Spectrum Brands Holdings Inc (SPB) 2014 Q1 法說會逐字稿

Good morning. My name is Chris, and I will be your conference operator today. At this time I'd like to welcome everyone to the Spectrum Brands first-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, January 29, 2014.

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

Thank you, operator, and good afternoon. And welcome to Spectrum Brands Holdings' fiscal 2014 first-quarter earnings 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 afternoon, as we have done in past quarters, we have placed a brief slide presentation. It is 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.

Let's start with Slide 2 of the presentation, for those of you who are following along with the slides. Our call will be led again today by Dave Lumley, our Chief Executive Officer; and Tony Genito, our Chief Financial Officer, who will both provide opening comments and then conduct a Q&A session. Joining us again this quarter for that Q&A session is Andreas Rouve, President, International.

Now let's turn to Slides 3 and 4. Our comments today include forward-looking statements, including our outlook for fiscal 2014 and beyond. Now, these statements are based upon management's current expectations, projections, and assumptions, and are by nature uncertain. The actual results may differ materially.

So due to that risk, Spectrum Brands encourages all of you to review the risk factors and cautionary statements outlined in our press release dated today, January 29, 2014, and their most recent SEC filings and Spectrum Brands Holdings' most recent 10-K. We assume no obligation to update any forward-looking statement.

Also, please note that we will discuss certain non-GAAP financial measures in this call. The reconciliations on a GAAP basis for these measures are included in this afternoon's press release and 8-K filing, which are both available on our website in the investor relations section.

Now, for the first quarter of fiscal 2014, Spectrum Brands swung to net income of $54.3 million or $1.03 diluted income per share on average shares and common stock equivalents outstanding of 52.7 million. This compares to a net loss of $13.4 million or $0.26 diluted loss per share last year on average shares and common stock equivalents outstanding of 51.8 million.

Quickly, by segment for the first quarter of 2014, the Global Batteries & Appliances segment reported net income as adjusted of $93.1 million versus $92 million a year ago. The Global Pet Supplies segment reported net income as adjusted of $12.5 million versus net income as adjusted of $10.1 million in fiscal 2013.

The Home & Garden business segment reported a much smaller net loss as adjusted of only $1.2 million versus a net loss as adjusted of $4.5 million last year. And finally, the Hardware & Home Improvement segment reported net income as adjusted of $35.7 million this year versus a net loss as adjusted of $3.5 million a year ago.

So with that, I am very pleased once again to turn the call over to our Chief Executive Officer, Dave Lumley. Dave?

Thanks, Dave, and thanks for joining us all this afternoon.

Let's turn to slide 6. You will see there we reported a record first quarter, which includes Hardware & Home Improvement, or what we call HHI, on a pro forma basis for last year. This record performance gives us a strong start on delivering a fifth consecutive year of record financial performance from our legacy business. And with HHI included for all of last year, a higher 2014 versus 2013 across all key financial metrics.

The first quarter was highlighted by particularly solid performances from HHI and Home & Garden; a resumption of growth in our Remington personal care business; strong European results; solid margin improvements; adjusted EPS and EBITDA growth; and an all-time high fiscal first-quarter level of continuous improvement savings across all divisions.

Turn to Slide 7. Including HHI for all of last year's first quarter, our net sales increased 3.6%, or 3.8% excluding the negative impact of foreign exchange. HHI, Home & Garden, and Remington personal care all had sales increases. As expected, the slight decline in battery division sales was entirely due to the approximately $10 million of incremental sales last year that we got from the impact of Hurricane Sandy in North America.

Our adjusted earnings per share of $1.09 grew a strong 40%. Adjusted EBITDA increased 11% or 3 times the rate of our net sales increase, and we were pleased to see our adjusted EBITDA margin increase to 16.2% in the quarter compared to 15.1% last year.

Our legacy business delivered its 13th consecutive quarter of year-over-year adjusted EBITDA growth in the first quarter, up 1.4%, with the margin increasing 50 basis points to 15.7% versus 15.2% in fiscal 2013.

So we do believe we have started strong toward another record year, both for the total Company including HHI for both years and for our legacy business as a fifth straight year of record profitability.

As we look at the balance of the year, a reminder about the general flow of our four fiscal quarters. Historically, our second fiscal quarter -- or the quarter we are in right now -- has been our smallest, as it follows the Christmas holiday season, and that remains so now.

The addition of HHI, which is not highly seasonal, but with somewhat stronger June and September quarters, has added to the relative size of the second half of our fiscal year versus the December and March quarters. So we see the back half of the year, which will include a number of new product introductions, distribution gains, the relative impacts of HHI, and the height of the Home & Garden season, to be even stronger than the first half.

Let's turn to Slide 8. We remain focused on growing our adjusted EBITDA and managing Spectrum Brands to maximize sustainable free cash flow. I want to emphasize 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 the last year, or nearly $5 per share; and $208 million in fiscal 2012, or $4 per share.

