Spectrum Brands Holdings Inc (SPB) 2013 Q1 法說會逐字稿

Good afternoon. My name is Kirk, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Spectrum Brands first quarter fiscal 2013 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, Wednesday, February 6, 2013. Thank you. I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Good afternoon and welcome to Spectrum Brands Holdings fiscal 2013 earnings conference call and webcast. I am Dave Prichard, Vice President of Investor Relations for Spectrum Brands and your moderator for our call today. Now, to help you follow along with our comments this afternoon, we have placed a brief slide presentation on the event calendar page in the Investor Relations section of our website at www.SpectrumBrands.com. This document will remain there following our call, so I hope most of you have found that by now. So, if you follow along with the presentation and start with slide 2, you will see that our call will be led today by Dave Lumley, our Chief Executive Officer, and Tony Genito, our Chief Financial Officer, who will both provide opening comments and then conduct the Q&A session.

Turning to slides 3 and 4 of the presentation, I want to point out that our comments today do include forward-looking statements, including our outlook for fiscal 2013 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 does encourage you to review the risk factors and cautionary statements that are outlined in our press release dated February 6, 2013, and our most recent SEC filings and Spectrum Brands Holdings most recent 10-K. We assume no obligation to update any forward-looking statement.

Also, 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 afternoon's press release and 8-K filing, which are both available on our website in the Investor Relations section.

Now, for the first quarter of fiscal 2013, the Company reported a net loss of $13.4 million or $0.26 per diluted loss per share. This was on average shares and common stock equivalents outstanding of 1.8 million. This compared to net income of $13.1 million, or $0.25 per diluted share in the year-ago quarter, and that was based upon average shares outstanding of 52.6 million.

So, very quickly, let me go through by segment the first quarter of fiscal 2013 results. The Global Batteries and Appliances segment reported net income as adjusted of $92 million versus $89.9 million a year ago. The Global Pet Supplies segment reported net income as adjusted of $10.1 million versus net income, as adjusted, of $13.2 million in fiscal 2012. Home and Garden business segment reported a net loss, as adjusted, of $4.5 million versus a net loss, as adjusted, of $6.4 million last year. Finally, for the two week period as a part of Spectrum Brands, the Hardware and Home Improvement segment reported a net loss as adjusted of $3.5 million. With that background, I am now pleased to turn the call over to our Chief Executive Officer, Dave Lumley. Dave?

Thanks, Dave, and thank you all for joining us this afternoon. Let's turn to slide 6. We reported a record first quarter. This is in spite of the less than robust global holiday season, cautious consumer spending in part from the fiscal cliff worries, struggling European economies, and with two fewer shopping days in our quarter than a year ago. I am pleased to report that this performance puts us on track to deliver another year of improved results from our legacy business.

Turning to slide 7, our net sales increase of 2.5%, or 3.2% excluding negative foreign-currency impacts, was driven by two weeks of HHI, or our new Home and Hardware Improvement sales of $34 million of revenues, and our FURminator acquisition and higher Home and Garden and battery revenues. As I will discuss later, we exited, as planned, nearly $30 million of low margin or no margin, North American home appliance businesses, as communicated on our November call, and some selected battery business in the quarter, actions which helped solidify our margin levels. Our net loss in the first quarter was driven by one-time acquisition and integration costs and interest expense, primarily related to the HHI acquisition. Tony Genito, our CFO, will discuss this in more detail a little bit later in this call. However, our adjusted diluted earnings per share of $0.72 increased more than 4% versus last year.

Perhaps most importantly, we achieved a fourth consecutive first-quarter record for adjusted EBITDA of $131 million, including $3.2 million from HHI, which was a 4.5% increase. For legacy Spectrum Brands, adjusted EBITDA was a first-quarter record, again, this time of $127 million, up nearly 2% from a year ago. Including HHI, we are pleased that our adjusted EBITDA as a percentage of sales improved to 15%, versus 14.7% last year and ahead of fiscal 2012's full year level of 14.9%. Stringent expense controls, Home and Garden, Pet and Battery sales increases and cost synergies were major contributors to our record first-quarter adjusted EBITDA.

Let's turn to slide 8. We see a fourth consecutive record year, with steady, measured growth in net sales, earnings per share, and adjusted EBITDA, and most importantly, at least $200 million in free cash flow from legacy Spectrum Brands, or before HHI, with improvements weighted to the second half of the year. With our accretive acquisition of HHI now complete, we see enhanced EPS and adjusted EBITDA and combined free cash flow approximating -- approximately $240 million, or nearly $5 per share in fiscal 2013. Deleveraging and strengthening our balance sheet remains a top priority. As we have stated earlier in discussing our purchase of HHI, we plan to reduce our total leverage by approximately a half turn per year, with major debt pay down occurring in the last two quarters of the fiscal year, consistent with the peak period of our cash flow generation. Long-term, our objective is to maintain a total leverage ratio of 2.5 times to 3.5 times.

