Spectrum Brands Holdings Inc (SPB) 2013 Q4 法說會逐字稿

Good morning. My name is Shannon and I will be your conference operator today. At this time I would like to welcome everyone to the Spectrum Brands fourth-quarter and full-year fiscal 2013 earnings conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, November 21, 2013.

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

Thank you, operator. Good morning and welcome to Spectrum Brands Holdings fiscal 2013 full-year and fourth-quarter conference call and webcast. I am Dave Prichard, Vice President of Investor Relations for Spectrum Brands, and I will be your moderator for today's call.

Now to help you follow along with our comments this morning, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website which is www.SpectrumBrands.com. This document will remain there following our call.

Now if you go to slide two of the presentation you will see once again that our call will be led this morning 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. Also joining us this morning for the Q&A session is Andreas Rouve, President, International.

Now turning to slides three and four, our comments today include forward-looking statements including our outlook for fiscal 2014 and beyond. These statements are based upon management's current expectations, projections, and assumptions, and are by nature uncertain. The actual results may differ materially.

Due to that risk, Spectrum Brands encourages all of you to review the risk factors and the cautionary statements outlined in our press release dated November 21, 2013, and our most recent SEC filings and Spectrum Brands' most recent 10-K. We assume no obligation to update any forward-looking statement.

Also, please note that we will be discussing certain non-GAAP financial measures in the call. Reconciliations on a GAAP basis for these measures are included in this morning's press release and 8-K filing, which are both available on our website in the Investor Relations section.

Now for the fourth quarter of fiscal 2013 the Company reported a net loss of $36.7 million, or $0.70 diluted loss per share, on average shares and common stock equivalents outstanding of 52.2 million. Now this net loss was due entirely to $122.2 million of costs and expenses related to the extinguishment of $950 million of senior secured notes in September 2013. This result compared to net income of $5.5 million, or $0.10 diluted income per share in the year-ago quarter, based upon shares and common stock equivalents outstanding of 53.1 million.

Finally, by segment for the fourth quarter of fiscal 2013, the Global Batteries & Appliance segment reported net income as adjusted of $54.8 million versus $55.2 million a year ago. The Global Pet Supplies segment reported net income as adjusted of $25.9 million versus net income as adjusted of $23.1 million last year.

The Home and Garden business segment reported net income as adjusted of $18.7 million versus net income of $11.9 million as adjusted last year. And, finally, the Hardware and Home Improvement segment reported net income as adjusted of $38.3 million in the fourth quarter of fiscal 2013.

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

Thanks, Dave, and thank you all for joining us this morning. Let's turn to slide six.

Fiscal 2013 becomes our fourth straight year of record performance and progress for Spectrum Brands. We met or exceeded our financial guidance with net sales of $4.09 billion and adjusted EBITDA of $647 million, including HHI from its acquisition date of December 17, 2012.

On a pro forma basis for HHI, net sales and adjusted EBITDA also increased. HHI delivered better-than-expected results since it's December 2012 acquisition while our Pet and Home and Garden businesses reported record years in sales, EBITD,A and margins. In addition, Europe was a particularly bright spot for us throughout the year in virtually all our businesses.

The legacy business delivered a fourth consecutive year of record adjusted EBITDA with a 2.1% increase, and excluding negative foreign exchange impact adjusted EBITDA grew a strong 6%. Our EBITDA margin reached another record annual level of 15.4% versus 14.9% last year.

Let's now turn to slide seven. In fiscal 2013 we overcame significant adversity, including $23 million of negative FX impacts on our adjusted EBITDA. This is based on challenging global economies marked by sluggish spending by still financially stretched consumers, slowing store traffic, tighter retail inventories and reorder rates, very unusual and disruptive weather patterns virtually around the world, and sustained and heightened competitor discounting in many of our businesses.

Our continuous improvement savings reached a record level, more than offsetting private cost increases and helping us invest in many new products, some launching now with more in the months ahead.

We manage Spectrum Brands to maximize sustainable free cash flow. Most importantly then, our free cash flow in fiscal 2013 reached a record $254 million or nearly $5 a share. This was up from $208 million in fiscal 2012 or $4 per share. We are expecting fiscal 2014 free cash flow to increase to at least $350 million or nearly $7 per share.

Let's now go to slide eight. It was a strong fourth-quarter finish with solid growth in net sales, adjusted EPS, and adjusted EBITDA that helped to achieve our record year. Net sales grew 4.4% on a pro forma basis, including HHI for the prior year, and legacy business net sales grew 1.4%, up nearly 2% excluding negative foreign exchange impacts.

Our Home and Garden business turned in a remarkable fourth quarter with net sales up 18% and adjusted EBITDA up 26%. Adjusted EPS increased 6% and adjusted EBITDA increased 3.3%. Legacy business adjusted EBITDA improved 3.6% in the fourth quarter and a strong 10.2% excluding negative FX impacts.

Now this was the 12th consecutive quarter of year-over-year adjusted EBITDA growth with the margin growing to 15.4% versus 15.1% a year ago and up from 14.2% those 12 quarters ago.