Deleveraging and strengthening our balance sheet remains a top priority. We plan to reduce our term debt by approximately $250 million in the second half of fiscal 2014, thereby reducing our total leverage by a half turn. Long term, our objective is to maintain a total leverage ratio of 2.5 times to 3.5 times.

And we also just announced with our earnings after the market close that our Board has increased the quarterly dividend by 20% to $0.30 from $0.25, effective with the next currently dividend to be paid in March. The action reaffirms our Company's consistent and ongoing ability to generate strong free cash flow and our commitment to deliver attractive returns to our shareholders.

Finally, in early January we completed a small but accretive tuck-in acquisition for our Home & Garden business, which I will discuss shortly.

Let's now turn to our individual businesses, beginning with Home & Garden, which is Slide 9. After delivering a record fiscal 2013 with a remarkably strong finish in the fourth quarter, Home & Garden is not letting up.

The business delivered a record fiscal first quarter for net sales, up 11%, and its first positive adjusted EBITDA ever for a first quarter: $1.7 million versus a loss of $1.4 million last year. Home & Garden also reported a record-low net loss for the first quarter of just $1.2 million compared to the net loss of $4.5 million a year ago.

Higher volumes, particularly in lawn and garden controls, improved product mix, cost improvement initiatives, and operating expense management all contributed to a very encouraging start to fiscal 2014. Home & Garden is driving for another record year in fiscal 2014, and that is assuming a more normal quarterly weather pattern for the business than we saw in fiscal 2013, when the third quarter was lower and the fourth quarter was stronger than normal.

We expect distribution gains from new products like our Cutter Backwoods Dry Insect Repellent and the more powerful Black Flag lineup of products. And we will increase promotional support for our highest-margin division.

Finally, we were pleased in early January to complete a textbook tuck-in acquisition: Home & Garden's purchase of The Liquid Fence Company, the US leader in the growing consumer animal repellents market, with an EBITDA margin already higher than Home & Garden's 23% EBITDA margin.

This immediately-accretive transaction gives us a new and complementary position in a segment growing more than twice the rate of the overall $1.5 billion US retail lawn and gardens control market. The synergies we expect to quickly achieve will result in an even more attractive multiple paid for this business.

Now let's move to Remington, our personal care business, which is your Slide 10. When we discussed Remington's strong fourth-quarter finish in fiscal 2013, we said that it would provide momentum into fiscal 2014. And that was the case in the first quarter with Remington, with global sales increasing 3.1% on strong revenue growth in Europe and Latin America.

This more than offset slightly lower sales in North America, which resulted primarily from continuing category softness in the men's shave and groom category. Importantly, though, adjusted EBITDA increased at a double-digit rate for the first quarter, including North America, despite the lower category shaving and grooming sales.

Overall, then, higher global sales, improved gross margins, more cost savings, lower operating expenses all combined to create a strong profitability improvement. We continue to expect global Remington net sales and adjusted EBITDA to advance in fiscal 2014, in large part from improvements in North America women's hair care, where we have recently gained share in three out of the six categories in which we compete. We also plan to launch several i-LIGHT facial hair removal products in the months ahead, and we'll roll out our new, exciting HyperFlex men's shave and groom models.

We plan even further investments to grow our women's hair care position in Europe. And for those of you who will attend the International Home + Housewares Show in Chicago in March, be sure to stop by our Remington booth, which will also include new products from our growing small appliance business.

Let's turn now to that small appliance division of global appliances, which is Slide 11. The business had essentially flat sales on a constant currency basis in the first quarter. Still, very strong European sales, as with personal care and batteries, helped offset lower North American revenues -- those lower as a result of competitor discounting at a major retailer and some timing of some holiday shipments.

More importantly, however, both North America and Europe reported higher adjusted EBITDA in the quarter. North America continued to improve its gross margins by 170 basis points in the quarter after doing so every quarter last year -- this primarily from the exit of what we have discussed several times, of the $45 million of low- or no-margin business.

Global cost improvements were also stronger in Q1. So looking to the balance of 2014 and actually into fiscal 2015, small appliances has the most new products launching since the 2010 Russell Hobbs acquisition, including new George Foreman grills, Black & Decker toaster ovens -- including one of those toaster ovens with industry-leading capacity, new irons, and many other products, some of which, as I said earlier, will be displayed at the upcoming Chicago housewares show.

We are also putting more resources and focus behind our market-leading George Foreman brand, which you will hear about this Sunday on Super Bowl radio broadcasts. Our small appliances and personal care businesses -- together, Global Appliances, continue to effectively work with our supply base to achieve cost improvements that are already tracking higher versus our record level last year.

We are working with our partner suppliers to minimize cost increases while continuing to evaluate non-China sourcing options. In short, we believe continuous improvement savings in fiscal 2014 will again more than offset continuing but more moderate Asian supply chain cost increases.

