Spectrum Brands Holdings Inc (SPB) 2014 Q2 法說會逐字稿

Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands fiscal 2014 second-quarter earnings conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, May 7, 2014. 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.

Yes. Good morning, and welcome to Spectrum Brands Holdings' fiscal 2014 second-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, we've 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 the call.

If we turn now to slide 2 of the presentation, our call this morning will be led again by Dave Lumley, our Chief Executive Officer; Andreas Rouve, Chief Operating Officer and President, International; and Tony Genito, our Chief Financial Officer. Dave, Andreas and Tony will deliver opening remarks and then conduct the Q&A session.

Let's turn now to slide 3 and 4 to tell you that 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. Actual results may differ materially. Therefore, due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated May 7, 2014 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, we will discuss 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 second quarter of fiscal 2014, Spectrum Brands swung to net income of $33.8 million, or $0.64 diluted income per share, on average shares and common stock equivalents outstanding of $53 million. This compares to a net loss of $41.2 million, or $0.79 diluted loss per share, on average shares and common stock equivalents outstanding of $52.1 million last year.

By segment for the second quarter of fiscal 2014, the global batteries and appliances segment reported net income as adjusted of $35.7 million versus $34.6 million a year ago. The global pet supply segment reported net income as adjusted of $19.4 million versus $16.4 million in fiscal 2013. The home and garden segment reported net income as adjusted of $22.8 million compared to $20.6 million last year. And finally, the hardware and home improvement segment reported net income as adjusted of $31.9 million versus $600,000 a year ago.

So with that as background, I'm pleased to turn the call over now to our Chief Executive Officer, Dave Lumley.

Thanks, Dave, and thank you all for joining us this morning. Let's turn to slide 6. We're really pleased to report a record second quarter, our seasonally small and most challenging quarter of the year.

Combined with our record first quarter, we had good first-half momentum towards delivering a fifth consecutive year of record performance. The second quarter had many highlights. All divisions contributed. Virtually all our businesses achieved higher sales and adjusted EBITDA versus last year.

Our batteries, HHI, personal care, and home and garden businesses had especially good results. Internationally, and particularly Europe again, was a bright spot, as Andreas will soon discuss.

On the cost side, we achieved an all-time high fiscal second-quarter level of continuous improvement base, building on a similar first-quarter record. In short, our Spectrum value model continues to work effectively and continues to resonate with retailers and consumers in a global economy that remains challenging.

Our same or better performance for less price, performance-orientated, value-branded Spectrum Brands products are winning in today's marketplace and with today's smart shoppers.

Let's move to slide 7. Spectrum sales increased 3.4% and 4% excluding negative impact of foreign exchange, which was primarily in Latin America. This followed a similar 3.6% sales increase in the first quarter.

We overcame unusually harsh and prolonged winter weather in January and part of February in the US and Canada that hurt retail store traffic and their POS; most significantly, in our case, in our HHI and pet businesses.

Our adjusted EPS of $0.72 grew a strong 64%. Adjusted EBITDA increased 9%, nearly 3 times the rate of our sales growth. Excluding negative FX impact, adjusted EBITDA increased 10%.

This is our 14th consecutive quarter of year-over-year adjusted EBITDA growth. We are pleased again that our adjusted EBITDA margin increased this time almost 100 basis points to 15.3% versus 14.5% last year. With a stout first half behind us, we are optimistic about our second half, which should be larger than our record first six months.

We also expect both June and September quarters to show growth year over year. We have new products launching in all divisions on a global basis. We have retail distribution gains secured. We have new retail customers in place and continued geographic expansion in Europe, Latin America and Asia. And we've been successful with select pricing actions.

At the same time, we will maintain strict spending controls, and we are tracking to another record level of cost reductions.

Let's now turn to slide 8. Our focus is to grow adjusted EBITDA and maximize sustainable free cash flow. We've been telling you that for a long time, and we will continue to do that. Free cash flow is expected to reach at least $350 million, or nearly $7.00 per share, in fiscal 2014. This is versus $254 million, or nearly $5.00 per share last year; and $208 million, or $4.00 per share, in fiscal 2012.

Deleveraging and strengthening our balance sheet remains a top priority. We plan to reduce term debt by about $250 million in the year at about 4.2 times or less. So long-term, our objectives remain -- to maintain a total leverage ratio of 2.5 times to 3.5 times.

Let's now turn to our individual businesses, and let's begin with home and garden, which is your slide 9. Home and garden has reported record results so far this year. Sales and EBITDA grew 12% and 11%, respectively, to record Q2 levels. This is primarily from higher sales in the lawn and garden controls category, from strong early-season retail customer, new distribution and demand. That's an important point. Both of those is why we did well.

We also have a positive impact from our accretive Liquid Fence acquisition and continuing cost improvement and operating expense management. Retailers have been and remain optimistic about the season, especially with our promotional programs in place, all of which is encouraging for a solid June quarter for our highest-margin business.

Home and garden is driving for another record year. The business is assuming a somewhat more normal quarterly weather pattern than the reverse we saw in fiscal 2013, if you remember, when the third quarter was much lower and the fourth quarter was much stronger than normal.

Integration activity is also ahead of schedule for Liquid Fence, the US leader in consumer animal repellents market. Liquid Fence volumes and EBITDA are tracking to our expectations.

Let's now turn to Remington, our personal-care business, which is your slide 10. Remington's momentum from a good second quarter and first half puts the business on a path to come very close if not achieve record sales and EBITDA for the year. Second-quarter sales increased 2.4%, or almost 3% excluding negative FX impact. This on strong revenue growth in Europe and Latin America, which is much like the first quarter. Adjusted EBITDA increased 3 times the rate of sales in the second quarter and at double-digit rates in the first half. While North American sales were relatively flat, we expect them to grow in the second half. This largely from increases in shaving and grooming and our hair care category, from [excepted] new product launches and distribution gains.