We have committed to continuing to manage Spectrum Brands to maximize sustainable free cash flow. In 2012, we delivered free cash flow of about $4 per share. In fiscal 2013, with HHI, we now have a higher free cash flow target of approximately $240 million, as I said earlier, or approaching $5 per share. When you consider a potential future refinancing of our $950 million or 9.5% senior notes in 2014, a decrease in our acquisition, integration restructuring costs, mostly driven by HHI, and include the impact of HHI's earnings, there's opportunity to drive free cash flow per share on a run rate basis to perhaps $7 or more and 24 months from now. That's exciting.

Let's turn now to our individual businesses beginning with Global Pet Supplies, which starts on your slide number 9. Global Pet is off and running to another record year in fiscal 2013. First-quarter reported net sales increased 3.6% or almost 5% on a constant currency basis, this coming from higher sales of companion animal products, primarily FURminator. Still, aquatics growth continued in North America. Adjusted EBITDA improved 5% in the quarter, again driven by many, many things, including FURminator. We are excited about the full slate of new products we introduced by global pet, a lot of them in the second half of 2013, and those will be on a global basis. With more growth expected in the second half, we see a combination of sales increases in both aquatics and companion animal, we've achieved select pricing, we have new products, and we have a record level of continuous improvement to offset cost increases to enable Global Pet to deliver record profitability again this year.

Now, let's move to Remington, our personal care business, which would be your slide 10. While Remington's first-quarter sales fell nearly 2% as reported, the decline was nearly flat on a constant currency basis. We are pleased as we look at the business with our solid growth in Europe from and gains in shaving, grooming, and hair care categories. In North America, however, our performance was negatively impacted by several major external factors. The first was a major personal care category decline of nearly 10% in the industry, predominantly from shelf space cutbacks at several key retailers. The other, was an unusual West Coast port strike that reduced our product replenishment for Remington from China during a crucial holiday season.

On the other hand, our stated focus to grow the higher margin consumables side of Remington, to increase investments such as our Shaser Bioscience acquisition in November, which features our i-LIGHT product, is paying early dividends, while from a small base, global consumable sales were up nearly 40% in the first quarter alone. We expect our investment spending to accelerate consumables growth in the second half of 2013 and really take off in 2014. As we look at the balance of this year, Remington has achieved some new and expanded placements this spring in hair appliances and in hair accessories, primarily in North America. And, as we see growth in Europe continue this year, we will roll out hair accessory products across that content. Finally, and Remington, in addition to our investment push in consumables, Remington is also the foundation for our increasing company-wide investment in global e-commerce, which we see as a new platform for higher margin growth across all Spectrum Brands. In fact, we have just hired an experienced e-commerce executive from Dell to lead this initiative to grow our e-commerce presence with retail customers and through our own sites.

Okay, let's look at our Small Appliances category, which is part of the Global Appliances division, which would be your slide 11. The sales decline here of about 10% was largely due to our planned and continued elimination of low margin promotions in North America, which totaled approximately $20 million of net sales, or $30 million of gross sales. Again, we discussed this in November. We are going to continue to do this throughout the second quarter, as well, as we will then be able to lapse last year with our new products. We begin this program, again, deliberately by reducing not only those sales, but others, which totaled $30 million for all Spectrum Brands. We stated on our mid-November year-end call that this initiative would continue into this quarter, as I just stated. This strategy is working.

North American small appliances had more than 300 basis point gross margin improvement and higher EBITDA in the first quarter of this year versus last year. In Europe, we continue to see strong sales growth, driven by gains in the UK and regional expansion in Western and Eastern Europe. Looking to the rest of the year, we are pleased with early success in our George Foreman weight loss program and a line of exciting new kitchen appliances launching in the second half of the year. Global platforms, product development platforms, are now beginning to enter the market with success. We believe category management has taken hold and is working well. On the cost side, Global Small Appliances is increasing its continuous improvement savings in fiscal 2013, to the point where we are cautiously optimistic that we can more than offset continuing but moderating agent supply cost increases. That is a big statement, when you look at how much those costs have been going up the last two years.

Now, let's move to our Home and Garden division, which is your slide 12. With momentum from a record fiscal 2012, this business is off to a strong start this year. It posted record sales for the first quarter of $31 million, up 24%, with increases in all three product categories. Remember, we are in controls, household, and repellents. These are all high-margin products, and as a result of distribution gains, stronger retail inventory replenishment, and our new Black Flag has us excited us as we go into this year.

Adjusted EBITDA improved by 55% to a loss of $1.4 million in the quarter, the fifth consecutive year of EBITDA dollar and percentage improvement. Our array of exciting new products and distribution wins are in place for the spring and summer 2013, including our exciting relaunch of the Black Flag brand along with plans for continued expense management and the delivery of strong cost improvement programs. We want to stress, now, a major timing challenge between the second and third quarters. Many of you will recall that last March was the warmest and driest March in nearly a century in the United States. This led to a very early beginning to spring and unusually strong record second quarter sales for our Home and Garden division and most everyone else in the industry. This provides for a very difficult year-over-year comparison in 2013 in our fiscal second quarter. Thus, this year, we plan for a more normalized spring season between the months of March and April. You will see that reflected as we go forward.

