Spectrum Brands Holdings Inc (SPB) 2012 Q3 法說會逐字稿

Good morning, my name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to the Spectrum Brands fiscal 2012 third 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, Tuesday, August 7, 2012. Thank you. I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Pritchard, you may begin your conference.

Thank you, operator. Good morning and welcome to Spectrum Brands Holdings fiscal 2012 third quarter and nine months earnings conference call and audio webcast. I'm David Prichard Vice President of Investor Relations for Spectrum Brands and moderator for today's call. Joining me to lead the call are Dave Lumley, our Chief Executive Officer, and Tony Genito, our Chief Financial Officer. Also with us today for the Q&A session are Terry Polistina, President Global Appliances, and John Heil, President of Global Pet Supplies.

Our comments today include forward-looking statements, including our outlook for fiscal 2012 and beyond. These statements are based upon management's current expectations, projections and assumptions and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated August 7, 2012, and our most resent 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 are both available on our website in the investor relations section.

Now let me review our GAAP results very quickly. For the third quarter of fiscal 2012, the Company reported net income of $58.7 million or $1.13 per diluted share on average shares and common stocky equivalence outstanding of 51.8 million. This compared to net income of $28.6 million or $056 per diluted share in the year-ago quarter based upon average shares and common stock equivalence outstanding of 51 million. By segment for the third quarter of fiscal 2012, the Global Batteries and Appliances segment reported net income as adjusted of $40.9 million versus $39.9 million a year earlier. The Global Pet Supplies segment reported net income as adjusted of $18.8 million in fiscal 2012's third quarter versus net income as adjusted of $15.1 million in fiscal 2011. And finally, the Home and Garden Business segment reported net income as adjusted of $44 million in the third quarter of fiscal 2012 versus net income as adjusted of $42.2 million in fiscal 2011.

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

Thanks, Dave, and thanks for joining us today. We first want to note our press release this morning announcing our board's approval of our plans to initiate a regular quarterly common stock dividend starting in fiscal 2013 of $0.25 per share and declaration of a one-time special dividend of $1 per share to be paid on September 18. Initiating a dividend recognizes our Company's strong consistent and ongoing ability to generate free cash flow and reinforces our commitment to deliver attractive returns to our shareholders. Going forward, we expect to use our cash flow to fund our regular dividend, further reduce leverage and make accretive value enhancing acquisitions. In future years after 2013, we expect to evaluate the opportunity to increase our dividend based on the growth of our free cash flow. The payment of our one-time special dividend is in recognition of our strong results in 2012 and meant to allow shareholders to receive a dividend in 2012 that is equivalent to our planned quarterly dividend in 2013.

We do not anticipate and investors should not expect, however, payment of a special dividend in future years. In addition to paying our one-time special dividend in the fourth quarter, we also plan to continue to strengthen our balance sheet by reducing debt in the fourth quarter and achieve our target fiscal year-end total leverage ratio of approximately 3.4 times. Over the long-term, our objective is to maintain a total leverage ratio in the range of 2.5 times to 3.5 times. We have made considerable progress on reducing our leverage and our cost of debt in recent years. We may make acquisitions opportunistically that may take us, on an interim basis only, above the high end of our long-term leverage range objective. We would only do that for very and immediately accretive and or strategically valuable acquisitions and we would only do so if we have a comfortable and specific plan that will return us back to our stated long-term target leverage range. Conversely, we could even see our total leverage potentially drop below our target range.

Now, let's turn to our third quarter results. We reported a solid quarter this morning and reaffirmed that fiscal 2012 will be our third consecutive year of growth and record financial performance. Our higher third quarter net sales, operating income, EPS and adjusted EBITDA were achieved despite increasing negative foreign currency translation impacts from Europe and Latin America, softening European economies and ongoing commodity and Asian supply chain cost increases. On a constant currency basis, our third quarter net sales grew 6% and adjusted EBITDA at 12%, both at rates more than twice as fast as prior year level. We are also pleased to report that our net income and diluted EPS more than doubled in the third quarter, while our adjusted EPS increased 18%. Our improved performance was the result of volume growth, retail distribution grains, new products, geographic expansion, select and targeted pricing actions, continued spending controls and investment paybacks from our global cost improvement programs.