Remington North America has recently gained share in four of the top six categories in which it competes. We are also launching several new i-LIGHT facial hair removal products soon and be rolling out our new Hyperflex men's shave and groom models. In addition, we are investing further than we have ever in the past to grow our women's hair care position in Europe.

Let's now turn to the small appliance division within global appliances, which is your slide 11. The business had essentially flat sales on a constant currency basis in the second quarter. However, higher European sales were slightly offset by those lower North American sales, which were primarily from a non-reocurrence of loan margin promotions. We are pleased Latin American sales grew strongly on a constant currency basis from several new product launches. In addition, North America adjusted EBITDA increased.

We are optimistic about the second half outlook for small appliances, especially in North America, the largest geographic component. As we noted before, small appliances has the most new products launched now and into fiscal 2015 since the 2010 Russell Hobbs acquisition. This is going to include new George Foreman grills; new Black & Decker coffee makers and toaster ovens, including one that can cook a frozen pizza in just five minutes. We have new irons and many other products. These are secure and will be shipping in the back half and early next year.

Our small appliances and personal-care businesses, together we call global appliances, are also working effectively with our supply base to achieve cost improvements that, to date, are tracking higher versus the record level last year.

We spend a lot of time working with our partners' suppliers to minimize cost increases by continuing to evaluate non-China sourcing options. In short, we believe continuous improvement savings this year will again more than offset continuing but more moderate Asian appliances supply chain cost increases.

Now, let's go to global battery, slide 12. This business turned in a very strong second quarter. Sales grew 6%, 7% without negative FX impact; and adjusted EBITDA increased at a double-digit rate to a record Q2 level. This is with all regions growing in the battery business. In fact, the adjusted EBITDA margin expanded a strong 120 basis points. This follows a record Q1 adjusted EBITDA level.

So a combination of new retail customers, new products, numerous distraction gains, geographic expansion and effective promotions drove this strong performance. Growth in the do-it-yourself channel was most impressive. We are also optimistic about second-half battery growth, especially in North America, and the potential for a record fiscal 2014 in batteries. Relatively flat to slightly higher commodity prices persist, but we are tracking on a record level of continuous improvement savings in fiscal 2014.

Now, price competition will likely persist along with some very recent erratic competitor discounts. And, of course, we still have tight retail inventory management, usually a result of slower-moving premium priced products. Still, as we have stressed for quite some time, retail POS data continues to show that performance-oriented products like branded value Rayovac and VARTA batteries sold at same or better performance, less price. It is a winning position in the global marketplace for batteries.

Let's now turn to global pet supplies, which is your slide 13. We expect pet to deliver a record year despite the challenging first half. Second-quarter sales recovered from first-quarter declines. Slightly higher sales in Europe in aquatics and companion animals were offset by total aquatics category declines in North America, in large part due to a very adverse winter weather that hurt store traffic at all three of the top three pet retailers in North America.

Still, we are encouraged pet grew its adjusted EBITDA 4% in the quarter and posted an 80-basis-point margin expansion. Pet second half will be stronger. It has secured and expanded significant business that will ship in the third and fourth quarters in North America and Europe in both aquatics and companion animals.

The launch of US-made Dingo Market Cuts and the large US chicken jerky market has been significant. Pet has also expanded its footprint in large US retail market for rawhide, with additional product placement in mass, specialty and food and drug stores second half.

In Latin America, we expect faster companion animal growth by leveraging Spectrum Brands' sales network in the region. This is the first time we've done that.

Operationally, we expect pets to achieve a record year of cost savings. So all in all, good times ahead for pet.

Now, let's move to our newest acquisition, the Hardware & Home Improvement Group, or your slide 14. HHI delivered another quarter of solid results. Sales grew 4%, or 5% on a constant currency basis. Adjusted EBITDA increased 11%, or almost 3 times sales, as the adjusted EBITDA margin expanded more than 100 basis points. This Spectrum-like good sales to EBITDA leverage is exactly the kind of leverage performance pattern for HHI in fiscal 2014 that we've been communicating to you.

Now, growth in residential security and continued international expansion, along with these cost reductions, drove the second-quarter improvement. HHI results were particularly noteworthy for several reasons. So let's go there. First, it was comparing against an 11% sales increase last year. And second, the severe and prolonged winter weather in North America in the first few months of the quarter did negatively affect store traffic and POS for these types of products, which also contributed to an up-and-down new housing market. Still, HHI sales picked up sequentially in March. The business looks to a stronger second half versus the first half and prior year, with its seasonally somewhat larger June and September quarters.

Among growth areas in the second half are a modest new housing construction uptick. We have a conservative estimate versus the high -- much higher market projections for new housing that came out earlier in the year, and we can talk about that if you want in the Q&A.

SmartKey locksets are also doing well. The new Kevo Bluetooth lock has been a big hit, especially in new channels, and it's a much higher [ring] than anything else we sell in this category. They've made very good progress penetrating the multi-family showroom and hospitality channels, and they continue to expand internationally.

So, we expect HHI to increase its rate of cost reductions as this news of our businesses moves towards our division annual cost reduction goals of 3% to 5% of cost of goods sold. Along with their move into more shared services and the resulting savings that come from that. We're also quite excited about the uptick we've seen even in this quarter and takeaway in this business as store traffic is returning to the home centers where we sell most of our products.

So with that, I'm pleased to announce -- not announced, we've already announced -- to introduce Andreas Rouve, our President of International and our new Chief Operating Officer. He's going to give you some brief remarks about our performance and outlook in the international regions. Andreas?