Now, let's turn to our Global Battery business, or slide 13. We view global batteries, as I've said many times before, as a growth vehicle for Spectrum Brands, and that primarily comes from higher volumes from market share gains. It retains a strong EBITDA producing cash flow generator, as evidenced by its record EBITDA in fiscal 2012. We see another record year in fiscal 2013. Global battery sales in the first quarter increased 1% as reported, but 3% on a constant currency basis. This in the face a North American holiday category decline and North America holiday price discounting from our competitors and certain retailers.

Demonstrating the leverage in the business, adjusted EBITDA was up 5% on a constant currency basis. Continuing growth in our European VARTA battery business was driven by new customer listings and promotions and geographic expansion in Eastern Europe. Our Latin American business, the alkaline and zinc carbon market leader in that geography, was essentially unchanged on a constant currency basis for the quarter. We believe we have turned around our Latin American business, after sales and profit declines in fiscal 2011 triggered by major competitor price discounting.

In North America, despite unique market dynamics, Rayovac market share increased significantly in the important holiday period versus prior year due to distribution gains in existing accounts. However, the reversal of our competitors' price increases to deep discounted holiday caused the alkaline category to decline on both a unit and dollar value during the month of December, the critical selling season for batteries. Despite this unsustainable holiday discounting, which has since ended, Rayovac was the only brand with December quarter share gains versus last year.

Also in the quarter, we with Rayovac exited about $10 million of low margin North American volume from disruptive retailer programs. All in all, we are pleased with our global battery business. Our long-term strategy of same or better performance for less price is clearly working in the global marketplace. Consumers and retailers continued to embrace the Rayovac and VARTA models. Our goal remains help the retailer grow the category, increase market share, and provide the best value to consumers.

Finally, and most exciting, let's go to slide 14. The Hardware and Home Improvement group, our newest and fourth reporting segment acquired on December 17, 2012. For those two weeks of the quarter, HHI reported net sales of $34 million and adjusted EBITDA of $3.2 million. That EBITDA was negatively impacted by a $1.6 million accrual adjustment necessary due to a change in contractual terms relative to product returns with a large retailer. As we have noted in the earnings press release, the final two weeks of the calendar year are typically seasonally low periods for HHI and not at all representative of full-year results. We are excited to have HHI in the Spectrum Brands family and look forward to a significant accretive contributions it will make in 2013 and future years.

The integration is proceeding smoothly and on time. In fact, this unit may be the best group I've ever worked with at integration. First-year synergies will be achieved, and the geographic and new market growth plans are in place. In summary, we are off and running to another record year for Spectrum Brands in fiscal 2013. This will be boosted by significantly beyond that, from the nine months impact of the HHI acquisition. We will remain focused on increasing adjusted EBITDA and running the business to maximize sustainable free cash flow. I want to thank you for your attention so far, and I'd like to turn it over to our CFO, Tony Genito.

Thanks Dave, and good afternoon, everyone. Turning to slide 16, let me first comment on our gross profit and margins in the first quarter. Our gross profit and gross profit margin of $288 million and 33.1% compared to $284 million and 33.5% a year ago. The gross margin decrease was driven by increased cost of goods sold from the sale of inventory, which is revalued in connection with the HHI acquisition. This more than offset gross profit improvements from the planned and previously announced exit of low margin products in the North American small appliances business of nearly $20 million. Excluding HHI, I am pleased to note that the gross profit margin in the first quarter of fiscal 2013 was 34% for Spectrum Brands legacy business, and was actually 34.5% on a constant currency basis.

First-quarter SG&A expenses, excluding the impact of the FURminator acquisition this year, were essentially flat with last year's first quarter. Interest expense in the first quarter, excluding approximately $29 million of expense primarily from the HHI acquisition, was flat with the prior year, as well. Now, to our effective tax rate, which was an unusual 325% in the first quarter, versus 68% a year ago. Our book income tax rate is impacted by our high level of profits in foreign jurisdictions. This means we provide for foreign income taxes, even while having a book loss the US.

Our US book loss results from substantially all of our debt and our acquisition integration and restructuring costs being incurred in our US entities. 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 indefinite live intangible assets. Because the tax expense on the indefinite live intangible assets is the fixed amount, the closer to $0 our income is, the greater the impact on our effective tax rate.

Let me highlight a few more key items in our financial statements. Restructuring, acquisition and integration charges increased to $27 million in fiscal 2013, versus $15 million in 2012, driven by the HHI acquisition. Cash interest for the first quarter of fiscal 2013 was $73 million, compared to $49 million in 2012. Excluding one-time cash items related to the HHI financing of $18 million, cash payments increased by $6 million, due to timing. Cash interest payments for the full year of fiscal 2013, excluding one-time items related to the HHI financing, are expected to approximate $190 million.