Our acquisitions of Black Flag/TAT brands and FURminator PET grooming business were also key contributors to our higher third quarter performance. These businesses have been fully and quickly integrated, both ahead of schedule and will be significant contributors into fiscal 2013 and beyond. The Black Flag integration was completed in less than six months with first year synergies exceeding our initial projections. Manufacturing benefits were greater and came faster, while SG&A savings were accelerated. For example, only one Black Flag employee was retained.

The story is very similar with FURminator, where the integration team delivered significant annualized savings in just six months. Only about one third of FURminator employees, primarily in sales and marketing, have been retained. And four of five FURminator facilities have already been closed. FURminator was also successfully transitioned into United Pet's European Pet organization and United Pets global platform already is accelerating FURminator sales and profit growth. Our purchase two years ago of Russell Hobbs, which was an $800 million global business, is another example of our ability to rapidly and successfully integrate acquisition and deliver significant synergies, which in this case are helping us to deliver solid 2012 results and offset higher commodity and Asian supply chain costs. We reiterate today that we are on track to deliver $35 million to $40 million in annual cost synergies from the Russell Hobbs transaction, which is an increase from our original estimate of $25 million to $30 million.

In reiterating our fiscal 2012 guidance, 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 low to mid single digits. We see adjusted EBITDA increasing at a faster percentage rate, usually 2 to 3 times higher, and we continue to 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. Our growth has been driven by our Spectrum Value Model. We think it is the right go-to-market strategy for retailers and customers who sell and purchase our largely, non-discretionary everyday replacement consumer products. This is especially so in this prolonged climate of sluggish and cautious consumer spending, tight retail inventories, inflationary pressures and higher commodity and Asian supply chain costs.

Our Spectrum Value Model also delivers real value to the consumer with products that work as well as or better than our competitors for a lower cost. It provides higher margin and lower acquisition cost to our retail customers along with retail category growth and market share gains for our customers. We continue to 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 our market categories. We have stayed the course with this strategy of Last as Long for Less since launching it in 2007.

In our Global Battery business the headline is Rayovac and Varta are winning with the retailer and the consumer. Important distribution gains secured recently and over the past year are being consolidated here and abroad, as we achieve wins at point of sale, not through traditional consumer advertising, but by using a combination of new products and pricing and/or distribution gains. As a reminder, we reinvest our cost improvement success in batteries for enhanced product performance, better retailer POS and market share growth by the retailer and higher retailer gross margins and we are also investing in new battery capacity and performance in plants worldwide to support our present and future distribution wins. Our goal remains, help the retailer grow the category and increase their market share.

In the US, Rayovac share expansion continues in several new and existing accounts. We have been steadily gaining market share in recent years. We believe the recent addition of key retailer point of sale in the new Nielsen data, along with traditional panel data, which would include all sellers, will confirm these points as we move forward in the months ahead. And the timing of these retail distribution gains is important, as we prepare for the approaching and all important Christmas holiday season, which is the key selling period for batteries.

On a constant currency basis, our European battery sales in the third quarter increased as we achieved customer gains in all core products, especially hearing aid batteries, and continued our regional expansion into eastern Europe. In short, we continue to believe that our European battery market segmentation strategy is working well. We're also pleased to report that our Latin American alkaline and zinc carbon battery business continues to rebound in fiscal 2012 and is clearly back on track, as evidenced by a stronger net sales performance in the third quarter, primarily from improvements in the key market of Brazil. We are also encouraged to see what appears to be the end of unusual competitive pressures that negatively impacted the entire market in fiscal 2011.

In Global Appliances, we continue to experience increased commodity and Asian supply chain cost increases. However, we are offsetting most of these primarily with global new product development programs, restructuring and integration cost synergy programs, retail distribution and share gains, especially globally, and stringent expense controls. Our personal care category, Remington, remains on track for another record year. Remington is winning in the marketplace globally from a combination of new products for men and women, product line extensions, geographic expansion and distribution gains. A bright spot this year has been our growth in men's grooming in Europe, where we have seen double-digit sales growth.

We have mentioned before that a major Remington initiative is to expand our consumables product line at a faster rate than durables. Women's hair care accessories and brushes are the latest addition to growing our higher margin consumables business. We are very pleased with our early success at several key retailers and mass merchants in the $800 million US market for women's hair accessories and we are looking at new geographies for this category. Remington also has some exciting new products in development for 2013 and beyond. Finally, Remington is the foundation for our increasing Companywide investments in global e-commerce.