Thank you, Dave, and good morning. It's a pleasure to participate in the quarterly earnings conference call. If we move to slide number 16, we are very pleased with our international performance in the second quarter and also in the first half.

We are also very optimistic about the opportunities to drive further sales growth by even more efficiently leveraging our global product portfolio and international sales organization.

Dave's remarks contain some references to international growth. Indeed, our international sales net of currency grew 5.4% in the second quarter. Currency had only a modest impact, as a stronger euro and British pound offset weaknesses in other currencies, especially in Latin America.

Europe continues to grow as it did in fiscal 2013, and also in Latin America constant currency sales growth was nearly 5%. Growth in both regions was broad-based and spread across all product categories. Similarly, international sales in the first half grew nearly 4% net of currency, driven by virtually all categories and regions.

Our international expansion is driven by the Spectrum value model, which truly is a globally effective go-to-market strategy. Our focus has been on a continuous launch of new products and of products with improved benefits. And, in parallel, we continue to provide compelling offers for consumers and our retail partners, which helps us gain additional listings.

In addition, we are systematically strengthening our sales organization. Spectrum brands has currently the presence in many countries outside North America, but previously this had been often linked to only one or two product categories. By launching more of our global products and the addition of HHI's categories, we are broadening our footprint and expanding into more countries. And at the same time, we are pushing for more cross listings.

This approach has been supported by our focus on shared back-office services and is working well. On one side, we are strengthening our relationship with existing retailers as we become a more important supplier; on the other side we are controlling the expenses of our sales entities and spreading them over more categories, which is making us more competitive.

Thank you, and now to Tony for the financial comments.

Thank you, Andreas, and good morning, everybody. Why don't we turn to slide 18, and I'd like to first comment on our gross profit and margin in the second quarter. Our gross profit and margin are $360 million and 35.2%, compared to $323 million and 32.7% a year ago, which included a $26 million increase in cost of goods sold from the sale of the inventory that was revalued in connection with the HHI acquisition. Excluding the revaluation, gross profit margins were unchanged.

Second-quarter SG&A expenses were flat, and operating expenses declined 10% versus last year, primarily due to lower acquisition- and integration-related charges. Second-quarter interest expense of $47 million decreased $13 million from $60 million last year, primarily as a result of savings from the refinancing of our 9.5% notes last September.

2014 full-year interest expense is expected to be in the range of $195 million to $200 million, which includes $104 million in the first half, of which $11 million was one-time items related to our term loan refinancing in the first quarter.

Regarding depreciation and amortization, we expect full-year 2014 D&A to approximate $190 million to $200 million, which includes $95 million in the first six months.

Our second-quarter effective tax rate was 24% compared to an unusual negative tax expense of 246% last year, primarily due to positive earnings in this year's second quarter versus a small loss in 2013. Our 2014 effective tax rate is still expected to be 25% to 30%.

Now I'd like to highlight a few more key items in our financial statement. A cash payment for restructuring, acquisition and integration charges for the second quarter of 2014 were $19 million versus $20 million in 2013. Cash interest for the second quarter of 2014 was $27 million compared $18 million in 2013. This $9 million increase was primarily due to the timing of our term debt payment, compared to payments for our 9.5% notes that we financed last September. Cash interest payments for the full year fiscal 2014 are expected to approximate $170 million to $175 million.

Now, if you turn to the last slide, slide 19, cash taxes for the second quarter of 2014 were $19 million, compared to $6 million in 2013. The increase of $13 million was due to timing of payments, primarily in Germany, and the impact of several audits. Based on the level of NOLs we expect to be able to utilize, we do not anticipate being a US federal taxpayer for at least the next five to 10 years. However, we will continue to (inaudible) form in a very small amount of state cash taxes.

Cash taxes are now expected to be $75 million to $85 million for fiscal 2014, due in part to our overall higher international profits. Our 2014 cash taxes are higher than in 2013, mainly due to the timing of payments -- again, primarily in Germany -- and the anticipated conclusion of several income tax audit in certain jurisdictions from the 2007 to 2010 period.

Now, going forward, we expect our normal annual run rate for cash taxes to be in the range of $55 million to $60 million.

Now, we ended the fiscal second quarter with a solid liquidity position, with $124 million available on our $400 million ABL working capital facility and with a cash balance of about $93 million. As of the end of the quarter, total debt at par was $3.438 billion.

Regarding our cash flow projections, I've given the strong cash flow potential of our businesses; our goal is to generate at least $350 million of free cash flow, or approaching $7 per share in fiscal 2014. And we continue to see a pathway of $400 million of free cash flow, or nearly $8.00 per share in fiscal 2015, and that's before factoring in any growth in the business.

We expect capital expenditures to approximate $70 million to $75 million in fiscal 2014, including expenditures for the integration of the Tong Lung business versus $82 million in 2013. Our normal long-term run rate is expected to approximate $65 million to 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 now, I would like to turn it back to Dave Prichard so we can open up our Q&A.

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

(Operator Instructions) Bill Schmitz, Deutsche Bank.

Tony, congratulations on the retirement. You're a good man; you did a great job.

Well, thank you, Bill, I appreciate it. (laughter)

My pleasure (multiple speakers) (laughter). Can you guys talk about the battery situation a little bit more? Obviously, it was a great quarter; way above people's estimates. And then, clearly, maybe not overtly for sale, but it's pretty clear that your two big branded premium competitors are in different states of flux. So what you guys think that means for the category and kind of what your interest level would be in any of those two assets?

I guess you guys want me to answer that, guys, right? (laughter) This is Dave Lumley. First of all, we're really pleased with our battery business performance. And one of the things I've explained to all you guys, and I know you understand, is as you gain share in a competitive battery business and you sell for a lower price, your sales don't always catch up at first until you can convert all of that.