Turning to slide 17, cash taxes for 2013 were $23 million compared to $18 million in 2012. This difference, again, was due to timing. Based on 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. We have said that our annual normalized run rate of cash taxes, including HHI for the full year, are expected to be $60 million to $70 million. In fiscal 2013, as we indicated on last quarter's call, our cash taxes are expected to be $65 million to $75 million, including HHI for approximately three quarters, primarily due to the timing of payments between fiscal 2012 and fiscal 2013 in Germany. We ended the fiscal quarter of 2013 in a solid liquidity position with $32 million drawn on our $400 million ABL working capital facility, and with a cash balance of $71 million. As of the end of the quarter, total debt at par was $3.226 billion.

Regarding our cash flow projections, given the strong cash flow potential of our businesses, including the HHI, our goal in fiscal 2013 is to generate approximately $240 million of free cash flow net of HHI acquisition costs or nearly $5 per share, as Dave said. Our normal annual capital expenditures, including HHI for the full year, should be approximately $65 million to $70 million. However, in fiscal 2013, and as we indicated on our last quarter's call, fiscal 2013 capital expenditures will be slightly higher, approximating $70 million to $80 million. More than two thirds of the spending will represent investments in battery production capacity, locks in production infrastructure related to the integration of Tong Lung, technology infrastructure, new product development and cost reduction projects. We believe the investments we are making in fiscal 2013 will accelerate research and development, new product enhancements, and new product introductions in 2014 and beyond. Thank you. Now, back to Dave for our Q&A.

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

(Operator Instructions)

Bill Schmitz, Deutsche Bank Securities.

It's Nick Cavallo calling in for Bill. Just wanted to dig into the battery category competitive dynamic a little bit. I know you said some of the really deep discounting during the holiday season has since subsided. Curious if you would categorize the category now as rational, like back to steady-state, or if there's still sort of a little bit of elevated promotional activity from some of the competitors? Then, just curious if there are any shelf space changes, either pre-or post holiday?

This is Dave Lumley. I will answer your first question, yes, it stabilized again. I think it should remain there for now. We don't see any indication that it would go back to that. It was successful. The category went down in both -- especially the month of December in dollars and units. However, I think it's stabilized.

I think, an interesting note on the battery category, since 2009, the total battery category [kegger] is about flat. In fact, the alkaline business is up almost 1% since 2009. So, the batteries are going to kind of go along with GDP to some extent. It's going to be affected if you do bonus packs and discounting. For the most part, I still believe it's a stable, solid business -- not a high-growth business, but it's stable.

In regard to shelf changes and all that, that will -- you will see a lot more of that in the next few months. That's kind of when those changes happen. Most retailers years ended in January. A lot of the things that are happening, we're very cautiously optimistic about some things we've been involved in. I think we should have some things to talk about pretty soon.

Great. That's helpful. Thanks. Then, could you just quantify, if any, the impact of Hurricane Sandy on battery and appliances?

This isn't what I wanted to hear, but it wasn't a good thing. What happened was, you got a bunch of sales at first. Then, you didn't get any sales, because the trucks couldn't get through. The people couldn't get there. It really impacted a lot of other categories, really, Nick.

I do think the net result of it was, why there was a spike and some of the things were sold and some people got excited, there was also the downside. If you really study the total results, the whole category was down, right? That's the bad news. The good news is, I think once and for all, every retailer and consumer in America has learned that they really will never let that happen again. You are going to see a lot more, I think, pre buying and that.

One of the big winners, as far as the battery and life category of that hurricane was lights. We are very good. Batteries, now, we've introduced our 10-year battery life. Our competitors have the 10-year battery life. So, consumers can also buy ahead of time and feel confident about that.

Yes. Got it. Fair enough, thanks guys. I appreciate it.

Dan Oppenheimer, Credit Suisse.

This is actually Will on for Dan. If you could go back to the shelf space cut back in the personal care category, can you kind of talk about what was driving that and kind of elaborate on the conversations that you are having with retailers?

Yes. Retailers are very smart. They watch the trends. What's happening in personal care, especially on the end side, is that wet shave has had a big push from those two, and they are doing a lot of stuff, and they keep grabbing more and more space. The innovation on the dry shave, or electric shave side, both in grooming and shave hasn't been so robust. That space is continuing to be shrunk.

What really happened this year was that business really is driven on holiday promotions. And retailers went a different way this year, with different types of products -- not just in the shaving category, but what was in the category. So, that's the bad news. It had a big impact. The good news is, that in our discussions with retailers, they are saying -- geez, we can't go that far back. And, by the way, we are seeing a big uptick online in e-commerce. There are in a little bit of a transition on that, so are we. We are very confident, this coming holiday season, you will not only see more promotions in the store and more space, but a much more robust e-commerce business by that them.