Now let's talk about Global Batteries, or your Slide 12. Coming off of fiscal 2013 with higher adjusted EBITDA and a record margin, Global Batteries went on to deliver a new record adjusted EBITDA margin in the first quarter on essentially a flat EBITDA [bid]. As expected, the sales decline was entirely due to the one-time incremental sales impact, predominantly flashlights, of about $10 million from Hurricane Sandy in North America in last year's first quarter.

However, I'm pleased to note that our alkaline battery sales were higher in North America in the first quarter of fiscal 2014, which we told you about last year. This bodes well for the balance of the year.

After a strong fiscal 2013, our European Varta battery business continued to grow in the first quarter from new customer listings, distribution gains, and promotions.

Expense controls and cost reductions were also significant and important to our solid first-quarter performance. While we expect more price competition, more erratic competitor multiple discounting, and tight retail inventory management in batteries -- mostly from slow-moving premium-priced products -- we're still optimistic about fiscal 2014.

Why? Because POS data shows value for same-or-better-performance less-priced Rayovac is a winner in the global marketplace. Relatively flat commodity prices persistent, and we are on track to deliver a higher level of continuous improvement savings than last year -- a higher level.

We have good momentum with exciting new smartphone portable power products and near-term opportunities for new retailer business and shelf space gains, especially in North America. We were very pleased with the strong customer and consumer and media interest in Radovan's line of new portable power products for smartphones, which were introduced at the Consumer Electronics Show in early January. This is a new growth category for Global Batteries.

So in summary, our goal remains to help the retailer grow the category, to increase our market share, and to provide the best value to consumers.

Let's now turn to Slide 13, and we will talk about Global Pet Supplies. We still expect Pet to deliver another record year in 2014 -- this despite the first-quarter shortfall, which was caused almost entirely by timing: a shorter Christmas selling season for a discretionary product like Pet and significant retailer inventory reductions.

We believe customer inventories are now down to very low levels, and Pet has both new and expanding businesses that ship during the rest of the year here, and in Europe, and in Latin America. We expect the second half of this year to be much stronger. In fact, January was one of our strongest in history of Pet.

Recently, Pet also successfully launched its new US-made Dingo Market Cuts into the large US chicken jerky market. These are dog treats. So later this year, Pet will expand its footprint in the large US retail market for rawhide with additional product placements in mass, specialty channels, and food and drug stores.

More exciting, in Latin America we expect more companion animal growth. For example, Pet is now launching Dingo products and FURminator, our deshedding device, in both Brazil and Mexico.

So overall, fiscal 2014 has many growth and profit drivers from global growth in companion animal products, improving the [quarter's] results from new products, increased distribution, and more promotions. We have been successful with select pricing actions, new retail customers with increased shelf space, another record year for cost savings, and many long-term expense reduction programs.

Finally, let's turn to Hardware and Home Improvement, or your Slide 14. HHI delivered another quarter of very strong sales results as sales increased 23%. But as communicated in earlier quarterly calls between us, EBITDA now is made its move and was up 48% in the first quarter of fiscal 2014, for a nearly 18% EBITDA margin. HHI's three product categories -- residential locks, hardware, and faucets, all posted double-digit sales increases. And EBITDA of approximately $15 million was an all-time record level for HHI for the December end quarter.

HHI is winning in the marketplace with strong brands. It is driving solid organic growth; gaining market share, especially in residential locks; is benefiting from the US housing recovery; but is growing now internationally as well, especially in Asia and Latin America.

The first quarter was also marked by a number of commercial and operational wins, most notably the launch of the unique Kwikset Kevo Bluetooth door lock -- which earned a quote, Last Gadget Standing, unquote, award at the Consumer Electronics Show.

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 with a 6- to 12-month lag.

A little more than a year after the acquisition, the integration of HHI is all but complete. Virtually all but a very small handful of TSA cost agreements with Stanley Black & Decker have been exited -- months ahead of our original schedule.

We are confident of achieving at least the $10 million of synergies in the first two calendar years we talked about and have identified further synergy savings over the next few years in shared services areas such as IT, sourcing, manufacturing, and distribution and transportation. So an even more exciting future for HHI and Spectrum Brands.

In summary, we, Spectrum Brands, are off and running to another record year in fiscal 2014. This is true in both the legacy business and the total Company, including HHI. We remain focused on maximizing sustainable free cash flow.

I want to start out that again. We remain focused on maximizing sustainable free cash flow, thus increasing our adjusted EPS and adjusted EBITDA. And we're going to push new umbrella products to lead sales gains in new segments. And we're going to stay focus on reducing debt and deleveraging.

So thank you very much. I want to now turn it over to Tony Genito, our Chief Financial Officer.

Thanks, Dave, and good afternoon, everybody. If we could first start to turn to Slide 16, I'd like to comment on our gross profit and margin in the first quarter.