But we've been converting that. We've been doing quite well in most of the channels. We talk a lot about the home center channel and also some key big battery sellers. So we've gained that share, and we've been through the two-year (inaudible), and our product is selling through. So I think same performance, less price is working and resonating. And we tend to sell to our space or better. So I think that's encouraging, and that's happening around the world.

You know, we've had some new introductions to the on-the-go power for cell phones, and that's been doing quite well.

In regards to your other point, I think we need to learn more about the announced new structural strategy of one of our competitors. And also we've heard a lot about the largest competitor comments about batteries. I could say right now, Bill, our view is that one or both of those, if they go that way, would represent a good opportunity in the marketplace for Rayovac and VARTA, as the competitive playing field would be different than it is now.

In regards to anything beyond that, time will tell. Let's first -- we like to concentrate on what we're doing, and we'll see what goes on there. But like I said, I'm most excited about what it could mean in the marketplace for us.

Got you. (multiple speakers) Can I ask -- drill a little bit? It was a fair answer. Thank you. Do you think those businesses are self funding by themselves, or do you think the other businesses in the portfolio help support the battery business?

Well, I've never worked in either company, but my sense is that you're -- when you have the breadth and strength that those two battery companies have and who they are owned by now, that gives them more options than if they are alone.

Okay, great. And then just a follow-up, I'll bite on the housing start invitation you kind of offered (laughter) in the prepared comments. So why are you guys thinking that housing starts are going to be below the more formal forecasts?

You know, we planned for that. Our HHI team has done an excellent job of looking forward. As you might remember, new housing starts only represent about 25% of their business with a six- to nine-month lag. But that team did an excellent job. They took the housing forecast when we did the plan, and they basically cut it in half. And that's about where it is.

And so I think they positioned themselves very well for that plus add their new products. So we never were as exuberant as others were about it. We also -- what I think you would find, Bill, that we are more excited about is what's really happening is what I would call (inaudible) throughput or upgrading. And that's where we're really doing well. From plumbing and Pfister, which they've done a terrific job on to their locksets.

So you're right. We never expected it to be as rosy as it was; it's not, but it's still better than it has been. I think that our business is prepared for that, and we geared up to really take advantage of fix your shower, fix your bathroom, upgrade to a Kevo lock. You know, our SmartKey, where you can rekey the lock in 10 to 15 seconds versus our competitor that you still have to go to the store for a half-hour to rekey, those are the things that are driving it.

So I think you guys should all feel quite well. We planned for this, and they are operating well. So we're very pleased with where they are going.

Great. Thank you guys so much for the time.

Connie Maneaty, BMO Capital.

Could you give us an update on the synergy plans for HHI being on the first $10 million? And when does that business go on your SAP system?

That's a terrific question. They had several of their own systems themselves plus the breakaway from Stanley Black & Decker in the [TSA]. So we have a very robust SAP plan that will take a couple of years. It's very complicated, as you know, with [SAP] with manufacturing and all that. We've begun that.

SO we are working on that. And Connie, it's a good question, we do believe -- I don't want to give a number out now, but I would say that the opportunity for savings through SAP and continued shared services is much greater than we thought when we posted the $10 million plan. So I will talk more about that in the future, but it's something to be excited about.

And then I guess on the international expansion, are your shared services and systems built up enough? I know Andreas alluded to this. But how do you see the international growth moving from this point on? If you've got your structure in place but you are building out your sales force, could you give us some examples of which countries are getting which product lines? You know, help us understand where you are and where you're going.

Sure, and it's really quite exciting. And I don't know a better person who's been doing that for quite a while than Andreas. Andreas, do you want to jump in and talk about some success and where you are going?

Yes, thank you. Yes, I think the idea is we wanted to take our strength in the retailer relations. And if you look, for instance, at the UK, where we are a market leader with Russell Hobbs, we are also very strong with Remington. But so far, relatively weak with pet; also with batteries. So basically we're taking our retailer relations and we are launching those products.

And you have many other examples like that. Even going to Japan, where we have very strong position with aquatics products. Or if you go to Brazil, where we have a strong position with batteries, but weak in other categories. So the idea is really this kind of pushing cross-selling.

And you are 100% correct, we just need to add dedicated salespeople and marketing people. But basically the entire infrastructure from SAP, supply chain, everything is already there to support the business.

Andreas, why don't you give a couple of examples of what you're doing with HHI and a couple of regions with the padlocks and others?

Yes, basically the HHI international expansion is, let me say, in Latin America probably a little bit easier because their technologies are more similar to North America. So there again, we have very strong presence. We are present in Latin America in 13 countries with our own sales organization. So we are basically pushing out the entire range of HHI products -- not only the locks but also plumbing, hardware into those markets.

And in a similar way, we are going, for instance, in Asia, where HHI is actually stronger in batteries and appliances. And there, we are using now, for instance, the HHI infrastructure to launch also now batteries and appliances in that part of the world.

And Connie, we can talk to you more off-line when we talk to you about a lot of the other successes in Asia-Pacific with HHI (inaudible) and how we've put together -- they actually lead in there, and Canada HHI is selling our batteries.

But I think what you're going to see here is an infrastructure that -- and HHI have embraced each other, where HHI is much more important in our international network than it was with its previous owners, who had a lot more sales and a lot more priorities. So I think you should feel good about where they could go in the future there, and we are doing it right now.

Can I just ask one more question?

Sure.

On HHI sales, it sounded like you did some good planning for it. But did sales come in -- where did sales come in versus your internal expectations? And what's your outlook for full-year HHI sales?

Yes, you know, If you look at how they have done in the first six months, they are slightly ahead of what our expectations were. So that's good news.

