Spectrum Brands Holdings Inc (SPB) 2013 Q3 法說會逐字稿

Good morning. My name is Kyle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands' third 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, Tuesday, August 6, 2013. Thank you. I'd now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Pritchard, you may begin your conference.

Good morning, and welcome to Spectrum Brands Holdings' fiscal 2013 third quarter and nine months earnings conference call and webcast. I'm Dave Pritchard, Vice President of Investor Relations for Spectrum Brands, and moderator for our call today. Now, to help you follow along with our comments this morning, as some of you may have seen by now, we've placed a 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.

Now, starting with Slide 2 of our presentation, 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. Joining us for the Q&A session are Terry Polistina, President of Global Appliances; Greg Gluchowski, President of Hardware & Home Improvement; and Randy Lewis, Senior Vice President and General Manager of Home and Garden.

Now turning to Slides 3 and 4 very quickly, our comments today include forward-looking statements, including our outlook for the fourth quarter fiscal 2013 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 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 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 filings, which are both available on our website in the investor relations section.

For the third quarter of 2013, the Company reported net income of $36.3 million, or $0.69 diluted income per share, on average shares and common stock equivalents outstanding of 52.7 million. This compared to net income of $58.7 million, or $1.13 diluted income per share, in the year-ago quarter, which was based upon average shares and common stock equivalents outstanding of 51.8 million. By segment for the third quarter of fiscal '13, the Global Batteries and Appliances segment reported net income as adjusted of $32.2 million, versus $40.9 million a year ago. The Global Pet Supplies segment reported net income as adjusted of $24.5 million, versus net income as adjusted of $18.8 million in fiscal 2012. The Home and Garden Business segment reported net income as adjusted of $42.8 million, versus net income of $44.0 million as adjusted last year. And finally, the Hardware & Home Improvement segment reported net income as adjusted of $40.1 million in the third quarter of fiscal 2013. With that background, I am now pleased to turn the call over to our Chief Executive Officer, Dave Lumley.

Thanks Dave, and thank you all for joining us this morning. We've got quite a bit to cover, a lot of exciting news this morning. So before reviewing our third quarter results and our fourth quarter and full-year outlook, let me highlight other important news we issued this morning in separate press releases. First, we've announced plans to refinance our $950 million of 9.5% senior secured notes due 2018. We expect to complete the process in early September. This refinancing is expected to lower our cost of capital and reduce our cash interest expense.

Second, we announce that our Board of Directors has approved a new $200 million common stock repurchase program, effective for 24 months. The Board's action reflects its confidence in our future earnings power and strong free cash flow generation. We will use this plan in conjunction with our debt reduction goals. Given our outlook for significant projected free cash flow growth in the coming year and beyond, we believe this repurchase authorization is now an excellent use of our future excess free cash flow, and another way to return capital to our shareholders. Lastly, we announced this morning $100 million of term debt reduction to date, and reiterated our plan to pay down a total of at least $200 million of term debt in fiscal 2013, ending September 30.

Let's now turn to Slide 7. Our third quarter net sales increased 32%, and adjusted EBITDA improved 42% on a reported basis. Including HHI, our Hardware & Home Improvement group in the last year on a pro forma basis, our net sales in the quarter increased 1%, and adjusted EBITDA grew 2%, but 3% on a constant currency basis versus pro forma results last year, with a solid 17.3% margin. We are pleased to also report our 11th consecutive quarter of year-over-year adjusted EBITDA growth for legacy Spectrum Brands, a record that dates to the first quarter of fiscal 2011. How? Well, focused spending, strong control of variable costs, increased savings from continuous improvement programs across all divisions on a global basis, and growth in Europe helped us offset negative foreign currency impacts from a number of currencies and a difficult macroeconomic conditions to still post 2.3% increase in adjusted EBITDA for the quarter, or almost 4%, exactly 3.9%, on a constant currency basis.

Legacy Spectrum Brands' adjusted EBITDA margin for the third quarter grew to all-time record quarterly level of 16.8%. HHI posted impressive third quarter results, with an adjusted EBITDA margin of nearly 19%, even with increased investment spending, which I'll talk about later, and another quarter of double-digit net sales growth of 13%. We're especially pleased that this record quarterly EBITDA performance with higher margins was achieved even as we are also making important and major investments in our Remington personal care business. This includes our i-LIGHT hair removal on a global basis, our women's hair care accessories, and moving away from Remington, we have put significant investments in our battery performance and production, our launch of global eCommerce, and a new product development and marketing for key new HHI products, all of which will help drive future growth, but did temper profits in this quarter.

Let's turn to Slide 8. Our Q3 results were negatively impacted by macro factors. They include FX, not just the euro, but other currencies like the yen, British pound, and Brazilian real. There are other factors, such as slower store traffic, cautious consumer spending, in part impacted by cold and wet weather in April and early May in the US and Europe, heightened and aggressive competitor discounting in several businesses, and a continued tightening of retail reorder rates and tight inventory control. Despite these headwinds, we still posted relatively flat net sales in the quarter for legacy Spectrum Brands, save our planned and continuing exit of $10 million more of low- and no-margin sales in North American small appliances, which continue, though, to boost margins, and a $10 million Home and Garden sales shortfall, merely from timing, as the cold and wet weather shifted the spring season into July. Despite that, Home and Garden actually improved its adjusted EBITDA in the quarter.