Let's go to slide nine. We have the momentum now from our fiscal 2013 performance and continuing accretion from HHI as we focus now on delivering another year of steady, measured financial input improvement in fiscal 2014, including a fifth consecutive year of record performance for the legacy business and higher results from HHI. I want to emphasize again that free cash flow is expected to be at least $350 million, or nearly $7 per share, in fiscal 2014. This is versus $254 million in last year, or again $5 per share, and $208 million in fiscal 2012, or $4.

We will continue to pursue a mix of volume growth as well, new retail customers, retail distribution gains, new products, cross-selling opportunities, key further geographic expansion internationally and select pricing actions. We will maintain strict spending controls and push to deliver a record level of continuous improvement savings. We also plan to reduce debt by at least $250 million and further delever the balance sheet.

Now let's turn to our businesses. Let's begin with Global Pet Supplies, which is your slide 10. Pet delivered a record fiscal 2013 for net sales, adjusted EBITDA, and adjusted EBITDA margin, which improved almost 100 basis points to 19.3%.

Adjusted EBITDA increased every quarter and grew 6% for the year. That performance was driven by growth in the high-margin FURminator product line globally, companion animal growth in Europe and North America, and a resumption of growth in the North American aquatics. We also saw increases in e-commerce. In addition, continuous improvement savings were more than twice the level of 2012.

Looking ahead, we are optimistic Pet can deliver another record year in fiscal 2014. This will come from a combination of global growth in companion animal products, continued growth in North America aquatics, select pricing, new retail customers along with increased shelf space at many key retailers, another year of record cost savings, and strong expense controls.

We are excited about many new products launching across the world in this division as well. For example, Pet recently began shipments of US-made Dingo Market Cuts, which is chicken jerky, into the large US chicken jerky market. A market we believe did nearly $200 million annually at retail and one we are just beginning to participate in.

Now let's move to Hardware & Home Improvement or your slide 11. HHI delivered its third consecutive strong quarter of results since its December 2012 acquisition. Sales increased 14%, largely on the strength of US residential security and Pfister faucet categories, with another solid adjusted EBITDA margin reaching 19%.

HHI continues to win in the marketplace with its strong brands, driving solid organic growth, and gaining market share, which especially is happening in residential lines. Yes, they are benefiting from the US housing recovery, but more importantly from key customer and product initiatives.

We are also launching in HHI innovative products, such as the unique Kwikset Kevo Bluetooth door lock. Similar to the third quarter, investments in new products and increased marketing spending on hero products like SmartKey and Kevo are modestly tempering short-term adjusted EBITDA results even as the sales grow. For example, SmartKey unit adoption has increased at a double-digit rate. Through investments like these we will provide profit and sales growth in 2014 and beyond.

Now, we also are growing in nonretail hospitality, showroom, and multi-family channels and plumbing, and it is also moving the whole business forward. Improvements in the US housing starts are also helping. As a reminder, new construction channel sales correlate to US new housing starts with a three-month lag and HHI retail sales correlate to existing home sales in the six- to 12-month cycle.

We are pleased to report that the integration of HHI continues to be smooth and essentially complete, virtually all TSA cost agreements with Stanley Black & Decker will be exited by calendar year-end, which is a months ahead of our original schedule. We are also confidence of achieving the projected $10 million in synergies in the first two calendar years, and we have now identified further synergy savings over the next few years in areas such as IT, sourcing, and distribution and transportation.

We see net sales, adjusted EBITDA, and free cash flow growth in fiscal 2014 from the North American housing markets driven by new products like Kevo, the expansion of SmartKey, and non-retail plumbing. We also see the home electronics market and international providing growth. HHI will also increase its level of global, continuous improvement savings.

So in summary, we are pleased with HHI's performance and the pace of integration to the Spectrum Brands and excited about its growth prospects.

Now to Remington, our personal care business, which is slide 12. Remington finished strong, especially in the fourth quarter; net sales grew 6% and 7% on a constant currency basis. Solid growth again happened in Europe and improvement in Latin America more than offset a flat North America, which was primarily impacted throughout the year by the men's shaving and grooming category shelf space reduction at a major retailer.

Without this, North American sales would have increased. However, North America's fourth quarter was quite an improvement and we see momentum into fiscal 2014.

North America has been gaining market share in three of the six categories in which we compete. For instance, North American Remington has just become the number two overall hair appliance brand. We see global Remington net sales and adjusted EBITDA rebounding in fiscal 2014 in large part from improvements in North America.

Overall, Remington, we believe, is the fastest-growing personal care brand in Europe and we expect growth like that to start in Latin America as well. Our i-LIGHT product, our unique hair removal offering, is launching now in Mexico and Colombia after successful introduction in Brazil. Finally, we are fine-tuning your product development and marketplace strategy to drive more growth in e-commerce and consumables, given that Remington is a highly recognized, innovative global brand consumers trust.

Let's turn now to slide 13. The small appliance category of global appliances finished with a solid fourth quarter as well with double-digit adjusted EBITDA growth and a 2.3% net sales increase on a constant currency basis. This was led by double-digit growth in Europe.