They saw big increases there. As we all get ready for that, and we are, I think we will get back to a normal season. Plus, there are some good, new products coming. I can't speak for our competitors, I'm sure they have them. But we have them in shave and groom, and we are excited about those. They will be coming for this holiday season.

Perfect. That's very helpful. Then, as a follow-up, can you maybe quantify some of the opportunities for the revenue synergies on HHI? Thanks.

Well, HHI is a very disciplined operations-driven company. Now, there some great products like smart key technology and the new Bluetooth and things like that. I think you're going to see revenue synergies coming from our merchandising group, from our Home and Garden side. That's up to 450 people that are in HHI's number one, the top two retail customers. That's also a products that will really benefit from displaying it and testing it. So, I think you are going to see sell through much better, and you are going to see revenues go up.

Now, in addition, although we didn't buy after the housing recovery, the housing recovery impacts HHI as well, up to 25%, 30% of their sales. They're going to have a big opportunity to sell a lot more locks. The-- they are the dominant player, really big player there. So, you are going to see that happen naturally. Then, you couple that with the merchandising and the better in-store, I think you are going to see sales go up. I don't want to give you an exact number, but we are very encouraged by that, and I would think they would tell you that they are, as well. You are going to see a sales increase versus what's been kind of a flat business the last few years, as they've been for sale and they've been integrating and housing has been down. Does that answer your question?

Yes. That's very helpful. Thank you.

Lee Giordano, Imperial Capital.

So, you mentioned distribution gains in Home and Garden. Just wondering where you are seeing those gains specifically and what kind of opportunities you see longer-term. Does the HHI acquisition actually improve shelf space in some of your other categories, particularly in the home-improvement retailers? Thanks.

Okay. Let me answer them one at a time. Home and Garden has been growing in controls and repellents pretty well. A control would be like our Spectracide brand, controlling weeds mostly outside. Insect repellent is self-explanatory.

What we are seeing now, is that Black Flag and our HotShot brands and our investment in the food and drug channel and the non-home center channels, great growth there. We are getting a lot of our placement there, and then back in our big accounts, our top three accounts, we are also getting more space because, we have HotShot and/or Black Flag. There's a shift there. Plus, I think a lot of retailers are realizing whether it's bedbug or roach and ant, they can sell a lot more of that in the store. Some of our products even have germicides mixed in with that.

It's kind of happening across the board -- our Black Flag acquisition has really driven it, right? And us becoming a bigger player in food and drug, which, we have a formidable competitor there, very good at it. It gives us a better way to compete there. All right?

Our big three accounts, we are also balancing the brands we have there and putting together programs for them, as well. We are optimistic about that, and we have merchandising there. In regard to, does HHI help our Home and Garden business? Absolutely. HHI's business in the home centers and hardware is really big. When you couple -- when you put that together with a pretty big number two, almost number one player in Home and Garden, and then our growing battery business in there, we can benefit from the scale, the shipping, the merchandising and all the things that we can do with the customer to try to push them, right? To meet the needs of our customers, today.

I just wanted to add on since we were talking about H&G right now. I know you said it in your prepared remarks, Dave. Again, to talk about the second quarter versus the third quarter, we had a very successful Home and Garden season. Our business was very successful last year, in total. Again, it was very much front-driven, as much of the industry was, because of the very, very warm early spring. This year, as Dave said, we are looking at a more normalized period. I just want to reemphasize that during the Q&A since we had a question on HG

That's great. Thanks a lot.

Hamed Khorsand, BWS Financial.

My first question is regarding the competition in your battery line. Do you -- does it pose a risk that you saw, I think it was a couple of years ago, when you faced a similar situation with a competitor, but it lasted because of lingering inventory issues?

Is your question, do you believe that we take the risk because some of our competitors have extra inventory? Is that your question?

Yes. Two years ago, there was that kind of issue, right? Because of the lingering inventory of discount products?

Oh the bonus packs. Yes. I don't believe that. Our competitors are very good battery companies. They make good products. They know what they are doing. They have strong brands.

Our retailers are even better at not allowing the inventory to grow like it used to, two years ago. I think that our retailers help focus where the business is going, as well as the manufacturer. So, I believe there will be discounting. There will be bonus packs. I believe that this will continue to get more rational.

There are certain things that work and certain things that don't work, and this is an important category to retailers. They don't want the category to go down. So, I believe that that's not a risk. But, to tell you the truth, I don't know their exact inventory levels. I have not heard that that is a risk to them right now.

Okay. On your personal care side, did wet shave go up in revenue this past quarter?

No. Not for us. We are just -- we did a test in wet shave, and we had a strategy to bring it out over the next year. But, we are not really, per se, in wet shave yet. Most of our consumables business, right now, is our i-LIGHT product, which is the intense pulse light hair removal system on a global basis and bulbs that we sell with t with some exciting new products coming. And hair care accessories, mostly for women. That's what we are concentrating on, now. We will be in wet shave, soon.

All right. My last question is on the HHI and plans for expansion. Do we see any revenue in this fiscal year, as far as expanding that from that product line internationally into new markets?