Now, many other Spectrum divisions turned in sales growth, especially in Europe and Latin America. In fact, a Q3 highlight we are proud of is our overall strong sales and adjusted EBITDA performance in Europe, with or without negative FX for all our divisions. Spectrum Brands continues to perform well in a region marked by economic challenges and recessionary pressures. All in all, Q3 was a good quarter, because we are able to increase adjusted EBITDA and margins to record quarterly levels, even as we invested heavily in consumables, batteries, eCommerce, and HHI new product development and marketing for future growth.

Q3 adjusted EPS of $0.90 did decline from $1.12 last year, which now includes HHI in the prior year, but primarily due to an increase in our noncash stock compensation expense, driven by our commitment to increasing employee stock-based award programs, and in the Q&A, we'll talk a little more about that.

Let's turn to Slide 9. Let's look at Q4. We see a record finish, and we see momentum carrying into higher results for fiscal 2014. We expect higher sales and adjusted EBITDA from both legacy Spectrum Brands and the total Company, including HHI in Q4 versus comparable period year before. Legacy Spectrum Brands net sales should grow as much as 2%, with adjusted EBITDA improving up to 3%, giving us our 12th consecutive quarter of year-over-year adjusted EBITDA growth. HHI sales growth could reach 10%, along with adjusted EBITDA growth. Almost every division is expected to have Q4 top-line growth versus last year. This stepped-up performance will be driven by our and retailer optimism about value-branded sales in the back-to-school season timeframe. We expect higher store traffic following a lackluster June quarter, coupled with earlier retail promotions and holiday sets.

We have new product launches, expanded retail distribution, and continued geographic growth. And, [confessing] what I said about the third quarter, this growth is coming even as we invest heavily in new products. Many of these new products are launching now. They include our 2-Hour and 7-Hour power for Rayovac and VARTA globally, US-made chicken jerky in pet, the Kwikset Kevo Bluetooth lock in HHI, new dynamic George Foreman grills, new Black & Decker toaster ovens, new Remington men's shavers, and so on and so forth, which we'll talk about it when we get to the division section. Now, this is all happening in addition to commodity costs that are relatively flat and strong expense and variable cost controls, along with increased global operations savings across divisions. This should all help offset current negative FX impacts that we are encountering.

Let's turn to Slide 10. We expect 2013 to be a fourth consecutive record year of results for legacy Spectrum Brands. This includes adjusted EBITDA and adjusted EBITDA margin. We project total Company fiscal 2013 adjusted EBITDA with HHI and at current FX rates of $640 million to $650 million. This growth will be even higher -- would be even higher, except for our major strategic growth investments in Remington consumables, which I've talked about, eCommerce, batteries, and HHI. We do project total Company net sales to be between $4.060 billion and $4.1 billion, an increase of more than 1% versus a comparable prior year, despite FX challenges.

The Spectrum Brands model is working. It is even more relevant now, as retailers need more store traffic and POS with value-branded products. Now, we continue to expect free cash flow, including HHI, to reach at least $240 million for the year. We reiterate our plan to reduce total leverage and pay down at least $200 million of term debt this fiscal year, with an even higher level of debt reduction next year from increasing free cash flow. We announced a $100 million term debt paydown this morning, so we're already halfway toward our $200 million target. Long-term, our objective is to maintain a total leverage ratio of 2.5 times to 3.5 times.

Now, we manage Spectrum Brands to maximize sustainable free cash flow. This is our strategy, and has been. In 2012, we delivered free cash flow of about $4 per share. In fiscal 2013 with HHI, we have higher free cash flow targets of about $240 million, or nearly $5 per share. When you consider our planned refinancing of our $950 million of 9.5% senior secured notes, a significant decrease in our acquisition, integration and restructuring costs of approximately $45 million over two years, and include the free cash flow impact of HHI in fiscal 2014, there is an opportunity for Spectrum Brands to drive free cash flow per share on an annualized run rate basis to at least $7, and perhaps more, again compared to $4 per share in fiscal 2012. Now, let's turn to our individual businesses.

Beginning with Global Pet Supplies, which is Slide 11. Pet is sprinting towards a record year for net sales, adjusted EBITDA, and adjusted EBITDA margin. Adjusted EBITDA will have grown every quarter this year. Through the nine months, adjusted EBITDA is up 9%. Driving Global Pet's strong performance are continuing growth in the high margins FURminator product line globally, geographic growth in companion animals in Europe and North America, such as our Dingo and Nature's Miracle brands, resumption of growth in North American aquatics, which we have seen for a number of quarters now, and eCommerce sales improvement. We're excited about the many new products launching across the world, which will provide momentum in the next year. For example, Pet is currently entering the large US chicken jerky market, which we believe approaches $200 million annually at the retail level, with a US-manufactured product, also helping our shelf space increases at some retailers, and new retailer customers here and abroad. Finally, we are especially pleased by the fact that Pets continuous improvement saving this year will be more than twice the level achieved in fiscal 2012.