Including HHI on a pro forma basis in the prior-year quarter, our gross profit and gross profit margin of $381 million and 34.6% compared to $363 million and 34.2% a year ago. The margin improvement was primarily driven by higher sales and improved product mix.

Excluding HHI, the gross profit margin in the first quarter of fiscal 2014 was 34.2% for Spectrum Brands legacy business versus 34.1% in fiscal 2013.

First-quarter SG&A expenses including HHI were $237 million versus $229 million last year. The increase was due to higher amortization expense and incentive compensation programs related to HHI. Legacy business SG&A in the first quarter was unchanged from a year ago.

First-quarter interest expense of $57 million decreased $13 million from $70 million last year. The reduction was primarily due to the nonrecurrence of $29 million of costs related to the financing of the HHI acquisition and savings of $14 million from the refinancing of our 9.5% notes last September.

This was partially offset by $11 million of costs from refinancing the term loan in the first quarter and inclusion of a full quarter of interest related to the HHI financing this year versus a partial period in last year's first quarter.

Our effective tax rate was 19% in the first quarter versus an unusual 325% benefit in the first quarter a year ago, due primarily to a reduction of the tax amortization of our indefinite-lived intangibles, as these assets have been fully amortized. Our 2014 effective tax rate is expected to be 25% to 30%.

Let me highlight a few more key items in our financial statements. Restructuring, acquisition, and integration charges for the first quarter of 2014 decreased to $10 million versus $27 million in 2013, as initiatives related to the HHI acquisition and its integration are decreasing.

Cash interest for the first quarter of 2014 was $63 million compared to $71 million in 2013. Excluding $2 million of costs in 2014 related to the refinancing of our term loan and $17 million of costs in fiscal 2013 related to the HHI financing, cash payments increased by $7 million.

This increase was due to the semi-annual payment on notes and a full quarter's payment on the term debt incurred to finance the HHI acquisition, which totaled $42 million; and a quarter's payment on term debt that refinanced the 9.5% notes of $10 million. And this was all partially offset by the nonrecurrence of a semi-annual payment on the retired 9.5% notes of $45 million. And once again, our cash interest payments for the full year of fiscal 2014 are expected to approximate between $165 million and $175 million.

Now, let's turn to Slide 17, and you can see our cash taxes for the first quarter of 2014 were $8 million compared to $22 million in fiscal 2013. The decrease of $14 million is really due to timing, and we will see that catch up as the year goes on.

Based on the level of NOLs we expect to be able to utilize, we do not anticipate being a US federal taxpayer for at least the next 5 to 10 years. However, we will continue to incur foreign and a very small amount of state tax taxes.

Cash taxes are expected to be between $70 million and $80 million for the full year fiscal 2014, due to our overall higher international profits and a full year of results for HHI. The main reason for the increase versus last year is the timing of payments, primarily in Germany, and the anticipated conclusion of several income tax audits in certain jurisdictions from the 2007 to 2010 period. Going forward, 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 the fiscal first quarter of 2014 in a solid liquidity position, with $167 million available on our $400 million ABL working capital facility and with a cash balance of about $132 million. As of the end of the quarter, total debt at par was $3.375 billion.

And regarding our cash flow projections: as Dave had said earlier, given the strong cash flow potential of our business, our goal is to generate at least $350 million of free cash flow or approaching $7 per share in fiscal 2014. And we now see a pathway to approximately $400 million of free cash flow or nearly $8 per share in fiscal 2015, even before factoring in any growth in the business.

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, including requirements related to HHI, is 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.

And with that, thank you. And now back to Dave for some Q&A.

Thank you very much, Dave and Tony. Operator, with that, let's now begin the Q&A session, please.

(Operator Instructions) Bill Schmitz, Deutsche Bank.

I don't want to pin you to try to give segment guidance, but obviously HHI was amazing this quarter. Can you give us a guess as what the momentum of the business would suggest in terms of top-line and EBITDA growth? Because I obviously don't want to mismodel. I know this was a great quarter.

This is Dave Lumley. We don't really do that. I think that it would be fair to say that we give guidance saying that we should grow our GDP, and EBITDA should grow at twice that. I think you will see HHI do better than GDP. And I think that's where we have to leave it.

Because the way things go, we just don't know. It looks good; they have good products coming out. They are continuing to move forward on cost improvement as well as new introductions. So I think they will do better than we -- than the legacy business will do. I will be glad to talk to you as we know more.

No, that's fine. And then if you look at some of the point-of-sale data from Nielsen -- like, you look at the kitchen appliance business, for instance, and it shows massive market share and massive growth. And then you look at the reported numbers, and they are different. And I think you see that either up or down across the categories.

I ask this every quarter, but it kind of makes my head spin, because it seems like there is no correlation between the POS and the reported stuff.

Okay. That is a really good question, and I am going to go as fast as I can to answer it in three parts. One, Nielsen is just a segment of the market. Okay? And this is especially true in a lot of our businesses, is we have very strong businesses that are not Nielsen-reported in the home centers, and a lot of the other outlets of industrial, and audiologists and that. So that is one thing.