We do. We will see some. Our goal from this year, is to integrate. We are moving a lot of, what we call TSAs or support from the Stanley -- transition services from Stanley, Black & Decker, of which international's a big part of. Our first goal is to integrate correctly, whether it's the TSA or international location, to get that all right. Then, I think you will see the leverage of the shared services and HHI's freedom to grow and get more attention, really take hold in '14 internationally. I definitely think you'll see international growth in '14.

Plus their smart key technology is a great door opener for that. I do think in the US, you are going to see sales growth this year, because -- and Canada, because they've done a really good job of getting that smart key out. They're going to promote it more. They are in good position with housing. They are looking at home automation. I think you'll see some there. I think international comes in '14.

Okay. Great. Thank you.

Reza Vahabzadeh, Barclays.

The slides are helpful.

Good. That will make our IR, Dave Prichard happy. (laughter)

As far as the personal care segment in the US, how did your share hold up in December quarter? I know you mentioned you had some shipping issues or sourcing issues given what was happening on the West Coast ports.

Well, we lost some sales we wish we didn't lose, to tell you the truth. But our share has held pretty steady, because with the new consumables coming in and some of our other products. Now, with the shelf space loss, right? That's not good. Right? But, our turns are pretty good in there. So, it's okay.

I think that we didn't go up. If we went down, it's just a bit. Now, we don't have those reports, but that's what we think is going to happen. We are very bullish on the second half, because we know what we've won.

Got it. And then, on batteries, do you anticipate the promotional environment to rise again in the coming months and quarters? Or, I know you mentioned so far in 2013, it's leveled off. But, what's your expectation on the promotional environment and batteries?

Well, batteries is -- 65% of batteries are bought on impulse. Most private label batteries are all sold on promotion. Up to 95% of the time, they are on promotion. So, I think you're going to still see sporadic promotions like the business has always had. You are going to see share grabs by trying to -- people buy their way into an account or sponsorships. But, batteries have always had that level of income.

I think -- not income, promotion. Two years ago, we saw an unusual move to bonus packs by everybody. I think everyone learned their lesson on that one. So, I don't foresee an unusual amount. But, if there is, we will match it every single place we see it.

As far as overall shelf space in batteries in North America, you are up from last year at this point in time. You would think that your shelf space would be higher year-over-year throughout the year, right?

Well, our shares has gone up every year for five years. We are at the highest share point we've been. We still are not anywhere near the top two leaders. But, we are making good progress on that. We would hope we hold our shelf space and continue to increase it. We are optimistic about that.

Got it. And my last question has to do with the pet business. Would you anticipate pet to post sales growth in 2013 ex acquisitions?

Absolutely. Absolutely. Their aquatics business has been growing. Their POS is growing, and their companion animal, dog treat has been growing. In fact, in their specialty channels, with their Nature's Miracle brand, and we even have a really exciting product -- fish product. GloFish, that's pretty, pretty neat. They are forecast to grow literally really across the board and by geography.

Just an additional thought on that, Reza, the aquatics business, we've seen a turnaround in North America. We are seeing the aquatics business continue to grow. The lessons, the learnings that we had from the North American experience, we're actually bringing those to the European continent, and again, we are doing the seed -- so to speak, planting the seed with starter kits. Smaller aquariums that get the hobbyist involved. Albeit on a small-scale, but once they buy the environment, then they've got to fill it up with the fish food, the higher-margin fish food, the filter media, the water treatment chemicals, et cetera. So we are actually embarking upon that as we speak in Europe, now. We are very hopeful and confident that we are going to see that translate to additional aquatic sales in Europe, as it did in North America.

Got it. Thank you much.

Karru Martinson, Deutsche Bank.

I was just wondering, could you quantify, perhaps, the impact on sales from the port strike? Are we talking $10 million, $20 million? Or more than that?

Yes. It's about $5 million to $10 million of shipments.

It hit us really hard. There was just no way to plan for it.

It's all about the retention.

Yes, and we just didn't have it. But, we have plans that that will never happen again.

Okay. Now, I guess on that same vein, if the weather does change and March is warm again, what is the ability to get goods on the shelf right now and retailer willingness to be on that front?

(laughter) We are building the inventory. And by the way, our Home and Garden business is first in class, when it comes to supply chain and being at the ready. We are producing the product as normal. In fact, the comments that we made in the prepared remarks, regarding the timing of the season, clearly, if we have an earlier, warmer spring, we will be ready. And quite honestly, we hope that happens, and we hope that the season -- If you recall last year, we had that benefit in the March timeframe, really in the second part of the year, we had a severe drought through most of the US. Where we benefited, in all honesty, was in our fourth fiscal quarter towards the end of our third and then into the fourth fiscal quarter, the West Nile virus breakout predominantly in Texas but in other states, and our repellents was very, very successful. No. We are definitely at the ready, to meet the demands, if we are lucky enough to have an accelerated season.