Now, let's talk about our newest acquisition, Hardware & Home Improvement, your Slide 12. HHI delivered strong third quarter results, following a solid second quarter. Sales were up 13% on the strength of residential security and Pfister faucet growth, with a solid adjusted EBITDA margin approaching 19%. HHI is on track for an even stronger second half of the calendar year, primarily the December end quarter. HHI is winning in the marketplace, driving solid organic growth, gaining market share, especially in residential locks, is benefiting from the US housing recovery, but is launching innovative products such as the unique Kwikset Kevo Bluetooth door lock. investment in new products, such as that Kwikset Kevo lock, and increased spending on hero products like SmartKey are modestly tempering short-term adjusted EBITDA results, even as sales continue to grow. These investments will provide profit and sales growth into fiscal 2014 and beyond.

Improvements in the US housing starts are also helping HHI, as new construction channel sales correlate to US new housing starts with a three-month lag, and HHI retail sales correlates to existing home sales with a 6- to 12-month lag. The HHI integration continues to progress smoothly and ahead of schedule. We expect to have exited predominantly all our TSA agreements with Stanley Black & Decker by calendar year-end. We are confident of achieving the projected $10 million of synergies in the first two calendar years, and maybe more. In summary, we're very pleased with HHI's performance to date, excited about its many future growth prospects, and pleased with the pace of its integration into Spectrum Brands. We think it was the right acquisition at the right time.

Now, let's move to Remington, our personal care business, which is your Slide 13. Remington's third quarter global net sales were essentially unchanged. We're pleased with significantly higher revenues in Europe, which nearly offset lower net sales in Latin America and North America, where we have been impacted in North America by the shaving and grooming category shelf space reduction at a major retailer, which began in the first quarter. Without this retailer move, our sales would have increased. We did, however, achieve gains in personal care at another major retailer. It's important to note that in North America, we are gaining market share in four of the six categories in which we compete with Remington. New shipments from women's and men's shelf space gains at several key North American retailers should help drive new Remington volume higher in this quarter and higher than last year, especially if the month of July was an indicator. Even with the impact of the major retailer shelf space reduction all year, which may in part be reversed next year, Remington global net sales in fiscal 2013 still may be up slightly.

Let's stay with Remington, talk a little bit about i-LIGHT, our unique and patented hair removal product. It's just enjoyed a very strong Brazilian launch in the third quarter. In fact, we believe Brazil may become the largest market for us in this product category. We also just received clearance for i-LIGHT in Mexico, and expect approval in Colombia soon. For many quarters, we have said to you that Remington is the key platform for our planned and increased spending this year in global eCommerce and consumables, which we see as future growth categories. This does not come without expected cost or EBITDA performance this year, but this strategic spend has yielded valuable insights for fine-tuning our product development and marketplace strategy to drive growth in eCommerce. We also are driving consumables growth for next year and beyond. We have strong confirmation that the Remington brand is highly recognized, innovative global brand that consumers trust. The Remington name also has been working well in wet shave at retail in our tests. So we have strengthened that strategy for entering this large and growing market with a global licensing agreement and partner.

In the small appliance categories of Global Appliances, which is Slide 14, we're pleased with continuing growth in Europe and Latin America, which we've seen all year. We overcame a major unfavorable foreign currency impact from several currencies. Half of legacy Spectrum Brands' sales decline in the quarter was simply due to the planned exit of another $10 million or low or no-margin North American sales. This is on top of the $30 million of sales in the first half of the year. We began this program last year. It's clear this strategy is improving our gross margin percentages for the segment and total Company. ¶ Consider this. North America small appliance gross margin percentage improved nearly 350 basis points in the quarter. This is following increases of 300 basis points and 450 basis points in the first two quarters. Since North America is the largest geographic segment of the Remington business -- I'm sorry, of the kitchen appliance business, this turnaround has particularly significant impact. We expect this sales exit process to continue this quarter. New product launches, however, with select pricing incentives and retailer shelf expansion should contribute to higher fourth quarter sales for Appliances. We have the most new products launching this year since we acquired the business in 2010. These include new George Foreman grills, new Black & Decker toaster ovens and irons. We also have major new product introductions coming in fiscal 2014.

Global cost improvement is also a major success for small appliances. Savings this year are tracking twice the rate of fiscal 2012, as the business moves more fully into Spectrum Brands continuous improvement into global new product development process. With higher cost savings, new products, select pricing, distribution gains, and strong expense control, this business is more than offsetting continuing but moderating Asian supply cost increases this year, and is well positioned for fiscal 2014.

Now, let's move to the Home and Garden division, which is your Slide 15. Weather across the US was very challenging for our product categories in April and early May. It was the coldest spring in US weather history after the second-warmest on record last year. Despite net sales gains and share gains against competition, and continued gains for our new Black Flag line, sales were down $10 million, or 6%, but that is compared to a near-record third quarter level of sales in 2012. Now, aggressive expense management and strong cost improvements, however, drove better-than-expected profitability, despite the weather. Third quarter adjusted EBITDA declined only slightly compared to a record $47.5 million last year. Even more impressive is that adjusted EBITDA margin for the quarter increased to 29.4%, versus 28.5% last year. Home and Garden is finishing strong in the fourth quarter. July sales, largely higher margin repellants, were up double digit versus last year. A strong bug and mosquito season, with many reports of West Nile virus and Lyme disease are favorable for repellant sales. Retailers are responding to our Spectrum value model. They continue to support the season, and are pushing repellent products. Remember, the bulk of our good sales come now, not earlier in the season. So we still are very optimistic about the year.