North American sales would have grown as well save for the exit of another $5 million of low or no margin sales, which is a total of $45 million for the year. This strategy has boosted our gross margin percentages for the segment and total company. North American small appliance gross margin percentage improved 500 basis points in the quarter following increases of 300, 450, and 350 basis points in the first three quarters. This sales exit process is essentially now complete.

For fiscal 2013, the small appliance category achieved higher adjusted EBITDA. Net sales increased as well after excluding the $45 million of previously mentioned, no margin sales exit in North America.

Global cost improvement was a major success story here. Savings were more than twice the fiscal 2012.

Looking to fiscal 2014, small appliances had the most new products launching since the 2010 Russell Hobbs acquisition. New George Foreman grills, new Black & Decker toaster ovens, irons, and beverage products; so we believe that these new products, with our continuous improvement savings, will again help offset continuing but more moderate agent supply chain cost increases.

Now let's turn to slide 14 and talk about our Home and Garden business. Home and Garden delivered a remarkable and record fourth quarter, enabling the businesses to achieve a record fiscal 2013 for net sales, adjusted EBITDA, and adjusted EBITDA margin, which has now reached 23.1%. Fourth-quarter net sales increased 18% and adjusted EBITDA grew 26%.

As you will recall, weather was very challenging in the June quarter in the United States with the coldest spring in US history. This pushed the season and the point of sale into July and beyond. Fourth-quarter revenues grew in all three of Home and Garden's product categories, driven by the extended selling season and the more favorable weather conditions that happened at the end of the year.

Aggressive expense management implemented earlier in the year when a delayed spring season became apparent was also a contributor, along with cost improvements which more than offset product and commodity cost increases.

Now what do you do for an encore? Well, Home and Garden will push for another record year in fiscal 2014 and is assuming a more normal quarterly weather pattern for business than we saw in fiscal 2013 when the third quarter was lower and the fourth quarter was stronger than normal. In fact, a record.

We expect distribution gains from new products, like our new Cutter Backwoods Dry Insect Repellent, and the recently retooled more powerful Black Flag lineup of products. We will also increase promotional support this year to help drive [PS] for our customers.

Finally, let's go to slide 15, Global Batteries. Global Batteries is operating in a very aggressive competitive environment with major negative foreign currency headwinds. Still, our global battery business delivered increased adjusted EBITDA in fiscal 2013, approximately 5% higher results on a constant currency basis. Sales were essentially flat on a constant currency basis.

The adjusted EBITDA margin was also a record supporting our contention this is a strong EBITDA producing cash flow business with steady performance year in and year out. Our European VARTA business performed especially well in fiscal 2013. Global, continuous improvement savings also helped us outpace cost increases.

Fiscal 2014 will likely be another year of price competition, erratic competitor discounting, and tighter retail inventory management, which is usually a result now in the last year or so of slow-moving premium priced products in this category. Still, we are optimistic about a solid and steady fiscal 2014 because POS, or point of sale data, in all markets show that value, essentially our same performance, better price strategy, is a winner in the global marketplace.

We see relatively flat commodity prices and we have identified an even higher level of continuous improvement savings than last year for batteries. We also have good momentum with some exciting new smartphone portable power products that is providing distribution expansion for us and near-term opportunities from new retail business and shelf space gains that previously we did not have the opportunity to participate in. This is especially true in North America.

We are particularly pleased and excited that two of our portable power products were honored last week at the Consumer Electronics Show Unveiled event, press event in New York. So new Rayovac and VARTA products are creating global excitement and will help drive net sales in fiscal 2014. These products include our new 2-Hour and 7-Hour power products for phones, emergency lighting products, and new rechargeable lights. And of course, the world's longest lasting hearing aid batteries, just to name a few.

Growth also continues in a large and key North American non-Nielsen scan channel as batteries are sold, both in Nielsen scan channel customers and non-Nielsen customers. So as we execute this year our goal remains -- help the retailer grow the category, increase market share for them and us, and provide the best value, or same performance, less price, for the consumer.

With that I would like to thank you and turn you over to Tony Genito, our CFO, who is going to take you through the financials.

Thanks, Dave, and good morning, everybody. Let's turn to slide 17.

Fiscal 2013 gross profit and gross profit margins were $1.390 billion and 34%, which includes HHI since its acquisition date, compared to $1.120 billion and 34.3% a year ago related to the legacy spend from brands only. The slight margin decline was due to a $31 million increase in cost of goods sold from the sale of inventory revalued in connection with the HHI acquisition, which offsets gross profit improvements from the exit of $45 million of low or no margin sales in North American small appliances.

Fiscal 2013 gross profit margin for legacy Spectrum Brands improved 34.8% versus 34.3% last year, or 50 basis points. Fiscal 2013 SG&A expenses, excluding HHI, of $740 million were unchanged from last year. Fiscal 2013 interest expense was $376 million compared to $192 million last year.

$184 million increase was primarily due to one-time costs related to the replacement of our 9.5% senior notes coupled with one-time costs and ongoing higher interest expense related to the HHI acquisition. This is partially offset by the non-recurrence of one-time costs related to the replacement of our 12% PIC notes in fiscal 2012.