Okay. And just the pet side. What's the mix, today, for aquatics versus companion? Kind of where do we see that say over the next two years as FURminator continues to grow in some of the other branches?

As you recall, that's a great question, Karru. It used to be 60/40. Right now it's about 55/45. So, we've improved that mix. We've always said that we like to get at least 50/50. Then, perhaps, we can go 60/40 the other way.

Clearly with FURminator -- by the way, the FURminator acquisition has been a real home run, in a sense of -- I guess, first and foremost, it's a great product. Consumers love it. I mean, anybody that has used the product, and I've met quite a few, actually analysts in various meetings I've had, where their eyes well up. It's almost like they went to a tent revival. They just love the product. So, you can't beat a product that works and is effective.

But, the sales growth of FURminator has been very encouraging to us. Keep in mind, the household penetration of pets that -- of pet ownership, that are utilizing the FURminator product is relatively low. So, it's a big opportunity. Plus, you got the international opportunity, which by the way, a big chunk of the growth that came from FURminator in this past quarter that we just reported really was led by Europe, which is very, very encouraging to me. As -- so that's one example. Keep in mind, too, that we've launched companion animal products in Europe. This is now, we are going into our third year, I believe, where we are getting some really good momentum, and we are going to see that mix change again to be more, again -- our first goal is to get the 50/50 and then, to try to grow from -- beyond that to be heavier weighted in the companion. It's moving forward very, very nicely.

Okay. And just on the Tong Lung acquisition, here. You're going to close by March 31. What's involved in closing that acquisition? And can you remind us just again, what that brings to your portfolio?

It's -- primarily, it's just going through the legal and regulatory reviews. But, we are hopeful. I don't want to get ahead of my [fees] here. We say in our press release that we hope to close this transaction, the last remaining piece, by March 31. Based on where we are seeing it today, we think that we will probably close it sooner. So, we will pretty good about that. But again we feel very, very confident, and that's why we put it in our release that it would be by March 31.

If you recall, the transaction price was approximately $1.4 billion for the HHI asset. We've closed the first piece on December 17. That was approximately $1.3 billion. We held $100 million in escrow. So, the money is basically in escrow right now, so it's just a matter of performing the closing and the funding will happen automatically.

The business itself, though, is a long time supplier of the HHI business that allows us to be vertically integrated and to be able to really capitalize on opportunities and further improve the supply chain, both from an efficiency standpoint, operational efficiency as well as cost efficiency. On top of that, one of the benefits, and we had an earlier question on potential international growth. Keep in mind that in Europe, where we have an infrastructure and we look at that as an opportunity down the road for growth with the HHI business, Europeans use a different lock [structure] than North America. We use a tubular lock while they use a mortise lock. The beauty of Tong Lung is Tong Lung produces both tubular and mortise locks. This we see as a big opportunity from an operational efficiency and, again, further opportunity to reduce our cost of goods and improve our margins.

Thank you very much, guys. Appreciate it.

Carla Casella, JPMorgan.

You discontinued about $20 million of low margin appliance business in the quarter and exited some of the nonprofitable battery promotions. Have you scrubbed pretty much all of your portfolio? Or are there more opportunities like this going forward? That's the first question.

Let's go deal with that one. We have exited about $30 million. We probably have one more quarter just on appliances, maybe about $10 million. So that would be like $40 million. Now, we could have put that on the top line.

That, that would have cost us money and it would have sent the wrong message to the retailers and consumers. I mean, you really shouldn't have $9.99 George Forman grills. It's just not a sustainable model. However, the good news is, by the second half, we should be able to replace almost all of that with consumable sales on the i-LIGHT and all of that. To answer your question, I think we have about $10 million to go and then we should be clean.

Okay. That's great. Are there other businesses were you think you can go and kind of shave off the bottom, the lowest margin products, the promotions off of it, in other categories?

Our Home and Garden business is in very good shape. Our pet business is in very good shape. As we dig into HHI, we will see. They have a lot of SKUs, but they usually run a pretty tight ship. Obviously, wherever we do it, the whole Spectrum value model dictates that. Les SKUs, less models, zero products, lean, global, new products.

But really, this thing in appliances was the big one to do. It's not only just small kitchen appliances, it's also Remington and personal care. Remember, that supply chain is all coming out of Asia. They had all the price increases and had all of the issues that went with them, freight, oil, currency. That is moderate. I believe that by the middle of the year, we will be in very good shape.

Great. Thank you.

Ali Dibadj, Bernstein.

I want to go back to the battery comment you made about it being flat from 2009. I wanted to just clarify, that's a global comment, I think, right? It's not just US?

That the Nielsen database in North America from 2009. Remember, Nielsen does not include certain retailers.

Sure. Okay. And then, if you were to project forward and think about the category from a volume and price perspective in North America, this year and beyond, what's your expectation?