Home and Garden has also delivered excellent continuous improvement programs in operating expense management this year. Despite the tough hand dealt by Mother Nature, we believe Home and Garden will still deliver another record year of adjusted EBITDA, a remarkable performance, given the weather and timing. And we are optimistic about distribution gains and increasing promotional support for fiscal 2014 at our highest margin division.

Finally, to our Global Battery business, your Slide 16. Batteries is delivering adjusted EBITDA growth in a highly aggressive environment. It's a strong EBITDA-producing cash flow generator, with steady performance over many years. We have good momentum with new smartphone power products and distribution expansion, with more opportunities ahead for new retailer business and shelf space gain. Our brands Rayovac and VARTA are winning in hyper-competitive categories. In fact, over the last 12 months, market shares have increased. For example, continuing growth in our European VARTA battery business in the third quarter following first-half gains was driven by new customer listings and expansion into new channels. Our Latin American business, the alkaline and zinc carbon unit market leader in that category, was impacted primarily only by decreased exports into Venezuela, but we did see growth in alkaline batteries and lights in the quarter. In North America, Rayovac market share increased versus private year overall, with double digit unit growth in an large and important non-Nielsen scan channel. North American sales results were impacted almost totally by just one large private label retailer.

Key retailers further tightened inventory levels and trimmed reorders and competitor activities were focused on significant discounting. Still, we are convinced, and shares and POS confirm, that our long-term strategy of same or better performance for less price works. Our presence with prominent retailers worldwide has considerably grown in recent years. The data over many quarters show that value is winning for retail customers and consumers. New Rayovac and VARTA products are creating global excitement and will help drive sales in Q4 and into fiscal 2014 important holiday season, especially our new 2-Hour and 7-Hour power for smartphones, emergency lighting products, rechargeable lights, the world's longest-lasting hearing aid batteries, and others, to just name a few.

Our business is succeeding by focusing capital on battery performance enhancements, thus same performance, less price as premium brands. We also focus capital on cost improvement to offset cost increases and inflation, to maintain a flat cost of goods sold. We work hard at securing new distribution and expanded shelf space at existing customers. And we work very hard at minimizing and continuing to reduce our expenses. Our goal remains, which has been for seven years, help the retailer grow the category, increase market share, especially shelf space, and provide the best value to consumers.

In closing, we delivered a record EBITDA in the third quarter with higher margins, and made important long-term investments in Remington consumables, eCommerce, and our new division HHI, which is a wonderful platform for growth long-term to fuel additional growth in fiscal 2014 and beyond. We are on track for higher sales and adjusted EBITDA in the fourth quarter for legacy Spectrum Brands and total Company including HHI, and we see a record year in fiscal 2013 for adjusted EBITDA as well. Our free cash flow will be growing, and we see significant free cash flow per share improvement over the next 14 months and beyond. I want to thank you for staying with us on that long introduction, but we have Tony Genito, our CFO, now to add some additional color.

Thanks Dave, and good morning everyone. Turning to Slide 18, let me first comment on our gross profit and margin in the third quarter. Our gross profit and gross profit margin of $383 million and 35.1%, which includes HHI, compared to $292 million and 35.4% a year ago for legacy Spectrum Brands only. The slight decrease was due to unfavorable product mix and increased product costs. Gross profit margin in the third quarter of fiscal 2013 for legacy Spectrum Brands only was 35.0%. Third quarter selling, general and administrative expense, excluding HHI, was $178 million, down slightly versus last year's $181 million. Legacy Spectrum Brands SG&A expenses also decreased in the nine-month period. Interest expense in the third quarter was $62 million, compared to $40 million last year. The $22 million increase is primarily related to an increase of approximately $21 million in interest expense related to additional debt financing for the HHI acquisition. Our effective tax rate was 29% in the third quarter, versus a $5 million tax benefit last year. We now expect our fiscal 2013 effective tax rate to be between 25% and 35% for all of fiscal '13.

Let me highlight a few more items in our financial statements. Restructuring, acquisition, and integration-related charges increased to $21 million in 2013, versus $9 million in 2012, primarily driven by the implementation of a series of initiatives across the Company to reduce operating costs. Cash interest for the third quarter of fiscal 2013 was $94 million, compared to $58 million in 2012, driven by the financing of the HHI acquisition. Cash interest for all of fiscal 2013, excluding one-time items of $23 million related to the HHI financing, is expected to be approximately $185 million to $190 million.