Yes, we had a very strong first quarter. And in all candor, the second quarter -- the first nine weeks of the quarter were negatively impacted by weather. Now, the good news is we saw March month with a significant increase. In fact, from a standpoint within from month-to-month (inaudible) report months, the month of March was a record month for the HHI business from a sale standpoint ever in their history.

So we see that momentum regaining. But for the second quarter, the sales in the quarter for HHI were slightly below our expectations; only really driven by the nine weeks of bad weather that occurred.

But to answer your question, as we've been saying all year, we see HHI sales on a yearly basis growing in the high single digits, maybe low double digits, which would be about what I said about the conservative estimate of how it's going to really do, and that's going to be pretty good.

And we've said all along that, on an ongoing basis, long term, we see this business being a slightly faster than what we would prefer to back in the past as legacy Spectrum, when we say that's 1% to 3%. We see the HHI business probably slightly higher at about 4% -- 4% to 6%, in that neighborhood.

Great. Thank you very much.

You got it, Connie, thank you.

Michael Dahl, Credit Suisse.

Thanks. Actually just a quick follow-on to that last comment. The 4% to 6% longer-term expectations -- I guess just given a lot of the moving parts as far as new products expansion and eventually some tailwind from housing again. Should we think of the next two to three years that you can do higher than that? Or just some thoughts on if we should be in that 4% to 6% in 2015 and 2016 also.

You know (laughter), we tend to manage these businesses from a conservative sale standpoint so that we can take advantage and leverage the upside. This year, we are in the high single digits, low double digits. We -- our conservative outlook is 4% to 6%; our optimistic outlook is high single digits.

I think a lot of this is going to be dependent on weather; interest -- where interest rates go, right? Where unemployment goes. But it appears, as I speak to our best and top customers and HHI does, that there's a big demand to retrofit. There's a big demand to upgrade and buy packages.

And HHI is in a position of commanding share there. So I think that if you are a conservative, you do what you say. If you're optimistic, you do it the other way. So you're somewhere in there.

Now we have yet to see whether the Kevo leads to even more sales of SmartKey, which I believe it will. And HHI has some very significant plans for other parts of their business -- international, mass, Tong Lung -- with really great projects, cost reductions, which can lead them to promote more. So I would say in that middle to high single digits is our goal.

Got it. Thanks. And then still on HHI -- with the March performance, what is your sense of how much was inventory restocking or just where we stand from an inventory perspective at retail? Thanks.

Well, you know, the retailers -- January is their end inventory, and then you add on the tough POS and traffic. Basically not a lot of people would put a hole in their door when it's freezing outside. (multiple speakers) (laughter) door. I mean, I understand that's a simple way to think about it, but that's kind of what happened.

So what they are seeing now is that the retailers adjusted (inaudible) in January, and now they're seeing they've caught up in March and April. And, in fact, they're kind of bullish on where they are going to go. Because remember traffic in the home centers is very high. We've seen the same in our home and garden business and the same in the battery business. And even the large, large retailers are -- that we do a lot of business with see traffic coming back and the pent-up demand.

I think one of the things to remember in our business is we're in a replacement business. And some of them are seasonal. So they're going to buy that; it's just a matter of if they buy in February, March or April or April, May and June. We spend a lot of time in home and garden, and in a lot of ways HHI is true here. Oh my god, look what happened this month, what does that mean next month.

If you look at the five- and 10-year records, they still go up every year. Right? So we're talking about timing I think right now.

Okay, thanks guys, and good luck in the quarter.

Ian Zaffino, Oppenheimer.

I just wanted to dig down a little bit more into Europe. I know you kind of highlight that as a strong market for you. Was that a function of the overall market sort of improving over this past quarter, or was it merely a function of your efforts to push into that market deeper? Thanks.

That's a good question. Andreas is sitting in Italy right now. So why don't you jump in, Andreas.

Yes, actually, I would say the markets are actually improving, but it's also very mixed category by category. Whereas appliances the market is growing, batteries we have to accept the market is still down. So our growth is mostly driven by distribution gains and also launching new products, which are helping us to get new listings and partly also at higher price points.

So it is really more what I mentioned earlier, the Spectrum value model, which we are executing very systematically in all markets, which is helping us to grow.

And also in Europe, please let's not forget I mentioned earlier euro and pound was strong. But especially in Eastern Europe, we were also affected by a lot of negative currency impact. You know, Turkish lira, Russian ruble and so on, and we are nicely overcoming that.

So as you look at the appliance business as you push deeper into Europe, what's the margin differential in the markets that you're penetrating versus, say, your US market? It's higher margin, I imagine, but how much more?

I'll jump in on that. You've answered your question. The US appliance market is significantly lower margin but much higher volume, and it's being affected much more dramatically by the online sales. The European market -- and Andreas, you jump in if you want -- are usually more featured products, more benefits at a higher price. And those tend to work better over there.

Andreas, do you want to add anything to that?

Yes. I think if you look at cross-profit margins then, exactly as Dave mentioned, we do generate higher margins. But it's also fair to point out that, of course, with the complexity of the markets with a different trade structure and so on, also our SG&A expenses in Europe are higher. So that if you look at the EBITDA margin, then we are probably in a similar range as North America.

Right. It would make incremental margin that much higher in Europe, though.

The other question would be just -- you did talk a lot about weather, but you really haven't sort of defined what the impact was. And I know it is a bit difficult thing to get to. But if you could, just give us a stab at what you think HHI might've been hurt by weather.

Well, this is just opinion because we have so many different businesses and different retailers with different strategies. But I would say, in general, it hurt HHI. And that business was in North America in the low single digits at POS. It just did because (inaudible) people there just bought less. But, again, we're seeing that quickly turn around once they get back into the store.

So I think as you look at your models, if you were to look at POS, it did impact the quarter for all companies, including the retailers, especially for two of those three months in the low single digits. Now there's recovery, and you'll probably see disproportionate sellthrough now in May and June, which is what normally happens.

