter conference call. So on behalf of Spectrum Brands, we do want to thank each and every one of you for participating in our earnings conference call this morning. We will talk to you again next quarter and everybody, have a good day. Thanks again.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.