Our full-year effective tax rate was a benefit of 98% versus tax expense of 55% last year. This year's rate was impacted by the cost of the replacement of our 9.5% notes in September, which resulted in the generation of a pretax loss.

Let me highlight a few more key items in our financial statements. Cash restructuring, acquisition, and integration charges, excluding certain transactions related to items from the HHI acquisition, decreased to $36 million in fiscal 2013 compared to $56 million in 2012, driven by significantly lower legacy business cash payments. We expect a further decline in fiscal 2014 to $25 million to $30 million, which includes HHI cash charges, and legacy business cash payments continue to decline.

Cash interest payments for fiscal 2013 were $337 million compared to $185 million in 2012. Excluding one-time cash costs in both years, cash payments increased $23 million due to additional debt incurred for the HHI acquisition. From fiscal 2013, one-time cash costs related to the replacement of our 9.5% notes of $131 million, including $20 million of prepaid interest related to the satisfaction and discharge of those notes and $23 million related to the financing of the HHI acquisition. Fiscal 2012 one-time costs related to the replacement of our 12% notes of $25 million.

Cash interest for fiscal 2014 is expected to approximate $165 million to $175 million. Ongoing cash interest will decrease from fiscal 2013 levels due to savings from the refinancing of the 9.5% notes and debt payments, partially offset by timing related to a full-year of interest on bond payments related to the HHI acquisition.

Turning to slide 18, cash taxes for 2013 of $50 million compared to $39 million in fiscal 2012. The increase was driven by payments by foreign subsidiaries under the HHI acquisition. Cash taxes for fiscal 2013 were lower than our projected range of $55 million to $60 million, primarily due to the timing of payments in Germany.

Based on the level of NOLs we expect to be able to utilize, we do not anticipate being a US federal tax payer for at least the next five to 10 years. However, we will continue to incur foreign and a very small amount of state cash taxes.

Cash taxes are expected to be $70 million to $80 million in fiscal 2014, due to our overall higher international profits and a full year of results for HHI. However, the main reason for the increase is the timing of payments, primarily in Germany, and the anticipated conclusion of several income tax audits in certain jurisdictions from the 2007-2010 period. We expect our normal annual run rate for cash taxes, including HHI for a full year, to be in the range of $55 million to $60 million.

We ended fiscal 2013 in a solid liquidity position with no cash draws on our $400 million ABL working capital facility and with a cash balance of about $207 million. As of the end of the year, total debt was $3.231 billion at par.

Regarding our cash flow projections, given the strong cash flow potential of our businesses, our goal is to generate at least $350 million of free cash flow, or approximately $7 per share, in fiscal 2014. We expect capital expenditures to approximate $70 million to $75 million in 2014, including expenditures for the integration of the Tong Lung business versus $82 million in fiscal 2013.

Our normal long-term run rate, excluding requirements related to the HHI business, are expected to approximate $65 million to $70 million which we believe will be sufficient to fund ongoing new product introductions, product enhancements, cost improvement programs, and maintenance of equipment. Thank you and now back to Dave for our Q&A session.

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

(Operator Instructions) Bill Schmitz, Deutsche Bank.

Good morning. This is [Fiza] calling in for Bill. I just have a couple questions. First of all, if you could just discuss what your outlook for GDP growth is for fiscal 2014 and which businesses do you think are most levered to GDP upside next year.

And then if you could just talk a little bit about the G&A increase, what drove that increase. And then just a little bit on the margins for HHI and Home and Garden. Home and garden was much better than what we had modeled; is that just sales leverage or is there something else there?

Then just the HHI you talked about incremental spending. Is that going to continue for the whole year next year? Thank you.

This is Dave Lumley. That was five questions, so let's -- just to help, let's start with the first one, GDP growth.

It has typically been --

1.5% to 2.5% growth for GDP and that is what we are anticipating at this point in time. Again, assuming constant currency -- where currencies are today, based on announcements.

So that is kind of how our business, the legacy business tends to go (inaudible).

Second question I believe was about which one of our businesses tend to do better or worse than GDP growth. Clearly, HHI, with the housing rebound, is one that has the opportunity to do better. Our Pet business at times has a chance to do better than that as people tend to spend disproportionately on their pets.

I believe that our appliances and batteries tend to follow that curve, which I would think would stay about that unless there are market share gains. Home and Garden, I think, has the opportunity to outpace that based on weather and our new products, so I would say it is generally a positive outlook for us.

Question three was --?

Fiza, what was --?

What was three?

G&A.

G&A? G&A expenses, we would expect G&A expenses to be relatively flat. We pride ourselves on running a rather lean organization. We are obviously always looking for opportunities to reduce costs, not only both in the manufacturing or operation side of the business, but also on the administrative side. So we will continue to pull costs relatively flat.

What was the --?

Was there one more, Fiza?

Then I was just asking about the margins for Home and Garden and HHI. Home and Garden was better than what we anticipated, so was that just better sales leverage or was there something else? Then just for HHI if the planned investments are going to continue next year.

Yes, our margins in Home and Garden typically improve every year due to cost improvement and mix. However, this year was a little bit unusual that so much sales came at the end that were not tied to normal promotional spending, so they improved on that basis as well.