Turning to Slide 19, cash taxes for 2013 were $9 million, compared to $6 million in 2012. The increase was primarily due to the HHI acquisition. Based on the level of NOLs we expect to be able to utilize, we do not anticipate being a US Federal taxpayer for the next 5 to 10 years. However, we will continue to incur foreign and a very small amount of state cash taxes. We have said that our normal annual run rate of cash taxes, including HHI for a full year, is expected to be $60 million to $70 million. In fiscal 2013, although HHI is reflected in our results for approximately only three quarters, we expect our cash taxes to be in a similar range of $60 million to $70 million, primarily due to the timing of payments between fiscal 2012 versus fiscal 2013 in Germany. We ended the third fiscal quarter of 2013 with a solid liquidity position with about $70 million drawn on our $400 million ABL working capital facility, and with a cash balance of about $99 million. As of the end of the quarter, total debt at par was $3.230 billion.

Regarding our cash flow projections, given the strong cash flow potential of our businesses, including 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. Our normal annual capital expenditures, including HHI for a full year, should be approximately $65 million to $70 million. However, in fiscal 2013, and as we have indicated on our last two quarters' calls, fiscal 2013 capital expenditures will be slightly higher, approximating $70 million to $80 million. More than two-thirds of the spending represents investments in new production capacity, lockset 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, and now back to Dave for our Q&A.

Thanks very much, Dave and Tony. Operator, with that, you may now begin our question-and-answer period, please.

(Operator Instructions)

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

Hey, guys, good morning.

Good morning, Bill.

Ton of questions so I'll try to keep it brief. On the debt refi, there's an article on Bloomberg that you're going to do it with floating rate debt. Can you just talk about the debt you're taking out, and what you want to replace it with, and some of the interest rates, and maybe the interest savings?

Well, we're not going get into a lot of the detail at this point. We just launched the 9.5% refi today, Bill, but what I can tell you is that obviously our 9.5% senior notes that Terry pursued to our short term debt. So we are looking at obviously the market as to where rates are, and as a result of this transaction, we believe that we will materially lower the Company's cost of capital, and as a result meaningfully increase our free cash flow as a result of the lower cash interest that we have.

Okay, got you. So you won't even give us like maybe like a directionally what the interest might be on the new debt?

Well, it's going to be lower than 9.5%, we hope. (Laughter) As to your point about a fixed rate versus a floating rate, we're going to assess the marketplace and see what fit best for us, and again resulting in a significant and material reduction in our cost of capital, and with a hopefully a very meaningful increase in our free cash flow.

Okay, great, thanks. In terms of batteries. This happened when you got that shelf space at Wal-Mart, but you had this huge uptick in Nielsen market share when the Wal-Mart stuff came in, and now the Nielsen data's obviously turning massively negative, but your sales don't reflect that. And I know you said there's a couple of one-track customers, but could you just like talk a little more about what's going on in batteries, and why there's like almost like schizophrenia across the retail environment? (laughter) I've never seen this like choiceful changes in the brand assortment in the trade.

Okay. The lowest period of time for batteries is really the second and third quarter. There's no back-to-school, there's no holiday. It's not uncommon for shares to flip-flop quite a bit in that period of time, especially over the last -- as you would say, Bill, the last three or four years. I think an easier way to think about it is, if you look at our overall share, and Nielsen is less than -- just barely over 50% -- 60% of the market. It doesn't include the important do-it-yourself channel, the two-step channel, all kinds of other retailers, and the industrial marketplace.

So our overall share is very healthy and growing. What you're seeing in Nielsen right now is what I just said, some flip-flops of timing in the second and third period due to some promotions and unusual market share attempts. I think you'll see that even out as we go through the holiday. For instance, more batteries are sold through the day after Christmas and the day after that than sometimes the whole month - a whole month in the summer, right? So I think you'll see, I keep saying this, but I still think you're going to see sanity return. If you look at battery sales over the last 1 year, 3 years, 5 year, 10 years, they're still decent. There's no big change. They're still profitable for everybody, and remember, batteries are one of the most profitable items for a retailer. Now, I will maybe give you this. I'm sorry for the long answer.

No, no, I appreciate it.

For seven years, 59% of all questions I've been at this Company have been on batteries, so I enjoy this part of the conversation. Batteries, think of it this way. The difference of the two strategies, we have two premium competitors who make a good product and price at a premium level. We have mostly Rayovac and VARTA that are value-brand pricing with no advertising, per se. The premium strategy tends to focus on dollar sales. Higher dollar sales which correlates to higher dollar market share. That's their strategy. It also tends to correlate to less margin for the retailer and higher price for the consumer. Tends to.

Our strategy is that we have a product that lasts just as long. We tend to go after unit sales and market share from the standpoint of shelf space, okay? Because we believe over the long term through a comparison and through trial, they will convert to that. You have seen it to some extent in private label goods, although private label goods tend not to last as long as the premium products. If those are the two strategies, and you get unusual discounting by -- on a dollar basis, both by the premium lines forcing us to do the same thing, you're going to see a category decline. You're going to see, however, certain shares flip-flop during small periods of time.

We believe that what today's retailers need, and we think it's being confirmed, is that consumers have less money to spend. So if you're discounting a premium product, whether it's batteries, Home and Garden -- whatever may be, but the acquisition price is still higher than the everyday price of a value-branded product, that promotion is not going to look too well, but is going to depress the industry sale, right? I think as we go through these cycles of attempts for market share in a flat environment, especially where price, acquisition price, is so critical.