In the home category of Global Appliances, we continue to deliver revenue growth in both Latin America and Europe, including eastern Europe where expansion is progressing well. Our lower results in North America are due to the fact that we have had more Asian cost increases than we have been able to price for. This is why we mentioned several quarters ago that we would reduce the base business to plan phase-out or replacement of low margin appliances. We continue to work with our supply, chain and retail partners to replace SKUs and brands where it makes sense to sustain our collective margin, given the significant cost pressures from Asian suppliers.

In Global Pet Supplies we expect a record year in fiscal 2012 for sales and EBITDA, helped by accretive -- our accretive FURminator acquisition, which already has very positively impacted both this division's gross margin and its EBITDA margin. Global Pet is benefiting from first half distribution wins, new product launches in the second quarter in both aquatics and companion animal segments, achieved pricing actions and the cumulative positive impact of our global 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 continue to be pleased with improved performance in our North American aquatics business in recent quarters, driven by investment to bring consumers into the space and our companion animal business is showing nice growth in Europe, again, boosted now by FURminator. Likewise, our Home and Garden division is on track for another record year having delivered its 16th consecutive quarter of year over year adjusted EBITDA improvement in the third quarter.

We all know that no spring season is ever the same. 2012 has been no exception. Consumer takeaway has normalized in recent months after an explosive early season pace, especially the month of March. Favorable weather produced the earliest lawn and garden season in a long time, but in recent weeks much of the country has seen very dry hot weather. Through it all, we are still out pacing our competition, as results clearly show that branded value alternatives are winning at the store shelf. Our core brands have gained share and we are performing ahead of our category with growth rates. Our Black Flag/TAT brands acquisition has been a major contributor to our performances this year.

Given the extremes of the weather patterns this season, it is constructive to look at Home and Garden's performance for the second and third quarters combined. Net sales grew 12% and adjusted EBITDA at 14% in the second and third quarters versus the same two quarters in 2011. Our performance has been driven by an array of new products and distribution wins. On the operation side, Home and Garden has been successful again this year in implementing cost improvement programs to offset commodity pressures and achieving very high levels of customer service despite the weather challenges of the early season.

Looking ahead, we have exciting product extensions set to launch in 2013 in the controlled, repellent and household categories. With the Black Flag/TAT acquisition now integrated, we expect even more contributions from these brands in 2013. Right now I'd like to turn to Tony for a more detailed financial review.

Thank you, Dave, and good morning. Our third quarter net sales of $825 million increased 2% versus $805 million last year. The Home and Garden and Global Pet segments posted higher revenues, which included $19 million of net sales in the Black Flag/TAT brands and FURminator acquisitions. Excluding the negative impact of $28 million of foreign exchange, our third quarter net sales increased 6% versus 2011. Our third quarter gross profit of $292 million was slightly lower than the $294 million we reported a year ago. Gross profit margin deceased to 35.4% from 36.5% last year due to a $3 million increase in commodity prices, increased costs from sourced goods, primarily Asia, and a $2 million decrease from changes in our customer freight programs. As a partial offset, our increased sales contributed $5 million of gross profit.

Record low operating expenses in the third quarter of $197 million or 23% of net sales decreased $18 million or 8% from last year, primarily due to lower stock compensation expense of $4 million, lower restructuring and related charges of $3 million and lower acquisition and integration charges of $2 million. Also contributing to the lower operating expenses were synergies recognized following the Russell Hobbs merger, savings from our global cost reduction initiatives and positive foreign exchange impacts of $8 million. Corporate expenses of $9 million for the third quarter declined $5 million or 36% from $14 million last year, primarily due to a $4 million decrease in stock based compensation expense. Driven primarily by a combination of reduced SG&A expenses and lower acquisition, integration and restructuring costs, our third quarter operating income increased 21% to $95 million compared to last year. Operating income as a percentage of net sales improved to 11.5% versus 9.8% a year ago.

Let's turn now to our tax rate. As you may recall, our effective tax rate for the first half of fiscal 2012 was over 150%, while our effective tax rate for the nine months was only 47%. This reduction in our year-to-date tax rate, which is impacted by our seasonality primarily from the Home and Garden segment, resulted in a tax benefit in our third quarter. Our Company had an effective tax rate in the third quarter of negative 10% based upon a tax benefit of $5 million compared with a 24% -- compared with 24% in last year's third quarter, when we had a tax expense of $9 million. As a reminder, our book income tax rate is impacted by our high levels of profits in foreign jurisdictions, which means we provide for foreign income taxes even while we have a book loss in the US. Our US book loss results from substantially all of our debt and restructuring costs being incurred in our US entities and since there's a evaluation 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 indefinite and live tangible assets.