Just to further add on to the Home and Garden business, keep in mind, as Dave said in his prepared remarks, that the season itself was shifted over towards the latter part of the year. So we had a weaker-than-expected spring because of weather and as a result of that the business obviously started to ratchet down costs and not make certain promotional investments, only because they felt that they were not maybe going to get the payback.

As a result of the back-ended pick up in the weather towards the end of the year, we were able to have a pretty big [sell-in] of repellents which happens to be a very high margin product for us. But most importantly, is that those investments that were not made allow for greater leverage on the business itself.

Bob Labick, CJS Securities.

Good morning. Congratulations on a nice quarter and year. I wanted to focus on HHI for a moment. With the Allegion spin from Ingersoll-Rand coming out -- actually trading issued already -- it brings up a couple questions. I know HHI is the residential leader and Allegion is more commercial, but products are similar nonetheless.

It's trading over 13 times EBITDA so it makes your purchase look like a nice acquisition there. I guess my question is, though, could you remind us of the competitive advantages and barriers to entry of Kwikset? Then particularly as it relates to Kevo. Does going into the electronics side open up the market to new competitors or what are the barriers to entry there?

This is Dave Lumley. Yes, we feel very good about our purchase of HHI and clearly we have seen the evaluation of a deal right now. They are about 80% commercial and about 20% residential, and we are almost primarily residential. Where we compete we have significant patents on our SmartKey and now our Kevo products. They really don't -- haven't so far had an answer to our Kevo product and, frankly, we don't believe the SmartKey product.

So we feel very good about where we are in that situation with Kevo and SmartKey and the growth that is happening there. We see that as a very good situation for us right now and are enthused with the valuation.

Okay, great. Then just one more if I could. Obviously the integration has gone very well and you are projecting very strong cash flow for next year. Could you talk a little bit about the acquisition environment out there and typically when you might get active again, meaning at what leverage levels?

Again, Dave Lumley. Our goal is to drive free cash flow debt reduction. That remains what we are going to do. We also are on a push a lot of our new umbrella products as we will talk about in a little while. Remember, we want to get our debt leverage down to 2.5 to 3.5 times.

That said, the acquisition environment out there remains where people still have lofty expectations about what they would like to sell. Of course, they have very low expectations on what they would like to pay and we all know that that is very normal human behavior.

We will continue to keep our eyes open for very accretive small tuck-ins, especially in our Home and Garden and Pet and eventually the Hardware business. But right now we are solely focused on not doing that, what I said previously this year.

Great. Thanks very much.

Ian Zaffino, Oppenheimer.

It is actually Tom for Ian. I wanted to know, on the battery business I guess you guys are saying that it is going to be -- continued being slightly depressed in fiscal 2014. I was just wondering if you could talk on that a little bit. What is exactly happening on a competitive front, just some color on that?

Okay, sure. This is Dave Lumley. The battery business tends to follow GDP, especially on a unit basis, so the alkaline battery business and the specialty battery business is about flat on a unit basis. In some places it is even growing a bit.

We have had for the last two or three years a lot of different sales strategies among the big three, most of them focused on discounting which lowers the dollar volume of what you sell in and what you sell out. It remains a zero sum game despite all these attempts. Now we think this holiday season will continue to see that type of promotion.

We have continuing different strategies from the three battery companies based on the situation of their overall companies. However, batteries remain a very, very profitable item for retailers. When they get away from it that profit is very difficult to duplicate, so they are getting back behind it. We are seeing that.

More importantly, the battery companies -- I'm talking about my company and some of the others -- have introduced some new products that are driving margins up and entering new categories like our 2-Hour and 7-Hour copper. So I think you are going to see this discounting market share go on, driven by both the battery companies and, frankly, the retailers.

Retailers are getting back in. We are providing some new higher-margin products, the battery industry is. So I think we still have some more of this going on, but I think slowly and steadily since the zero sum game has produced no real benefit for this -- the consumer has been the big winner, which is not the worst thing. But I think you will see it getting better and better and better as we go into 2014.

It is still a pretty steady business. If you look at it over the last 10 or 20 years, it is still a profitable business for everyone involved.

Lee Giordano, Imperial Capital.

Thanks. Good morning, everybody. Can you talk a little more about the gross margin opportunity in fiscal 2014 and maybe the puts and takes you see there for opportunity for expansion, either taking price in certain categories, and how you see the cost environment progressing throughout the year? Thanks.

We are in six businesses, so that is a hard question to answer. Let me try to put it into a couple categories. Commodities overall have been tempered for now. Actually, they are pretty low if you look at it historically. That is a good sign. We don't see that going up too much yet because demand isn't that high.

Two, I think -- so you don't have that big attack there. We have been able to get select pricing, and I think we will continue to do that, especially with these new umbrella products we are bringing out, like I said, the 2-, 7-Hour power, the Kevo Bluetooth Lock, the chicken jerky, these things we have been telling you about product; our new iLIGHT facial product and our new appliances.

It has been years since we have had really competitive new appliances, and we have those now in Black & Decker beverage and toaster ovens and our new George Foreman grills and other products. So I would think that our opportunity for margins to improve are there.