For instance, we've had a competitor at Home and Garden have very high-priced product. It's significantly, it was a really good deal, but it t was still twice the cost of our comparable product. So it didn't sell too well. That's happened in batteries. I'm very optimistic that we have cycled through all this. We have strategic changes in the marketplace where everyone wants to make a healthy profit on batteries. So I think you're going to see this balancing out between dollar discounting of a premium and unit share, and I think it will be fine.

Again, at the end of the day, if the product lasts as long as the higher price one and you buy for less money, it's going to correlate, regardless of how long a premium product continues to discount. So I think that's our strategy. There's room for both. I think, Bill, you're going to see it. Okay, again, look at the 10-year, 7-year, 5-year, 3-year, 1-year batteries.

Yes.

It's pretty solid. I mean, we're talking 20% EBITDA margins that have not changed for the competitors.

Right.

A lot of other businesses would love to have that.

Yes.

Okay. So I don't know if that answered your question.

No, it does. And then just two really quick ones. Is there a follow-up to Spectrum 500 in terms of like an incentive compensation program? And then my last question is on the store traffic, there's been some commentary in the press release about you think that store traffic's going to increase? I know you have been fairly downbeat on the US macro. Is that like an indication that you guys are getting a little more optimistic about things?

I'll answer the store traffic and I'll let Tony answer the follow-up Spectrum 500 question, do you have one.

Okay.

When I say we're optimistic about back-to-school and holiday, we're talking in terms of what I would call products like value-branded, meaning like what we sell. That the consumer is coming back into the marketplace a bit, but they're coming in on promotional goods or goods that they perceive to be of value. Based on the promotions we've won, which are much better than last year, based on that big story I just told you about, does the retailer take a premium product and discount and sell it at high acquisition price or do they go with our product and a good promotion, that's what I mean. So I don't think that we will define a US macro market and make it better. I do think we're going to do better than we did last year because of these reasons I've just explained.

Yes, and Bill, this is Tony. Just a follow-up to your question on follow-up program for 500. Yes, we actually, and had it disclosed in our proxy statement last year. We've got a program called Spectrum 750, which basically the parameters of the plan are. It's a program where an aspirational goal to reach $750 million of adjusted EBITDA in fiscal 2014, cumulative free cash flow of $550 million, and when I say cumulative, that would cash flow in 2013 and 2014. So that cumulative number of $550 million would be the target, and then adjusted EPS of $5 per share. Now, the weighting of that would be 40% for the free cash flow and the EBITDA, and 20% for the adjusted EPS to achieve 100% of the target of $750 million.

Keep in mind that similar to Spectrum 500, the Spectrum 750 plan is not guidance. This is an aspirational goal. If you look at our Spectrum 500, we actually came in with EBITDA last year of $485 million versus the $500 million. Now, that was reported. Obviously, if you were to adjust for exchange, which the program did not allow for, we would actually have been up slightly over $500 million, about $502 million, $503 million. So basically that's the program in a nutshell. I believe it was disclosed back February, early February. February 4 to be exact, in an 8-K filing, if you want more detail on it.

No, I missed that one. (Multiple speakers)

I'm sorry, Bill?

I was going to ask you, have you accrued for it at all?

Yes, in fact, the increase, part of the increase that we saw, which had an impact on our adjusted EPS, was the fact that we had a larger accrual for employee stock compensation, that that's the amortization associated with the stock. So basically, it was a $13 million hit in the quarter versus last year at the same quarter, which translated to about $0.16 in EPS. That was a big factor in driving the EPS downward from last year.

Great. Thanks, guys. Sorry I was so long.

Operator, next question, please.

Dan Oppenheim from Credit Suisse. Your line is open.

Hello, this is actually Mike Dahl on for Dan.

Hello, Mike.

How are you?

Fine, thanks.

How are you doing, Mike?

My first question, just a follow-up on the battery side. Maybe if you could give a little more clarification, should we then assume that your guidance for 4Q reflects a stable, like a flattish, total battery market? How should we think about, if Nielsen data doesn't capture it all, what is your view on the market?

Yes (laughter), to answer your question directly, yes. I think you should see a relatively stable quarter in batteries, and remember, Nielsen is capturing a portion of the US market. We have $1 billion dollar global battery business, and so the other two competitors, much larger, right? Very -- batteries are sold all around the world. Most of the markets are relatively stable, most of these promotions and discounts are, again, flush through the holiday season is pretty well set. Most people know when it is.

There will be some Black Friday promotions in North America, but for the most part, we foresee a relatively stable, flat environment. Now, some companies have lost some customers, some have gained some. But we all know what that is. Of course, you never know, but I really don't foresee any volatile swings there. I think it would be pretty solid season.

Okay, thanks. And then on the Home and Garden side, given the strength in the POS, do you think you will actually recapture all of the lost sales by the end of the fiscal year, or is there still going to be some leftover where you won't fully recapture?

We have Randy Lewis here who runs our business, who's been in it for years. I'm going to ask Randy to directly address that.