Again, we're not in the ice cream business. You know, if you don't sell the cone in the hot weather, it's gone. For the most part, weeds are going to come up. Pets are going to get hungry; pets still get hungry. Doors have to be fixed. Toasters burn out. So I think that we're going to see a pretty good quarter now compared to last year.

Great. Thank you very much.

Bob Labick, CJS Securities.

I wanted to also congratulate Andreas on his new position and then Tony on his announcement and all the contributions he has made for Spectrum.

Thank you, Bob. I appreciate that.

Absolutely. So I guess a question for Dave. Knowing that you won't find anyone obviously as smart, personable or handsome as Tony (laughter), what are you looking for in his successor?

Well, we have an active succession program. We have an active search out. We are looking internally and externally. But I think we're looking for mainly the same attributes that you just talked about with Tony. Someone who understands our model; someone who's got great integrity and understands our business and dealing with all of you. I think also someone with a strong accounting background. Someone who has been in the public marketplace. Tony is directly and significantly involved in the recruiting of the new CFO. I don't think that CFO has to be as handsome as Tony. (laughter)(multiple speakers) and I don't think they have to be able to weight lift as much as Tony. That should make the search easier. (laughter)

But, look. Tony is business as usual. He is completely committed at least till the end of the year. We will not make a change until we are all completely satisfied with who it is. You have my word on that and Tony's -- and Andreas Rouve will be very involved.

Our principal shareholder has been significantly supportive in this and doing everything they can to help us. And our Board, the same. Obviously, we would like it if Tony was to never leave, but those of you who are around remember he was hard to get here. And we're a few years past the promise.

But nevertheless, in summary, someone who has the public company background. Someone who understands how to work with all of you but global in scope. Someone who wants to be in Mass -- or now Middleton, Wisconsin. Who can embrace our model and has the respect in the culture where we are. And, of course, why we are public Company, we are a control Company. So someone who can work in that environment as well.

So it's a challenge, no doubt, but a terrific opportunity (multiple speakers). You know, we are a $4.5 billion profitable Company now. When Tony and Lumley signed up, we had some other challenges, and we weren't nearly the size we are. But, again, we have a very strong, supportive Board; very strong, supportive controlling shareholder; and we are all involved in it.

And this is Tony. I appreciate the comments, Bob. But I would say that the most important thing that Dave had said is that it's business as usual. I'm here at least through the end of the year. I'm going to be integral in assisting with the recruiting, the transition, signing off on the 10-K this year. And we've got eight months, we've got to take the remainder of the year. We've got great momentum from the first half, as you guys can see, and we're very excited about the remaining year. But that is our focus is to get it done, as we say.

Great. Thank you for that color. That was excellent.

Jumping over to the new product pipeline and the launches you've discussed. Can you give us just a little bit of color overall on the expected P&L benefit? Is it accelerated sales because it's higher margins. How does that come about?

And just part two to that, do you have enough of a pipeline to sustain this innovation in the years to come? What's the product cycle going forward?

Well, do you want a global statement, or are you more interested in certain divisions of the business?

As detailed as you are willing to be.

Well, businesses today have a vitality rate. You like to try to come out with 15% to 35% a year of new products or new versions of products or improved products. And new products provide cost-improvement opportunities, pricing opportunities, and they get retailers and consumers excited. Especially in the world we live today, where a consumer may go into a store week two and nothing is new, they are disappointed because the Internet provides something new every day, every hour.

So depending on the business we're in, we aim for that 15% to 35%. Now within that, our success rate has been high. In most cases, we are the number two brand of business. so we have room to go, right? We have opportunities to grow; that's geographically.

Typically, if you were to study over the last five years our EBITDA percentage as a Company, our gross margin rate, you'll see it steadily improving. And that is a combination of cost improvement and new products. So that would give you a good track record of what to expect probably in the next five years.

We do not manage for grand slam home run. We do not enter giant bad businesses and hope that it is going to take us to the top because they typically go down just as fast. So that would be a good barometer for you.

Now, look at our businesses. If you were to look at most of our businesses, are 18% EBITDA businesses or higher. And they have steadily improved. And appliances has been the most dramatic improvement. If you were to go back, way back, we were down in the middle single digits as a Company, and now they are in the double digits. And that's a good barometer of what you can do with this global new products.

So I think that a company that can improve its overall gross margin percentage 100, 200, 300 basis points a year is doing quite well in today's world. Because there's not a lot of pricing. It's nice when you see all these people announcing pricing. But most pricing that's announced that they get a quarter of it or a third of it when they're all done is pretty good.

What really happens are these new products. So to your point, if you [studied] our five years and look forward, I think you could see more of that as we go. Does that help you?

Yes, very much so. Thank you.

All right.

Kevin Grundy, Jefferies.

Congrats, Tony. So first, Dave, could we start on the pet business? And understanding that the weather has been difficult over the past couple of quarters, but even looking back to the back half of last year, I don't think growth for that business has been quite what you'd hoped it would be. Can you give us kind of the state of the union with that business? How much has drag from aquatic, macros, et cetera? And what gives you confidence here in the back half of the year things are going to get better?

Sure. Good question, and you are right. The back half of last year coming off a really, really poor pond season. Aquatics started to decline over a year ago. Aquatics is driven on a few things. First and foremost, how many fish are being sold in tanks in the store? And less stores over the last year have done that. In fact, they've gone the other way.

We countered that by investing in low-cost tanks, and we won all the business (inaudible) start. And it started to improve. But still, it's store traffic is down and there's less fish in the store because there's less tanks. There's less people in the pet section. It really affects aquatics. Plus, over the last year we learned a lot of people view that more discretionary than replacement. All right?