I think we also exited quite a bit of low margin promotional goods, as well as we have had some retailers go on their own private-label and take certain approaches so we would no longer have to provide products to them at what is flat to a loss. So all those things are good.

Another great area to improve margins is the continuous improvement growth programs we have in place. The commonality of parts in the global products and that is working for us. So I would say that we have a good opportunity to improve based on all those things.

Now, all that said, it is a global environment. If the economies and foreign exchange and consumers decline dramatically, well, then that would lead to discounting. So we will see how that goes. We will see how this Christmas goes. Depending on what you read it is going to be the worst Christmas ever or it is going to be a pretty good Christmas, so I've decided to go with the pretty good Christmas.

We are not hearing it in our product groups, especially our brands, from our retailers. Our POS seems to be doing well. When you have a product that is same performance, less price in this environment and the retailers have tried to discount promotional premium price products all year, the problem is, even if you promote a premium-priced product and is still is too high on acquisition price there is still no sales. So we are enthused about that. I think we are going to do pretty well.

Great, that is really helpful. Then just second question. On the release you talked about opportunity for new retailers and new distribution; can you just talk about the channels where you see the most opportunity there? Are there any big holes you are looking to fill and what you might see in fiscal 2014? Thanks.

Spectrum Brands in most of our products are very strong in certain segments and have a lot of opportunities where our competition is strong in the other segments. We have worked very hard over the last three or four years to not only go into new geographic segments like Eastern Europe and Asia Pacific with our new Russell House appliances, Black & Decker, our i-LIGHT products, and batteries, and Remington.

But channels like food and drug in North America, which is a Nielsen-scanned channel, is areas where some of our big, big competitors are very strong with long-term relationships, rebate programs, selling allowances so we have made some good progress there. We will continue to go into grocery in our battery business, our appliance businesses, our Home and Garden business, and even Pet in North America. We have had great success doing that in Europe and we will launch that in South America.

But the things I am most excited about is markets within the market, like chicken jerky made in the United States. We never had that before and it is the biggest demand. It is a big opportunity, so we are going with that. And everyone wants that.

2- and 7-Hour power; we are in office supply stores now, electronic stores, airport stores. We are at festival marketing. We put this 2-, 7-Hour power at a music festival in Atlanta and then sold almost $100,000 of it in one day. This is a product that costs $7, so that is excitement.

I think we have a lot of untapped -- we have the worldwide platform built off batteries, frankly, where we can take all these products in and it is starting to really work. Last point is we spent years integrating companies. This year, 2014 will be the first time we are not integrating a major company in the Spectrum Brands for years and years and years, and that is going to give us a lot more focus and a lot more power to drive in these channels.

Dan Oppenheim, Credit Suisse.

This is actually Will Alexis on for Dan. So a couple questions on HHI. First kind of centers around the recent pause that we have been seeing in the housing market.

Was wondering if you could comment on point of sale trends since the quarter ended, and also if you could give a little bit of color on inventory trends if you can at retailers? Thanks.

Yes, this is Dave Lumley. You know we just had our Board meeting and we just went through all of our [pour outs]. Our leader of HHI, Greg Gluchowski, did say that there was a pause in August, a little bit in September on the builders market, but they are seeing that come back up right now.

Still remember that lag I told you about, and it's only about a quarter of HHI business. What they have seen, frankly, is much better POS growth for SmartKey in their locks business and their plumbing business at Pfister than the marketplace growth.

And I think that goes back to the fact that these had these patented SmartKey products that they are getting behind it. They are getting a lot of attention for SmartKey through their Kevo Bluetooth launch and that has done very well. They are in retailers that I am not sure a lock has ever been in, like Apple and sales on Amazon and Best Buy. So they are outpacing that.

Another exciting development for HHI's POS is that they have done some very successful in-store promotions at one of their key customers. It is a 25% lift in those store, so it is an exciting thing for them. But I think it goes back to, yes, the housing market is part of it, but if you have a compelling product like Kevo, an umbrella product, and a technology like SmartKey where the consumer really has a benefit, because most of that activity is retrofit I call it or remodel, and they are getting the word out.

I think they are going to do fine, and you are going to see that the EBITDA is going to come with it now. Because we have made the investments, we are in place, they are ready, and I think you are going to see them do quite well.

As far as our inventory at store, I can tell you it's in very good shape. I said earlier about most of our product categories, our unit sales are good. What we are suffering from a little bit is that other products in our categories are slower moving, especially at higher-priced premium products, so they affect the inventory build opportunity of the retailer.

But I will say this; the retailers are very, very good now at getting those inventories in line. I think as we get through Christmas and go in 2014, again it is going to be an opportunity for us. But I would not worry that -- in fact, HHI's problem is not that they have too much inventory in the field right now.

Kevin Grundy, Jefferies.

Good morning, guys. So first on the guidance, the revenue guidance for the year, you guys are sticking with your long-term or legacy guidance of at or above GDP growth. But it feels a bit conservative and we're all kind of doing the same math given HHI is growing quite well, low double digits at this point.