We continue to estimate that our fiscal 2012 full-year effective tax rate should be in the range of 45% to 55%. We reported significantly higher net income of $59 million or $1.13 per diluted share for the third quarter on average shares and common stock equivalence outstanding of 51.8 million, which was more than double last year's net income of $29 million or $0.56 per diluted share based on average shares and common stock equivalence outstanding of 51 million. Adjusted for certain items in both years' third quarters, which represented in table 3 of today's earning release and which management believes are not indicative of the Company's ongoing normalized operations, our Company generated adjusted diluted EPS of $0.78, a non-GAAP measure, for the third quarter of fiscal 2012, an increase of 18% compared with $0.66 last year. For the third consecutive year our Company delivered record third quarter consolidated adjusted EBITDA in fiscal 2012 of $133 million, a 4% increase versus the previous record of $127 million a year ago.

Adjusted EBITDA as a percentage of net sales was 16.1% compared to 15.8% last year. Our improved adjusted EBITDA was driven by increases in our Home and Garden and Global Pet Supply segments, which included a combined adjusted EBITDA of $8 million from the acquisitions of the Black Flag/TAT brands and FURminator. Excluding the results from acquisitions, our Company's adjusted EBITDA in the third quarter decreased 2%. Third quarter adjusted EBITDA was negatively impacted by $10 million of foreign exchange. Excluding the negative foreign exchange impact, adjusted EBITDA in the third quarter of fiscal 2012 grew 12%. 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 third quarter segment results.

Now, let me review a few more key items in our third quarter financial statements. Third quarter interest expense was $40 million, unchanged from $40 million last year. This result was primarily due to lower expense from the refinancing of our 12% PIK notes, lower balances for our term loan and expiration of interest rate swap offset by higher expense for our incremental $200 million of senior secured notes issued in the first quarter of fiscal 2012 and approximately $1 million or plus from the amendment of our ABL revolving credit facility. Cash interest was $58 million for fiscal 2012 compared with $49 million last year. Cash payments for fiscal 2012 were higher primarily due to timing. Cash interest in fiscal 2012 excluding approximately $26 million of unusual items primarily related to the refinancing of our 12% PIK notes is expected to approximate $150 million.

Cash taxes for the third quarter were $9 million versus $10 million last year, again, this difference was due to timing. 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. However, we will continue to incur foreign and a very small amount of state cash taxes. Cash taxes are expected to be $55 million to $60 million in fiscal 2012, due to our overall higher form of profits and the timing of payments primarily in Germany. As you may recall, our cash taxes in fiscal 2011 were only $37 million, which was lower than our guidance of $45 million to $50 million, primarily because of the timing of a German tax payment.

We finished the third quarter with a solid liquidity position, with just $3 million drawn on our $300 million ABL working capital facility, consistent with our lower seasonal requirements at this time of the year and with a cash balance of about $62 million. So much of the prior to fiscal year ends, we expect to be undrawn on our ABL facility at the close of fiscal 2012. As of the end of the quarter, total gross debt was $1.823 billion, which consisted of a senior secured term loan of $521 million, senior secured notes of $950 million, senior unsecured notes of $300 million, the working capital facility draw on our ABL of $3 million and other debt, which is primarily foreign debt and capital leases, of $49 million. In addition, we had approximately $27 million of letters of credit outstanding.

Regarding our cash flow projections, given the strong cash flow potential of our businesses, our goal continues to be the generation of approximately $200 million or approximately $4 per share of free cash flow for fiscal 2012. We continue to expect capital expenditures to approximate $45 million in 2012, of which more than two-thirds represents investments in new product development and cost reduction projects. We expect to use our strong free cash flow to continue to reduce debt, de-lever in the fourth quarter of fiscal 2012, consistence with the peak period of our cash flow generation. As a result, we continue to expect to achieve a total leverage ratio of approximately 3.4 times at the end of fiscal 2012. Over the long term, as Dave has mentioned, we feel comfortable with a target total leverage ratio in the range of 2.5 times to 3.5 times. In conclusion, with our solid third quarter and nine months' performance, we remain on target to deliver another year of improved financial results in fiscal 2012.