Two is POS is what is selling out. It doesn't necessarily mean the retailers have brought any more in from shipments. So great POS will be way ahead of shipments in today's world, in the just-in-time world.

Three, in some cases -- remember -- take appliances. We exited some things, and now we are getting them back. And there is also, Bill, a shift that I have been talking about for years to -- we sell nondiscretionary replacement products that are value branded, have good performance. So you're seeing a shift to those.

We sell things for a little less sale price, too. So we sell more units. So I don't know if that answers it as clearly as you would like, but that is kind of what is going on.

It makes total sense. Okay. I think that is it for the questions. Everything else is pretty self-explanatory.

Michael Dahl, Credit Suisse.

Is actually Will Alexis on for Mike. I have a question on the competitor discounting in the small appliances segment. How are you thinking about, going forward, responding to that discounting? And how is that -- I guess, can you give a little bit of color on how that is potentially impacting the product introductions that you are planning in that platform over the course of the year?

Good question. There is primarily one competitor that has taken their prices down dramatically. And they will get some unit sales from that, but we have been down that road two years ago. They are almost -- be in position now like the private-label pricing, which is always in this business, the small appliances. Why we are bringing out new products -- so first part is, I don't think that is sustainable.

Two, we have a whole breadth of product line through Black & Decker, George Foreman, where we have different price points. And we're ready for it.

But more importantly, our new products are priced higher than these very low prices that you are seeing in the market price, with much better products. So better pricing; better margin.

In fact, the whole thing about our appliance business has steadily improved its EBITDA margin, every year, every quarter. So I think you will see that flesh out. And I would think more about what you are worried about is just another version of private-label. And they only have about 20% of the market.

This is Tony. If I could just add to what Dave said -- if you look at our business on a consolidated basis, we've taken our EBITDA margin from 15.2% to 16.2%. And clearly, our focus is on higher-margin businesses.

And clearly, with the appliance business we have done, I think, a very good job. And we continue to do that to grow the margin of that business. As we said in our prepared remarks, last year we exited about $45 million of no- or low-margin business, which allowed us to gain about 400 basis points in gross margin last year.

We saw a continuation of that this quarter without the elimination of products because of our continuous improvement efforts. And we picked up close to 200 basis points, as we said, again, in the prepared remarks. So again, the focus of our business is to improve the margin of the business. And I think that we have demonstrated that, and we're going to continue to demonstrate that.

Thanks, that was very helpful. And then shifting over to the Remington business, can you talk about the new product introductions that you have planned? They sound very exciting.

Yes, you know we are. The Remington brand built its business on men's shave and groom. And frankly, we were probably a year late with our new shaver line. But we wanted to get it right. We wanted to get the value in there. We wanted everyone to win in that -- first the consumer; then the retailer; then, of course, ourselves and our supplier partners.

So our new HyperFlex line has already been reviewed by major magazines, rating us top value, great performance. It is really a great line of shavers. They are just setting now in the marketplace. So I think you will see a return to the strength of what Remington has always been in the men's category.

And with, frankly, all the news about men growing beards, that really hurts wet shave. But frankly, it helps our grooming products, because we actually have products, including our shavers and groomers, specifically designed to give you that look that -- I guess the women love. So that is great. We like that.

Until they kiss you. (laughter)

But it goes beyond that. We have very exciting products, as well, on the women's side. A whole series of dryers and straighteners, and things we call Big Air.

Our new i-LIGHT facial products are going to ship in Europe. And this is a hand-held unit. Less money, better performing to an intense pulsed light. We're waiting for final approvals to bring that forward in the United States. It is already in Latin America. So we're excited about that.

Our women's hair care accessories -- you got me on a subject I am all excited about. I will try to go faster. We built a good business there, competing with basically two people, and we have kind of taken the fashion angle and been embraced by large retailers. That is expanding worldwide and really helping the Remington brand name.

So when you think of i-LIGHT at the top and the women's hair care accessories at a $2 to $3 way in, it really enhances the whole Remington brand name. And then with the new products, I think you're going to see Remington just continue to go forward in the year ahead.

That is good color. I meant to ask more in terms of shelf space for the new products. Those sound like very good opportunities, but as you are introducing them, is it going to be within existing shelf space at retailers, particularly in North America? Or is there an opportunity to place these products on additional shelf space at retailers?

Very, very good question. We will be gaining shelf space in every one of these products. And full disclosure -- we lost some shelf space in the last year, so we're gaining that back. And we have gotten extra shelf space.

But more importantly, we have won a lot of big promotions as retailers are seeing that they can't eliminate this category, and that if they promote it right, they can make some good money at two or three times of the year, which is typically holiday and Mother's/Fathers Day, and Back to School. So we will gain distribution and shelf space.

Now, on the women's side, as I reported, we have already gained that shelf space in three to six categories.

Connie Maneaty, BMO Capital.