We believe batteries will grow at GDP or a little bit below. It really depends on discounting and how much space and attention a retailer gives it. For instance, a few years ago, some retailers cut way back on battery displays and where they were in the store and they didn't do too well. Then, they put a lot more batteries out. I remember, 65% of alkaline batteries are bought on impulse, and they sold them. So I think you should think in terms of the battery business as following GDP in general.

And then volume and price? Has that grown to GDP?

Volume and price, price is usually steadier than unit or volumes, depending on whether you are discounting, going to bonus packs are going to big value packs. What happened here in December, there was a lot more big value packs than before. That's a function of some other retailers being in the business or using them to promote. In general, in general, the dollars go up about 1% and the units are flat to a little bit below that.

You have different categories of batteries. You have the alkaline, which is a big, big part of it. You have your zinc carbon or heavy-duty or rechargeable and your lithium batteries. But, they make up a small portion of the total battery market. So, you have about a flat to slow-growing and dollars and you have units that can go up or down, depending on whether you use value packs or not.

Okay. That's very helpful. From your strategy in that category, the strategy clearly is to gain share. How is that going to happen? Are you willing to be more aggressive on promotion?

Or are you at the right place? It sounds at you want to get more distribution gained. How will you do that? Is there an element of innovation to this? Really want to get underneath your plans within that flattish market.

It's not hard to figure out our strategy. Our strategy is that we believe we have a good brand. It's a value brand where we will offer the consumer the same product performance for less price than the premium brands. Or, some retailers will offer the same price with more batteries. This is not a new strategy. We've been doing this since 2007.

This is how we've gained shelf space because a retailer has a decision to make. Are they going to have all premium products on the shelf? Are they going to have all private label? Because private label only grows to a certain percentage of business regardless of what it is. Private label in the United States has never gotten up past about 14% share, it's typically between 10% and 14%. We make a lot of private label, Rayovac.

So, our strategy is exactly what it says. Same performance, less price, to gain as much share as we can, whether it is a mix between the premium price products and ours, or a mix between the premium price product, ours and private label. We do that by offering the consumer the same performance, less price. Typically, the retailer has an opportunity at times to make more money on our product and less inventory cost. That's our strategy.

Our competitors have good products. They have their strategies and their pricing on their advertising and of course, private label. I do believe that you will continually see a shift from private label, as most of those products come from Asia. They under perform. They are faced with currency problems, performance problems, shipment problems, timing problems. For instance, in Hurricane Sandy, if you were a retailer and you were buying all your batteries from China, you got no replacement, zero. If you were buying from Rayovac in Fennimore, Wisconsin, you got batteries made that day and shipped the next. So, those are advantages that can also help you grow.

Our factory, much like our key competitors', but not the agent supply chain, are where the business is. We have a very large factory for VARTA in Germany. We have battery factories in England, two in Wisconsin, several in Latin America, and partners in China for Asia-Pacific. Speed is important. So, I think that's ours. That's why I believe will continue to grow.

So, if you are going to gain share, and it's a very compelling story that you paint to do so, a lot of it has to be from the higher priced companies. I'm struggling with how to make that jive with the pricing discussion we just had. So, I get that I would expect mix to be a bigger factor mixed down, i.e. pricing in the category from just a net price per battery, being under pressure going forward, just because you guys at a lower price point gain share. Maybe you could answer that question, perhaps in the context of the increased capacity you are going to put on in batteries.

You just answered it for yourself. Typically, when something costs less, you sell more of it. Other times, if something costs too much, you don't buy it at all. Typically, a lower-priced product that performs as well will sell more units than a higher priced product, and that usually makes up the difference. That would be true in many of our categories, not just batteries. Remember, we are just not competing with premium price batteries. We are competing with private label batteries, and there we outperform them.

So, you can move price point up, there, right? As we battled their, as well, that's another way to do it. This is our model. This is no different than when we sell HotShot versus our key competitor or Black Flag or, if we sell Remington men's razors against the high-priced model. We believe that every retailer should provide premium product, value branded product, and if appropriate, a private label. It's the mix that wins in the store. There's no silver bullet. It's the mix that wins.

And you still -- last question, I apologize -- and you still believe the pricing in the category can go up even as you at the lower price point gain share?

Absolutely. If you convert a lot of private label, you can go up. If you introduce new products like we have been, like our Rayovac advanced, it costs more money. You sell alkaline versus heavy-duty, it costs more money. If you sell rechargeables versus alkaline and a bonus pack, price goes up.

Plus, remember, there's a lot of specialty batteries now that are changing. There is power for mobile phones. And if you suffered through Hurricane Sandy, you were shut down in three hours. Once your car ran out gas, you had no power. End of story. So, there's lots of opportunities now to power mobile devices. You are going to see that change coming.

Very helpful. Thank you.

I think we've obviously reached the bottom of the hour and want to thank everybody, and we'll close down our conference call at this point. I do, obviously, want to thank Dave and Tony and on behalf of Spectrum Brands, we want to thank all of you for participating in our fiscal 2013, first-quarter earnings call this afternoon. Have a good rest of the day and we will talk to you next quarter. Goodbye.

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