And in our case, we were a little late on key products in aquatics. That is our fault. But we wanted to get it right. A lot of these products have to be approved in the fish food area by numerous government, and they have to be vetted. And we had to get those right.

Why do we feel good the back half? We've done that. We have the new tanks, the new fish food. Very exciting products like time-release. We have very neat stuff for inside the tank that's coming. Our glow fish is growing now. We have all the appropriate things in aquatics. But aquatics also involves reptile, and that is something that is growing, and we are entering that. But the good news is we've secured all of these for the second half. These aren't hopes.

So we know it's going to go up. We've also -- since we provide a lot of the fish tanks and make them commercially, we've secured new listings. And remember, there's only two or three people that drive that in North America; two or three people who drive that in Europe. And we have those orders, and we're making them.

So there in aquatics -- you know, only 12% of people are in aquatics, unlike owning a cat and a dog. True hobbyists. So as we drive that, we also -- and this is the long answer -- are re-engaging with the small pet owners who have fish tanks. And we are going out of our way to invest with them and make it easier for them to not only bring fish in in our type of tanks but to do more business because it's there that drives the interest. Think of a bike shop or a boat dealer and all of that.

So we're finally -- we feel a lot better about that. Now, make no mistake about it, aquatics is a tough business right now. It's been a long time since Little Mermaid. (laughter) And Nemo -- Finding Nemo, geez, we need to find Nemo. We've been begging Disney to do Nemo 2.

But I think that, fundamentally, if you look at our share gains and our cost improvements, you can feel better about aquatics long term.

Now, the flipside is companion animal, which we have great growth, but the margins are less. It's more competitive; a lot more people. A lot of things happen in that area. There, again, we've secured major listings in rawhide, chicken jerky, Nature's Miracle. We are with the category experts in there. The two big pet retailers. We've secured that business.

So, short of a major store traffic or POS downturn of major proportions, we know it's go up in the back half.

Finally, our acquisition of FURminator, which has been tremendous. We, again, were late on getting out the right new products for that. And this is a feverishly devoted group of people. If you've ever tried a FURminator brush -- a de-shedding brush that your dog is never going to give it up. In fact, I would appreciate it if you would buy one today. But they're coming; we got them, and they are coming. And then we are expanding that brand in new categories.

So it took a little while to get it right, just like (inaudible) our other businesses, but we are there now. And that's why we feel better about it. And you are right. There's high expectations for these businesses, and we are committed to doing it.

Okay, and then -- thanks for that. And then to shift back to batteries, which we touched on a little bit before. The number was very strong obviously in the quarter. I think you kind of probably beat what everyone had modeled. Was there any shipment benefit with that?

I guess just to kind of peel back the onion a bit, was there any shipment benefit in the quarter which is going to reverse now in the back half? I can't imagine you guys think you're going to do 7% kind of growth in the back half of the year. So color on the back half would be helpful.

And then lastly, I know Dave, you're feeling that people tend to over-obsessed with the US scanner data. But there's obviously a huge discrepancy between what we're seeing in the in the track data versus what you guys printed today. So color there would be helpful.

Okay. We're very optimistic about the back half. We didn't have any abnormal shipments. Those were POS sellthrough. Those were new distribution we got last winter. They're starting to make the changes in those channels I talked about, and we expect that to get better.

We also have secured major wins at a huge retailer that you are going to see later this quarter, which will take us up in the back half. Because Rayovac proved itself. Rayovac has to prove itself over and over and over again with retailers. And we've been through that cycle now for the last two years, and so we are optimistic about the back half.

We are committed to the battery business. This isn't a business for us that we make excuses for. We're committed to this business, and I think the retailers have grasped that whether we are in private-label, branded or in our hearing aid business, where we are the worldwide leader.

So we're investing in this business; we are bringing on-the-go. We have products that last longer. We have really neat new product launches coming in alkaline. So I don't think you're going to see it let up a lot in the back half, and I think we're going to do pretty good.

And we never have given up in the battery business. It is our infrastructure worldwide. It allows us to bring all of this out. In fact, because HHI is so strong in the hardware center and home and garden is (inaudible), it's helping our battery business. And vice versa in some of the other markets as they sell padlocks.

SO I'm bullish on it that you can be in a business that's flat to down. I think you're going to see some erratic behavior pretty soon -- but actually it started already. But that's not sustainable. And so I think that I'm cautiously optimistic that our battery business will actually grow throughout the year.

So mid-single digits, Dave? Not to put words in your mouth, but is that sort of reasonable for the back half of the year?

That would be very nice.

On average (multiple speakers).

Thanks, guys. Good luck.

Jim Chartier, Monness Crespi.

So you guys are expecting incremental $5 million of taxes this year. Are there any offsets in terms of better -- you're kind of keeping your free cash flow guidance unchanged. Anything better than expected to offset that? And then why wouldn't the normalized tax rate go up if the reason for the taxes this year is due to better international profits?

Well, to the first question. With our cash flow, obviously was a slight increase in cash taxes. There's other levers; for instance, the capital spending, where that is, what we originally had in our internal plan versus where we're actually coming out. And we're still making all the investments that we need to make, and our working capital assumptions. And of course, our EBITDA growth. So there's a lot of levers there, Jim. But that -- the slight increase in cash taxes has no impact on our cash flow guidance for the year.

Your second question -- could you just repeat that again, Jim? I'm sorry.

It sounds like you're kind of reiterating your longer-term cash tax assumption of $55 million to $60 million.

Right, right. And you had said what the impact that is -- why that did not impact our effective tax rate for this year?

No. I'm curious if the reason that the taxes are higher this year is because international profits are higher. Why wouldn't that impact (multiple speakers) --

Oh, that's the slight increase. The real driver of why the cash taxes are so much higher this year is really the timing of those payments in Germany vis-a-vis -- we made -- we are making two payments in Germany this year versus zero or less -- one less payment in Germany than we did last year. And that's just the timing issue.