Thank you and now I'll turn it back to Dave for our Q&A period.

Thanks very much, Dave and Tony. Operator, with that, you may now begin the Q&A session, please.

(Operator Instructions)

Bill Schmitz with Deutsche Bank.

Can you just talk about the US Battery trends? I don't think it came up in the prepared comments. So, what the growth was -- because it seemed like we get that multi-outlet data now from IRI and Nielsen, and it looks like the sell-through is way better than the sell-in. So I just want to try to figure out what we are missing there.

This is Dave Lumley.

Yes, your observation is correct at the moment, and I can explain, I think, why that is. Right now, you've seen some data out there saying that the last 13 weeks' unit sales are down -- equivalent unit sales are down about 5% -- and that's true in the US in the last 13 weeks on alkaline batteries.

However, the Battery business is doing fine. The actual dollar sales -- the sell-through, as you said -- are up in the last 13 weeks for total Battery and chargers and in alkaline; and that's with the new Nielsen data. Now, it's important that everyone understands, that new Nielsen data, while it includes a couple new major retailers, does not include any of the home centers, any of the hardware centers, any of the big warehouse club, and several other people that's in the panel data -- and they are over half of the top 10 battery sellers in the United States.

Nevertheless, what's happened is, that you have -- with the big changes in distribution, you had a lot of inventory still in the stores, in the big retailers, that they have been selling down in the last quarter -- even bonus packs left around the world. You also had some hurricanes last year that had some abnormal shipments in for all the suppliers. So, I think that all that combination of going on is why you see that.

And, again, I'll remind everyone the big battery selling season is the holiday. So, back to school has just started. I think you'll start to see the rest of that excess inventory that's all over the stores from all the battery companies continuing to sell through, and you should start to see shipments pick up.

Another thing is that any battery company with good business outside the United States, especially like us -- you've had some abnormal FX issues in this quarter, not only in Europe but in Latin America. So that has artificially depressed the shipment numbers by quite a bit in the quarter; and, again, it looks like that should be coming around.

That's super helpful.

Did you say what the growth was in the US business?

In the --

In batteries.

The new Nielsen data says that in the last 13 weeks, total batteries and chargers grew 1.3% in dollars and alkaline grew 3.5% in dollars. That's the new Nielsen data. The total panel data is similar; it's a little bit better.

And what did you guys do?

And we did just as well on the sell-out. Okay?

Like 2% to 3%-ish, is that about right?

Actually, our sell-out is much higher than that in certain retailers; but as a total, our sell-out is in the mid to high single digits, and in some retailers much higher than that. So, our sell-out is going well. But retailers have taken from their existing inventories and reset a lot of distribution. That just happened in May. So, this quarter ended in June and that's the slowest sell time of the year.

And you said, post-back to school, it should be pretty much cleaned up in terms of some of that --

Yes, just starting now. Back to school just starts now; and that should continue to build through September. And then again, you'd have Black Friday and then, of course, December. There are some days in December that are bigger than months in the year. (laughter)

Your supply chain guys must love that.

Well, it's always good to have orders. (laughter)

They do love it, Bill.

Thank you very much.

Dan Oppenheim with Credit Suisse.

I was wondering if you can talk a little bit about the pet business there. I think the margins came in very strong; you talked about some of the cost reductions. When you think about that going forward, do you think -- can you keep margins here? Or do you think there's still further room for expansion?

We have John Heil, our President of Pet on the line. I'm sure that he would love to answer that question, since those are up.

I sure would. One of the principal drivers on the margin is a combination of geography mix. So, we had some good sales in Rest of World, where margin is higher than North America. And also a very strong influence by FURminator, which has very strong margins and gave us a boost of 130 basis points this quarter. So, certainly the FURminator will continue as an ongoing influence, and the rest -- geography kind of comes and goes by the quarter.

And then, in the Battery business -- talked about further opportunities for share with retailers and some of that is starting to come through now. When should we expect to see some of real benefit of that, in terms of more shelf space wins coming through?

This is Dave Lumley, again.

That's a good question. It may seem counterintuitive to you on the line, but I think you'll really see that happen in the fourth quarter of this calendar year, or our first quarter. Like I said, there's a lot of inventory being moved through. There is a lot of investment going on to make these changes in distribution. It will start getting better now that we will be able to ship more with back to school. You'll really see it as we set up for holiday and sell through the holiday season. So, I think you'll start to see, like I said, our performance in our first fiscal quarter, and second fiscal quarter should be when this really kicks in.