So you should be getting 1.5, 2 points from that business alone. Is it fair to say that there is some conservatism in your top-line guidance?

I think it is fair to say that the management team would much rather underpromise and overdeliver. With that being said, you raise a good point there, Kevin, about the HHI business growing double digits the last seven quarters. We would love for that to continue, but we just look at this and say is that really sustainable.

There is a portion of pent-up demand probably that is now flowing through the system with respect to people now making investments in their house. As Dave said, 25% of the business is new construction, 75% is replace and remodel, so if we could -- does that mean we are not going to try to get double-digit growth in HHI? Absolutely not. We are going to try to get triple-digit growth, but that being said we are trying to be somewhat realistic here.

This is David Lumley. We manage this company conservatively. Again, free cash flow, debt paydown; that is working capital. We will not miss a sale, but we go step-by-step and we are ready. And you are right; that potential is certainly there.

We call that our stretch plan and that is what we pursue, but growth is still a little erratic right now so let's see how it turns out.

Okay, thanks. A couple more, if you wouldn't mind. Tony, looking at free cash flow and capital structure, you are going to do where the target is $350 million in free cash flow and the goal is to pay down $250 million in debt, and after you take out the dividend as well it doesn't leave much for the buyback. Call it, $40 million, $50 million or so.

Can you talk a little bit about that, sort of the pace of delevering relative to where your stock is trading in its current multiple and how you think about that, both for 2014? And then even looking out, how should we be thinking about this? Is this an exclusive delevering strategy regardless of where the stock is trading? Is that what we should be anticipating over the next couple of years is exclusively delevering and not looking for any sort of meaningful step change in either A) the dividend or B) the buyback?

It is a good question, Kevin. I think it is fair to say that (inaudible) we said we were targeting to do at least $350 million of cash flow this year and at least $250 million of debt pay down. That being said, you point out that we have a dividend.

As to -- obviously it will be a Board and directors decision as to future increases and the amount there of the dividend, but we also have other areas that we could allocate our capital. We have got obviously the repurchase program. When we announced that program, it is a two-year program, 24-month program, that we would obviously be opportunistic. When we believe that the stock was trading below our deemed intrinsic value we would make the appropriate buybacks at that point in time.

So point being is that we have a lot of levers and I don't think it is, at this point, fair to try and -- I don't think your question is unfair, I am just saying for me to say if we are going to be going in one particular direction. As Dave said, our long-term leverage goal is 2.5 to 3.5 times gross leverage. We believe that, and we said this earlier, that in connection with our ability to generate free cash flow, and we do have a primary focus on debt reduction to be able to get down to that leverage ratio as quick as possible. We believe that we would be able to delever at least half a turn a year.

So I guess the position of the Company is our primary focus is debt reduction. We have got some other levers that we can do with capital allocation. A lot depends upon -- Dave was talking about acquisitions.

Right now our goal is debt reduction, but if we see something that is a nice bolt-on, tuck-in acquisition and one of the platforms that we have talked about Pet, Home and Garden, possibly even our HHI business, we want to have dry powder enough to be able to do what we want to do when we want to do it. Does that help you?

I know it is objective and you will judge it relative to the assets that are out there and where your stock is trading, so, no, the color is helpful and I understand. One more, Dave, if you wouldn't mind, just on batteries in North America.

What specifically are you seeing in non-tracked channels, because the tracked channel data looks pretty awful? Are you seeing much difference there? Then you also mentioned that you have had some wins. I guess where are you winning and then who is losing as a consequence of you gaining share? Those are the key questions I'm looking for.

Let me see here. Spectrum Brands has a very strong industrial channel business, strong hearing aid battery business. We have done well in the home centers in the two-step and none of those are scanned. And why would that be?

One, we are in there with Home and Garden and HHI and Pet, but there is -- the majority of foot traffic in North America today is in the home centers. That is why you are seeing some of the mass retailers, regardless of -- the majority of the mass retailers suffering a bit on store traffic, mainly driven by some of this housing activity. And so they are selling more batteries than normal and we happen to be there. And we are doing well there.

In addition, the battery business as we go forward has opportunities in channels due to this portable power I talked about we haven't had before. Right now your choice is run out of power and hope you get to the outlet or spend $80 to put a rechargeable battery pack around your phone. Well, we have an alternative for the everyday consumer, because most consumers can't spend $80 for a rechargeable battery (inaudible) phone.

So I think that you are going to see a lot more growth in electronics stores, office stores, on site stores, and we are pursuing that. And there is good growth there and we are going to go get it. The same with specialty and rechargeable batteries.

Now I think, too, that the battery business is global and North America is not necessarily the center of it. There is a lot of activity in the battery business around the world and there we are seeing better unit growth on the alkaline and these new type batteries. In fact, we have Andreas Rouve, our President of International; he has been with us a long time. He drove European growth.

Andreas, maybe you want to comment a little bit about this question of where battery growth is coming from?

Sure. Thank you very much, Dave. This is Andreas Rouve. The growth is really triggered by what Dave had mentioned earlier that we are expanding into new channels into also new countries. There we are leveraging also our strengths with other product categories, like, for instance, in the UK we are very strong.