And the other issue is that we had some audit adjustments from the 2007 to 2010 period that we're making those payments this year. So that's why the cash taxes this year are going to be, I'd say, an anomaly. And then going forward, we believe that a normalized run rate should be $55 million to $60 million, as we said earlier.

Right. And then you talked about a sequential improvement in the POS in March. Have you seen that continue or accelerate into April?

This is Dave Lumley. Yes, in most of our businesses, especially those in the home centers.

Okay, great. And then international, you've talked about bringing more categories into different countries. I guess the question, why are you doing it now? Did you not have the infrastructure or systems in the past?

And then longer term, should international grow faster than North America?

This is Dave Lumley. International has been growing faster than North America for us for quite some time because we have been entering new markets, especially Eastern Europe.

We bring out products internationally onto the platform when we have vetted out the strategy. We have the right products ready to go. We don't want to overwhelm the system. So if you went back and studied us, we were a battery Company; then we brought Remington on. And then over time, we brought pet (multiple speakers) and then Russell Hobbs; that's behind us. But we hadn't taken pet like the Latin America yet because we weren't -- we didn't see a big enough opportunity for that; we see that now. Then, as Tony said, we did Russell Hobbs. Now, we have HHI.

So you got to pick the right products with the right support at the right time. So it's just kind of a sequential rollout.

A great example of that, Jim, would be Russell Hobbs. When we launched those products, which were not in -- virtually in Western Europe when we acquired the business, there were two countries that they were in, and they weren't -- didn't have a big footprint. But we launched into Western Europe, but then into Eastern Europe. A classic example would be we did not go to each country and take our complete stable of products and just blow them into the country and say good luck.

We looked at each individual country; what were the key products; what really moves the needle. So if you can focus on the old 80/20 rule, if you're going to have 20% of the products generate 80% of the sales and profits, let's focus on that. And that's exactly what we've been doing.

So, as Dave said, that's just a -- we're doing it in a very strategic way, and we want to make sure we do it right. And that's basically we've been rolling this out over time, though, and it continues to be a success for us.

Thank you, and best of luck.

I think we have one question left, Denise, if he's still in the queue.

Karru Martinson, Deutsche Bank.

You guys are taking me down memory lane there with all the acquisitions over the years. (laughter)

Thanks, Karru. You were there with us.

So the retail distribution gains that you guys were talking about, do you feel that that's coming at the expense of private-label? Are you taking this away from some of your branded competitors? And I guess across your categories, not just battery. Who are you replacing there?

Two things. This is Dave Lumley. One is a combination, okay? And two is when you look at just the Nielsen data, which is really a food-and-drug-driven data, it of course skews to those who spend a lot of time in food and drug. Most of our strength -- now, if you were to look at the top 10 battery sellers in America, food and drug added together is in the bottom half. Okay? The big one isn't who you'd expect. And one of them is in Nielsen, but the other four or five or not. So that's why you see that skew.

So I would say it's a combination of branded business and private-label. You can simply look at the results of one of our competitors and figure out what's going on there. The other one doesn't report anything. Okay?

So you can extrapolate that. But clearly, the other two strengths are more in food and drug and mass than they are in the others. But those are good companies; they have good brands. But, again, they are going through announced changes and what their companies are emphasizing.

In our case, we're committed to the battery business and investing in it long term. So I think that's why it's so hard to look at these things differently. We've publicly stated that we believe our market share when you add it all together is 17%, 18% alkaline; much higher in the general category. Everyone focuses on alkaline, which is important; it's about 65% of sales. But the other 35% is on other batteries. We sell all of those, and those batteries are also sold in the industrial channels, and they are sold in a lot of other places.

The other thing that we're seeing is that there are numerous opportunities to sell batteries to other devices, to newer devices, especially cell phones and tablets. Because when you are on a construction site, you can't plug into your car all day. You got to have [sunlight] [power]. When you're at a concert and you're a college kid, you got to have power; and they'll do anything for it. So I think that's a big area of opportunity going forward.

Does that answer your question?

Yes, it does. When you guys talk about the pathway to $400 million of free cash flow before any growth in the business -- certainly, implying another $50 million of cost savings that you could realize within the year -- are there any kind of big buckets or kind of one-off easy steps there? Or is this kind of a continual improvement? We'll get a little bit incrementally over the time period?

The breaking in basically (inaudible) a bridge from $350 million to $400 million of the cash flow without -- before factoring in growth of the business, sure. I mean, basically, we're going to be paying down debt this year. So you're going to get interest savings, would be one bucket. Lower cash taxes, as I just talked about in the previous question from Jim. We are going to be on a more normalized -- this is a bit of an anomaly this year, so we'll have some significant savings there.

And lower A&I and cash restructuring. Again, we've implemented initiatives. Those initiatives have been announced, implemented, and what we're seeing is the window -- or the wind-down of the cash tail of those charges. So when you factor just those three items in, you basically come to about $50 million. Which, again, not saying we're not going to grow. But somebody had mentioned to me once, well, why do you say you're not going to grow? No, I'm saying before we even factor in [growth], our $350 million of cash flow that we'll generate this year is apples to apples $400 million. And then, we grow from there.

All right, sounds good. Look forward to seeing you guys. Take care.

Thanks, Karru, (multiple speakers) and see you tomorrow.

Good. With that, I think we've concluded our call for today. I certainly want to thank Dave, Andreas from Italy and Tony this morning. And on behalf of Spectrum Brands, all of us here, we want to thank all of you for participating in our fiscal 2014 second-quarter and first-half earnings call. And have a good day. Thanks again.

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