And that would not be unlike any other times that -- in my career I've been part of big distribution swings. You have to get to the key selling season to see its real good impact. You tend to spend a lot up front to get it set up and ready before you see the come-through, and that would be those times.

Great. Thanks very much.

Lee Giordano with Imperial Capital.

Just following up on the last question -- can you talk about where you see your biggest distribution opportunities going forward, and maybe break that out by category? Thanks.

In what -- I'm sorry. You mean in Batteries?

In batteries and also home and garden and pet. Just wondering where else you see opportunities for distribution gains.

I'll address Batteries and Pet, and then I will ask John Heil to jump in on Pet. Sorry. I will address Batteries and Home and Garden; and then we have got Terry there, too.

On Batteries, we like the Battery business. We see continued opportunity for us in the United States, because we started with such a low basis share in 2006; and while we have doubled that, there's still a lot of room there in a lot of the categories. We see it again in Latin America, as we have put together our pricing programs better. So, we should see gains there. Now to be fair, some of that is switching from zinc carbon to alkaline. So, for us is good. And of course Eastern Europe, with our strong platform, we are seeing real good movement there in batteries. When we talk about batteries, we should think of them as not only alkaline, but specialty batteries, hearing aid batteries, rechargeable batteries.

I think in Home and Garden we have a similar situation there in all three categories. While we have made big strides in repellents, we have moved outdoors a lot. So, we want to keep doing that in the back yard. But, on household, where we have one primary competitor; with the addition of Black Flag, I would think over the next two years you will see a lot of growth for us there as we have a two branded attack now with Hot Shot and Black Flag, where we did not have that before. And of course, controls, where we are up against one brand that has typically enjoyed 70% to 80% share and we have been able to make some inroads there.

Before we get to Pet, there's another area where we think we have really exciting upside opportunity and that would be in the Remington space, and Terry Polistina is here. He's going to talk a little bit about what we call our consumables business.

Yes, that's an area we have had fantastic growth this year in our, what we call our personal care consumable business. And we think we have got accelerated growth, not only in North America but outside in the Rest of the World on our personal care business, along with really fantastic growth coming from the combination of Russell Hobbs with Spectrum Brands in Eastern and Western Europe on the Russell Hobbs side of the business. So, I think we got some nice growth opportunities in the Global Appliance business, in particular driven by our consumables business.

And John Heil?

On the Pet space, I would say there's three primary drivers that we have. One is, in Europe and Rest of World we are having great success with our Dingo/Delights dog treat business, as we leverage our global platform. Two, our acquisition, FURminator, which has great distribution in North America, but it has an expanding distribution base in Europe and Rest of World. And three, in North America we have been very successful with some very innovative and creative new kits and systems that major customers are really excited about and it's driving our North American aquatics business.

Great. Thanks a lot.

Hamed Khorsand.

Just two questions for me. The first one -- given the new product introductions that you usually make for the holiday season, does that mean there could be some margin expansion possibilities in fiscal Q4?

This is Dave Lumley.

Yes. I think there could be, especially, as John Heil was talking about, in FURminator. We didn't own that in that first quarter last year, so that's all new. Our hearing aid business continues to grow, and Terry's consumables business will start to swing into much bigger impact then.

But I think you'll really see the margins improve in the second and third quarters of next year even more so; as not only those things happen, but our cost improvement programs kick in.

Yes, and that's a good point about the cost improvement programs, especially as it relates to the Russell Hobbs business. Terry's done a great job in integrating Russell Hobbs business into the Spectrum value model, which again -- our goal is always to save 3% to 5% of cost of sales annually through cost improvement initiatives. And as I mentioned earlier on the prepared remarks, about two-thirds of our capital is focused on either new product introductions or cost improvement initiatives, which are sometimes part and parcel the same spend, quite honestly.

So with that being said, as we bring the Russell Hobbs family into the Spectrum value model, we will be seeing some acceleration of cost improvement initiatives in the years forward, which should help our margins as well.

And my second question there is on -- you've been talking about the cost increases coming out of Asia for your manufacturing and commodity costs. How much longer before that's fully offset by either cost savings or price increases through the supply chain.

That's a good question. It appears that commodities and some of these Asian price increases are leveling off. That said, that's after hundreds of millions of dollars of increases over the last several years.