I have a question. I hope it is not splitting hairs, but we are wondering about the language in your outlook. It now says that sales -- you expect your sales to grow at the rate of GDP. And the last time you made a comment, it was GDP or better. So I'm just wondering: are you noticing a change in the external environment in either GDP or FX? Or is there a slight change in your own business?

The answer is no. And we're now going to take a whip to Dave Prichard for putting that in the news release. No, I'm just kidding.

No, we typically aim at GDP or better. We don't see any change right now in that.

Again, our products -- the value products that we sell, slightly priced below or the same as competitors, are doing very well, gaining shelf space. We're very pleased about that sales growth in an environment where we have some very good high-margin businesses.

Home & Garden is 23%. We've got HHI, 18% to 20%; Pet 18% to 20%. In fact, even batteries are in that category. And you heard about the others. So high-margin businesses where we can invest to get more sales this year. And that is what we're doing. So to answer your question, there is no hair on that GDP.

Bob Labick, CJS Securities.

Congrats on a great quarter. Wanted to go back to the HHI. You obviously blew away expectations. Can you talk a little more about Kevo and the reception? And were there any initial stocking sales in the quarter related to that? And how big do you think the opportunity can be?

Well, to answer your question, Kevo exceeded their expectations than the first quarter. And you are right, you are very intuitive; half of the sales were initial stocking. But they got into channels they had never been in before -- electronics stores, even the Apple stores. They have done very well online.

And now it is just going to the customers. So their sales expectations on that were a little -- $10 million to $15 million. We think they are going to do a lot better than that this year so far with that product. It won a lot of awards at the CES show. And we haven't even got it out to international.

But more importantly, what that product has done -- it has dramatically raised the awareness of the SmartKey technology, which is in all their locks -- not all their locks, but a lot of the Kwikset locks, at a much better price point that isn't part of Bluetooth. And that is really helping their business, as well.

So Kevo has been a halo, what we call the umbrella product, and a dual win. And it is a high-technology product. So it is pretty exciting.

Okay, that is fantastic. And then just following up on that, there was an article recently in the Wall Street Journal about SmartKey technology, Bluetooth technology at hotels. I know you guys are residential, but how would that relate to Kevo? And is there an opportunity there for you in the future?

It directly relates. And it is an opportunity, and I can tell you that we're working on it. Both with -- inside our own place and with key suppliers.

And again, one of the great opportunities for HHI besides just its current business is its ability to move into what we call semi-commercial applications. Not only with security, but with plumbing and hardware. So again, that is another upside opportunity to the business.

In fact -- no, go ahead.

I was going to say, so that is at the high end. I was going to ask Andreas Rouve to tell you that even in Europe, we have launched even padlocks, and we're going after their business in Latin America and Asia, incorporated it into our platform. Andreas, maybe you'd like to talk about that for a moment?

Yes, thank you, Dave. Basically, it is the strategy that we are using our existing infrastructure to launch more of our global product portfolio. And there we are making nice progress of launching now HHI padlocks into Europe; and also in Asia, we are very successful in expanding into more countries.

That sounds great. And that certainly supports the greater-than-GDP growth for HHI this year. It sounds terrific.

Ian Zaffino, Oppenheimer.

The question would be on free cash flow and the delevering. There is about a $100 million delta; I guess probably two-thirds of that is made up by the dividend. And not to nitpick, but what is that other $30 million, $40 million that is left? Is that for Liquid Fence? Is that intention to do another small tuck-in? How do we think about that?

Keep in mind that, yes, we just purchased The Liquid Fence business, which is, as we said, a very -- it is an immediately accretive business with great margins. And yes, we leaned into our revolver to do that.

The impact on debt payment: we're still shooting to, as we said, approximately $250 million. We think we're going to be able to reach that target. We've got the dividend.

But to get into each of the elements -- we've gone through the major components of the cash flow and the impact from EBITDA of -- from our bridge down to get to the $350 million. There is ins and outs within the balance sheet. But basically, we can maybe take this off-line. But our cash flow is pretty solid at the at least $350 million level.

And then the other question is: I know you have those aspirational goals out there on that EBITDA line, and I think you are sort of at $715 million-ish or so on a like basis on one of the weakest quarters of the year.

How do you feel about those aspirational goals? And what would be out there, as you see right now, now that you have one quarter down? What are you seeing as far as maybe headwinds or sided? I know you have commented about raw materials being flat. How do we think about that?

This is Dave Lumley, and I will ask Tony to jump in. It is only one quarter out of four. Every day the world seems to change. We still look at the bank models on currencies, and maybe they are not there yet, but they still stay volatile.

We are very enthused about our first quarter, and we're cautiously optimistic that that can continue to go forward. On the headwind side, you're right about commodities. But the consumer right now is --

Is challenged.

-- is challenged. And brick-and-mortar is experiencing quite a change as they watch Internet sales come in and out.