We are a market leader with Russell Hobbs and we are using that strength to also attack that with batteries. And these are some of the examples where we continue to gain additional volume across different countries.

(multiple speakers) I was just going to say, can you guys comment at all on who you are gaining share from or would you care not to?

I think that the way batteries work I know it would be easy to say this company is taking from that company. What is really going on is that there has been a couple big changes at the premium level, but what is really going on is who is winning private label and who is converting private label to branded. And I think that is what is going on; all those things are going on.

Now, all that said, you can just simply also just look at the releases of the big three battery companies. Actually, I would appreciate it if you would ask the other two what you guys asked me, so I could hear about that as well. That's kind of a joke, but nevertheless the facts are pretty apparent of who is winning and who are losing.

Okay, thank you, guys.

We have just a couple more questions. Who is next, operator, please?

Patrick Trucchio, BMO Capital Markets.

Good morning. So I think you previously mentioned accretion from HHI of $0.75 to $0.80 in fiscal 2013 and more than $1 in fiscal 2014, so I'm wondering what was the accretion in fiscal 2013? What do you expect it to be in fiscal 2014? Thanks.

It is basically right around where we had said that we would be, Patrick, $0.75 and $1, respectively.

Thanks.

Basically, we are on -- we mentioned that when we announced the deal in October of last year those numbers, to your point. And we are hitting them so we feel really good about that.

Okay, that is it for me. Thank you.

Jim Chartier, Monness, Crespi, Hardt.

Good morning. Three questions for you. The first is in the guidance for this year it looks like cash taxes and CapEx are above what you consider normal levels. Should we expect those to normalize next year in FY 2015?

Yes. As I mentioned in my prepared remarks, the cash taxes is really driven by the timing. Again, primarily in Germany it was a tax payment that we anticipated would be paid in fiscal 2013. It got moved into fiscal 2014. So right now in our cash tax estimate for next year, 2014, we are actually anticipating two payments in Germany.

And then as I mentioned, to a somewhat lesser extent, we have got some audits that in certain jurisdictions relate back to 2007 to the 2010 timeframe that we will be making those payments or anticipating those payments this year in 2014 as well. So going forward in 2015 and beyond we would anticipate cash taxes, including the HHI business, to be $55 million to $60 million.

Then with respect to CapEx, capital spending this year was $82 million. Next year it is going to be slightly lower $70 million to $75 million, but we believe that long term, again beginning in 2015, probably be in the $65 million to $70 million range.

Then the FX impact on EBITDA was pretty significant this quarter and then greater than the impact on revenue. So could you just talk through how FX impacts gross margin and SG&A?

Obviously, from a translation standpoint to the extent that we do have a very disciplined hedging program with respect to our transaction and transactional activity. So it is really -- again we obviously don't hedge 100%. We typically hedge in the neighborhood of 70% to 80% max, close to that 70%.

So obviously when you have got a strengthening dollar you get a negative impact on sales and a positive impact on expenses. However, that translates to a net negative and that is what we encounter.

But keep in mind that a lot of the impact from exchange was really coming from the smaller or the non-euro and the non-pound currencies. It was really the Latin American currencies to a large extent that impacted us in 2013, primarily in the fourth quarter of 2013.

Great. Then, finally, there has been a lot of talk in the market about destocking at retail. Can you talk about what you have seen in fourth quarter and then first quarter to date?

Sure. This is David Lumley. Almost universally around the world retailers have -- are getting their stock in line. It's the mix that is the problem. In general, at least in our categories, depending on who the retailer is, very high-end retailers are selling high-end goods and they are doing pretty well. But that is a very small part of the overall market and our categories.

The main retailers are having a hard time. I shouldn't say that; they are not having a hard time. But the sales of more expensive goods aren't going as fast, so that is the challenge.

Now, you have to go different retailers. You take the home centers, they are selling everything. They are doing pretty well. But I would say that in general the inventory in the field is still a little high because of this mix.

Now Black Friday has -- it's called that for a reason, so we will see how the Christmas season goes worldwide. If it goes well, then I think those things will straighten out.

Now, yes, it is in my best interest to keep telling the story, but the story is true. Premium-priced products in most channels aren't selling that well and value-priced products are selling better because the consumer, the everyday consumer actual purchasing power over the last five years is down almost 50%. I know you say, oh, it can't be true. That is what it is.

They are paying a lot more money for gas and food and things that bring no value into the household, so they are more cautious. They are more worried about the future. And, frankly, every day the news on this Obamacare thing comes out they are finding out they may not even have health coverage, so there is a lot going on.

I know it sounds funny, but there is a lot going on. That is why we are bullish, but I think overall you keep seeing it is sluggish.

Great, thank you. Best of luck.

Karru Martinson, Deutsche Bank.

Karru, give us a call offline. I think there may be an issue.

I think with that we have completed our call. We had a lot of great questions and we will close down the call. I certainly want to thank Dave and Tony and also Andreas from Germany for the call today.

On behalf of Spectrum Brands, most importantly I want to thank all of you for participating in our fiscal 2013 year-end call. You have a good day and we will talk to you next quarter. Thank you.

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