Sure. Mike, we think we're going to be close. So if you look at where we were through the third quarter on POS, we were down 5 for the year relative to last year within the first month of the quarter, July was very good. We clawed back on a POS basis back to negative 2 for the year. So the run rate and trajectory's very good, and revenue's keeping up with that. As we look at it, by the time we get to the end, I think we're going to be within 1 point or 2 of last year, somewhere in that range.

Okay, that's really helpful.

And of course as Dave said earlier, we're expecting that we're getting great leverage through the P&L. So that would translate to, as we said in the prepared statement, it will be higher year-on-year EBITDA.

Sure. Very helpful. And then if I could squeeze one last one in. Just priorities on free cash flow. I guess just if we think about the timing here with the debt tender and the paydown on the term, should we think that then the near-term priority will be more focused on this new share buyback versus additional debt paydown? How should we think about that?

No, Mike. This is Tony. No, the primary focus is deleveraging. We will continue to generate good free cash flow, and with that cash flow we'll do primarily debt deleveraging and service-to-dividend. If an opportunity presents itself, keep in mind that, that share buyback program is over 24 months. So if an opportunity presents itself over that period of time where we believe that it's of -- appropriate for us to buy back shares because we think there's a value to do that, it's basically in that order, but our number one priority is deleveraging.

Okay, thank you.

All right, operator. Next question, please.

Your next question comes from the line of Lee Giordano from Imperial Capital.

Good morning, Lee.

Hey, good morning. Can you talk a little more about the business in Europe? It sounds like you're bucking the trend, despite the tough macro environment over there. What's driving that really -- or good performance in such a tough environment?

Well, it's a combination of a lot of things. We have a strong battery platform in Western Europe, and we've invested over the last five years in Eastern Europe, and that battery platform provides a unique opportunity with retailers, distribution, tax, all types of thing that you need to do business in these areas. And we have seen that through the growth of Remington over the years, and now Russell Hobbs has followed that system in there, and they have done a very good job on that, Russell Hobbs being small kitchen appliances. That's our brand in Europe versus Black & Decker here. And now Pet is in that system.

So what happens is you reduce your cost through shared services base. You reduce your costs through better distribution and transportation. You have an opportunity to introduce these products in a way where you can better leverage your total offering, especially in Eastern Europe where you're seeing a lot of the growth, right, and when you can do that, you can invest some of those savings from our shared services model to get into the stores and promote them and sell them through. I think the fact that they're new segments built on this model that we have, and this platform we have, in addition to some good new products, right? That we've have talked about has enabled us to get into these segments, and will continue to let us grow through those segments.

Now, we're just preparing for our new Hardware and Home Improvement group, which has some very small sales over there to follow this in next, right? The same would be true in Latin America, what's going on, but your question was about Europe. So I would tell you, it's that type of leverage and that type of approach. The other thing I would tell you that's helping them is a dedication to the expenses we have put in for category management. In a lot of Western and Eastern Europe, as sophisticated they are in some ways, this is new to them, and when you do good category management in those stores as well.

So also, it's a high-cost region for the consumer, and good products of brands like ours, value-branded, also works well because they don't cost as much. Those are all the things I think is why we're growing.

That's helpful. And then just secondly, on the acquisition front, what are your thoughts going into fiscal 2014 on acquisitions, and how you do you see the environment today as far as new opportunities? Thanks.

Well, our strategy has always been to pursue synergistic bolt-on acquisitions, especially for our Home and Garden division and our Pet division. We continue to meet with several of these entrepreneurs who tend to own all these -- or large companies who own small divisions, and we continue to meet with them and talk to them. Obviously when you look at Black Flag and you look at FURminator and how we were able to make the product, we were able to take out a lot of SG&A and use our sales platforms to grow great success story. There's nothing on the direct horizon right now, but we're continuing to look at that.

I think a more exciting one to talk -- not more exciting, but just as exciting, is the platform that HHI provides us into three areas, right? You have the lock sets, you have the hardware, you have plumbing. So you have a lot opportunities long-term there. Right now, we are focused on deleveraging. We are focused on using our free cash flow in the best possible way to get our debt down, and then we will look at all the other opportunities as they come up.

Thank you.

Thanks, Lee. Operator, let's go to the next question, please.

Your next question come from the line of Bob Labick from CJS Securities. Your line is open.

Good morning.

Good morning, Bob, how are you?

Very well, thanks.

Good.

I wanted to stick with HHI, as you just mentioned there. It seems like the integration is on track, and you certainly have a lot of growth opportunities ahead. Maybe you could talk a little about the new product, Kevo in particular, market size and opportunity. And then also talk a little bit about the new channel opportunity, both I guess US mass, and using your international distribution, how you see that enabling growth at HHI over the next few years?

Well, we happen to have Greg Gluchowski, our President on that. I think of no better person to tell you about that. His enthusiasm could probably keep you on here for awhile. Go ahead, Greg.

Hey, good morning. So I'll just -- I'll respond on the new product relative to Kwikset Kevo. What I will tell you is what's unique about Kwikset Kevo from a growth perspective is we are seeing -- or we are gaining access into the consumer electronics channels with residential lock sets, which is something we've never done before. So in terns of giving you an absolute number from a market size perspective, I wouldn't want to put one out there.