Now, we are very enthusiastic from our standpoint, because we tend to be the value-priced product that is as good is the premium for less money. So as the consumer has less money to spend, we tend to be considered and get more trials. So we're enthusiastic about it. I think I would like to see how this quarter goes before I talk about can we see any better than what we have been seeing.

Yes. And if I could jump in, Ian -- this is Tony -- you're absolutely right. When our Board of Directors approved the $750 million EBITDA program last year, that is an aspirational target. So you used the appropriate word. We are going to do everything in our power to try to achieve that or at least come as close as we can.

If you go back to the program that the Board set four years ago at the end of this fiscal year, it was Spectrum 500. And if you recall, we had come very close to that, but we did not reach $500 million. But it gave us an aspirational target to reach for and to claw for.

So as we have said in the past, we're going to continue to do everything in our power to get there. Whether or not we get there, that will be -- ultimately it will be decided to share. We do feel good about the cash flow elements of that, which is --.

That's our number-one priority.

And that is --

-- it is cash flow.

-- EBITDA growth and cash flow, obviously. But to the extent that we don't reach it, I can assure you that we are going to do everything in our power to get as close to it, if not reach and exceed that target.

Okay, great. Thank you very much. Good quarter.

Kevin Grundy, Jefferies.

A housekeeping question, Tony. I apologize if I missed this. Did you explicitly say what is implied from an EBITDA growth perspective, as we're kind of trying to get to the free cash flow number for the year. Have you guys gotten to that?

No, we have not. The guidance we have given is that our sales would grow in line with GDP. And that is primarily the legacy business. We have said that we would expect a slightly higher growth coming out of HHI. Nothing on count EBITDA.

But you have all the cash items that you would use for the bridge. The only one is --

EBITDA --.

And working capital would be one of the items.

Yes, understood. I just wanted to make sure I was clear on that.

And then back to HHI for a second. I guess with some of the US home data starting to worsen a bit, like existing home sales and homebuilder confidence, et cetera, can you help us bridge that and how we should think about that? Clearly you guys aren't seeing it in your business now, but can you talk a little bit about the lag and what you are planning for the remainder of the year without explicitly giving guidance?

We will try to do that. In fact, we're sitting right here in Lake Forest, California, where we had our Board meeting yesterday and HHI. We just went through a great review with them and the Board and our principal shareholder yesterday.

And they reminded us that only 25% of their sales and EBITDA is even dependent on new housing starts, with the lag. But they have built a plan with us, together, that they are really not dependent on new housing this year to make their plan -- because of the lag, and we went into it.

So these are exciting opportunities, rather than -- and the housing is helpful, don't get me wrong. But this is a business that really runs on placement and better technology to give you reason to replace it.

Think of Kevo, what it will do. Or a SmartKey lock -- never having to re-key again. And with some of their technology. And their hardware. And their plumbing. You know, the hidden part of this business is their plumbing, and faucets has done extremely well -- great fashion and all that.

At a great value.

At a great value. We don't want to use brand names, but they are fighting three big guys and doing quite well at it. So I would feel very good about the strength of this business on a daily basis. And not think of it as just, oh, gosh; if housing goes up, they are going to go up.

Tony, do you want to --?

I think you are absolutely right. I think the housing clearly helps. However, the amount of investment that has been made in this business over the years -- we are very, very proud of the team and what they have done with SmartKey over the years, and -- with Kevo and with the whole-home connect.

And it is those innovative products that are really driving the business. Obviously, as Dave said, to the extent that housing rises the tide and all boats rise, then we will take that benefit as well. But we are focused on delivering quality, value products that make the consumer's life a better life.

Just to stick with this for a second -- and this might be in difficult question to answer. You guys clearly have a lot of upside here from distribution and from a sell-in perspective. Based on the categories that you are in and the geographies where you are playing, what do you think the industry growth is? You guys just put up a huge number for the quarter. What do you think that the industry is doing? How sustainable do you think this growth is?

Well, it has typically been in the mid single digits in the last year. And I think -- you have got to remember here at HHI, they are huge market share in security locks on the residential side. And they have better technology, straight up, than their competition. So they are going to grow better than the industry.

When HHI came into Spectrum, they are now also benefiting from our Home & Garden merchandising force, which is extremely strong in Depot and Lowe's. And that helps that situation.

Like I said, their plumbing business has been growing really well, really well -- better than the industry. And that industry has actually grown more than single, double digits -- higher towards single digits; higher towards double digits. And they have some unique products there, like Universal Trim, where you can just put in a shower, 80% of them, and it will work, you don't have to go behind the wall.

Their hardware business -- they have straightened out, another merchandising business. And that is in the two-step, where we are very strong with Home & Garden and batteries and lights.

So I think we should -- we have a good chance of doing very well against the industry numbers.

Great. One last one. That is helpful. Tony, did you want to jump in there? I'm sorry, didn't mean to cut you off if you did.

No, no, no, that is fine.