I think the other issue with Asia that a lot of people may not fully understand is, it's just not the cost increases. It's the fact that many of these suppliers are closing up or no longer producing products or categories because they can't afford it anymore. So as we continue to have sluggish consumer takeaway, and retailers, who rightfully so are trying to keep the price down, these suppliers are just shutting down. So I think a combination of those things.

I don't think you'll see appliances completely offset by anybody in this calendar year. But by next year, I think as pricing takes hold, some consumer and retailer behavior changes some, I think there's a good chance deep into next year we could start to see this thing balance out.

But it's why you need cost improvement and pricing and some of these other things to help offset this cost increases, because -- let's not confuse those with foreign currency translation. But I think it's looking better. I guess I would say that. I think it's getting better.

Based on what we see today.

On what we see today.

Okay. Great. Thank you.

(Operator Instructions)

Reza Vahabzadeh with Barclays.

Just a couple of housekeeping items to start off with, Tony. The FX impact on sales and EBITDA -- I thought you mentioned the FX impact on sales being $28.5 million; the FX impact on EBITDA seems to be, what, $10 million?

Yes, that's correct. Those numbers are correct.

So can you explain how that works -- $10 million in EBITDA on $28 million of sales?

Basically, you got to look at it from this perspective, is that we do have a hedging program with respect to a portion of our transactions. So, basically -- quite honestly, Reza, it becomes math as the impact on sales, offset by -- there's a certain amount of our cost of goods that are expressed in dollars, which we are able to -- and we hedge a portion of that, then you've got the local currency impact.

So, you've got to look at that; and then of course you've got the benefit, as I mentioned, which was $8 million on operating expenses in the quarter. So, there's not too much I can comment on, other than just the amount that we have hedged and the mix of the cost of sales per se, for the quarter. And just looking at the numbers, it's about 36% pull-through, which is really not that outlandish, quite honestly.

Yes, it's not that outlandish, but I was hoping you would be actually less outlandish. But if that's the number, that's the number.

Yes, we were hoping it would be less outlandish as well.

Yes, this is Dave Lumley.

A lot of that can be timing, depending on what the strong quarters are in Latin America and Europe versus when the currency -- the translation is. For instance, this quarter you'll see less -- you should see less impact due to our mix of sales of what we ship, right? It's just this last quarter was the highest Euro with the lowest this year in a lot of years.

The Euro for the third quarter last year was about $1.40 -- low $1.40s, $1.42, $1.43ish, in that neighborhood -- and this year, on an average, it was probably in the $1.22, $1.23 area. So, as Dave said, it was, I believe, an 11% drop quarter to quarter, which is rather significant. And as Dave said in his prepared remarks -- of course, you've got the even bigger impacts as a percentage coming out of Latin America.

So, not to side step the question, but there's a lot of moving parts that we could, if you want, we could take it off-line; but basically it becomes a mix issue of how much is hedged, how much is local versus US dollar-based, and that US dollar-based piece not being hedged, per se. And then, obviously, the country mix, which is going to have potentially different currencies outside of (Multiple Speakers).

It appears, it appears that it should get better. The Euro, after August last year, fell down into the mid-$1.30s, right, and same with some of the Latin currencies. I think you also see the sale of (inaudible). So, we are cautiously optimistic about that. And then our US business really becomes much bigger as we go to the end of the year as well.

Absolutely.

On the Pet side, excluding the acquisition, would you say the base business was up, and you would expect that business to be essentially up on a going forward basis?

Yes. The Pet business, excluding FURminator, is expected to be up in both sales and profits this year.

Got it.

And, yes, it was up in the quarter, excluding FURminator.

Yes, in both the quarter and the year it will be up versus year ago on both sales and EBITDA.

And just to go back on the Battery business -- Dave, you're comfortable with the Battery business and the category, as far as sales remaining relatively firm or up?

Yes. Like I said, we see opportunities in the Battery business and we are just looking forward to getting to the key selling season.

Okay. Got it. Thank you.

There are no further questions at this time. I turn the call back over to the presenters.

All right. Well, thank you all very much. We have nearly reached the top of the hour, anyway; and we want to certainly thank Dave, Tony, Terry and John. So, we will now close down our third quarter earnings conference call.

On behalf of Spectrum Brands, we do want to thank all of you for participating in our earnings call this morning. We will talk to you again on our fiscal year-end call. In the meantime, have a great day. Thank you.

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