I would just tell you that the Kevo product is slated, we're taking preorders now. It's going to be shipping in September and October, and it's functional with all iPhone 4S and 5 smartphones. In addition, we're working on a generation that would be working with Android products. So if you do the math on a small percentage of folks that have those phones purchasing this lock set, you could get roughly right what that opportunity might be worth.

Your second question about the US mass merchant market, obviously -- our mass merchant market, obviously, Spectrum, has a tremendous presence in the US mass market. And we are already working with the Spectrum teams to assess our opportunities to grow in that space. And we've already had some -- a little bit of growth related to that in Canada, and we would expect that we will continue to see growth in the US.

And then internationally we have product platforms and technology that are transferable into the four major regions for us, which we define as Mexico, Latin America, Eastern Hemisphere, and Northeast Asia, and also in Europe. We have a base in the first four, with Spectrum in Europe we now have the opportunity to take those product platforms and grow into Europe. So we see tremendous opportunities from a new product standpoint with the technologies that we're launching, and that is further amplified on a global basis by the present Spectrum, the legacy Spectrum team has had.

Okay, great, thank you very much on that. Then just one housekeeping question, probably for Tony. You touched on the stock comp related to Spectrum 750 and the increase in the quarter. What's the right run rate for that? I know I guess some legacy 500 will roll off. How should we be looking at the stock comp on a go-forward basis?

For the full year, Bob, it's probably going to be in that, say, $40 million to $45 million range in total expense for this year. Now, it's hard to project what next year will be, since awards haven't been issued and it's contingent upon what the price of the stock is at the grant date and so on and so on, assuming shares are granted. I think right now for the full year we're looking at total comp related to stock-based compensation of about $45 million. That includes the normal, what we call our EIP plan, Executive Incentive Plant, which covers about, I believe, about 125 folks, in that neighborhood, and then about 150 people covered by the Spectrum 750 plan. And then we've got the, as you properly point out, an impact from spectrum 500 as a carry-over from last year.

Okay, thank you very much.

Thank you.

Thanks, Bob. Operator, we have one questioner left, and let's go to that one, please, before we wrap up.

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

Hey, good morning, guys.

Good morning, Hamed, how are you?

Very good, thank you.

Good.

Wanted to touch on the product exits. I know you have been working on this for the past year or two now. Do you feel like that is constraining any retail relationships, that you're getting out of products that you might not have enough competition for and just the costs are too high to sustain?

We know we have Terry Polistina on the line who has been intimately involved in this, and has been in this business for a very long time. And I think I'll be glad to add on, but Terry, you want to jump in on that?

Yes. I think what you're seeing us doing, we talked about it going back several quarters now, is just to be very, very disciplined about the innovations and new products with reasons to buy that we put there. And not spend a lot of time in chasing the lower-priced promotional activity. So it's something that the bulk of it is behind us, but we are going to be very disciplined in weeding and [feeding] promotional activities.

So as an example, you're going to see very good promotional wins in the fourth and first quarter for the Home business, but they're more profitable promotions than you would have seen in the past. So we're choosing to stay away from the lower margin stuff and participate where we can make a little bit of money versus losing money just to participate in promotions.

Terry, maybe you could address retail relationships. I actually think that, that's worked out pretty well. Maybe you want to address that.

Yes, I think our relationships are actually better today than they've been in a number of years. We've been very, very transparent with the retailers on what we're doing, the supply chain. Our operations teams have worked not only at the buyer level, but all the way through the different channel in the organization. And I will tell you, coming from outside of Spectrum Brands and then now being as part of Spectrum Brands the last three years, that the hand-in-glove connection that Spectrum has with the infrastructure and the teams from operations all the way through sales and marketing has really actually improved our relationships with the -- with our customers around the globe.

Okay. And my last question is, where are you guys on the HHI expansion in Europe, and what costs are you expecting in the fiscal '14 from it?

This is Dave Lumley. I think that, that is a good opportunity, but right now we're focusing on exiting the TSA's integrating into Spectrum Brands. I think you would see this more as a late 2014, 2015. Greg, you can jump in if you want here.

I just would like to add, I think the key thing to think about relative to growth opportunities with the HHI platform is that a big part of the organic growth that we're driving is really coming from initiatives that don't include Europe. So things we're doing today to expanse marquee, to expand our Pfister business in the non-key retail areas, to expand in home automation, and to expand in existing international platforms, that's what is driving the growth in the business.

The European comment that we just talked about is an opportunity that we're beginning to work on and look at for 2014 and beyond, but it's not a core part of the way we think about business growth going forward. And I didn't mention the other, the underpinning that helps us with the growth in the business is really the performance of the US housing market, both new construction and existing home sales. All of that is what is driving the growth, and that's much more than what we think about in terms of European opportunity. That's more opportunistic, probably for '14 and '15.

Okay, great. Thank you, guys.

Thank you, Hamed. Take care. With that, we've reached just past the top of the hour, and will end our conference call. But I do sincerely want to thank, of course, Dave, Tony, Terry, Greg, and Randy for participating on the call today. We want to thank each and every one of you for taking part. Have a good day, and we'll talk to you again on our fiscal year-end conference call in November. Thanks again.

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