Tony, this one is for you. One last one if I may, guys. With the dividend increase now, where do you want that to go over time? And are you benchmarking yourselves against traditional staples companies, which are close to like a 50% dividend payout ratio?

How are you thinking about that longer term? Because you guys could pay significant dividends once you get the leverage ratio to where you want it to be. How are you thinking about it?

Well, what we are thinking about right now is that we want to reward the shareholders, as we initiated the quarterly dividend last year. And we have raised that, as we had said we would raise it as our free cash flow rises. And we will continue to reward our shareholders. Our primary focus is deleveraging. We believe that every dollar of debt that we reduce is a dollar value accretion to the equity holders.

And when we cross that bridge, when we get to -- if we were to get to -- below our 2.5 to 3.5 times, which we said may actually happen if there was nothing out there, we will look to see what is the best use of our capital allocation. But at this point in time, we will continue to reward the equity holders through, hopefully, future increases in the dividend.

We don't have any particular metric that we peg to at this point in time. And we think that when you are generating $350 million, and as I mentioned in my prepared remarks, a pathway we see today to get to $400 million of free cash flow with virtually no growth in the business. And just adjusting for the normalization of the elements within our cash flow statement today, we can do quite a lot with $400 million.

Okay. It looks like we just have two questions left, operator, and then we will probably close down the call. So could we go to the next question?

Jim Chartier, Monness, Crespi, Hardt.

On HHI, how much of the growth in this quarter was a function of an easy comparison last year? I think pro forma you were down like 2% or 3% revenue for HHI last year.

That is a good question. If you were to have all the numbers and you were to look at their average for the quarter, you are right; it would be higher than last one. But they still outpaced that average, or their highest quarter ever, quite well, quite well. So it is real. They have done very well.

Yes, we had a $50 million quarter this year. And that was a record quarter in absolute dollars --.

No matter how you look at it. But it's a good question.

And then the cost synergies for HHI: how much of those did you realize in 2013? And is that $10 million net of the investments that you made in the business last year?

Well, what we have done -- with respect to the synergies that we talked about when we did the deal, as you will recall, we said $10 million over two calendar years. Last year we got about half of those synergies.

It was really through the elimination of TSA agreements, primarily cost TSA agreements between ourselves and Stanley Black & Decker. As we exited those, we were able to provide the services at a lower cost.

So we're right on track to be on or slightly exceed, in all honesty, the $10 million target. But as I have said before, even overachieving that target by 20%, let's not get too excited, because it would be only $2 million.

That being said, we see, quite honestly, a bigger opportunity with respect to -- as Dave said in his prepared remarks -- the synergies that would be available through bringing our HHI business into the shared services network through IT savings, the back office, the V&T.

So very similar, if you will, to the profile that existed within businesses like our Home & Garden business, or our battery business, or any other business that we have in the Spectrum legacy fold. So there is the opportunity. And that's not going to be happening immediately, but it is going to be probably out, say, a year to 24 months.

Because the key element in this is implementing SAP. Our HHI business is not an SAP shop, Stanley Black & Decker used a different ERP system. Once we convert to SAP, which we will, then we will be able to really turbocharge the savings and be able to get those very quickly at that point in time.

Okay. Is that good?

One last question. The battery business, excluding the $10 million benefit last year, was up about 1%. Did you gain any distribution in North America in the first quarter?

First of all, we thought this would be our first earnings call where no one asked about batteries. We almost made it. God bless you. God bless you. Thank you very much for asking the question.

Dave was starting to feel lonely.

I was feeling lonely. I used to be the battery guy a long time ago.

We are very excited about -- was almost all flashlights. Actually, we grew our alkaline share in the low single digits in North America. We grew alkaline over 5% globally the last quarter.

We are excited about what we're doing in batteries. We've got the new on-the-go products, these ones that power phones. There's a lot of good batteries out there to power your phone for $80. There's not a lot out there for $2 and $7. So we're excited about that.

So as I have told all of the other battery-question guys, our model is working. And it is starting to really turn now. So we're cautiously optimistic about the battery business.

And you know, it's a good EBITDA business, too, just like Home & Garden, HHI and Pet, all 18% to 23%. So it is something that we feel good about. And what has become an extremely competitive market -- batteries.

Great. Thanks. Best of luck.

We have one question left, and then we will close down the call. Operator?

Carla Casella, JPMorgan.

This is (inaudible) on the line for Carla Casella. I think you have answered all my questions.

Jason Pritchard: Okay. Great. Well, if not, just give me a call, Phil, tonight or tomorrow if there's is anything left over.

And with that, Operator, I think we have used up all the questions that we have. And we will close down the call. We reached the hour.

We want to thank all of you for participating on behalf of Dave Lumley, Tony Genito, and Andreas Rouve. And so with that, we thank you for taking part in our fiscal 2014 first-quarter earnings call. Have a good evening, and we will talk to you next quarter. Thank you very much.

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