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Spectrum Brands Holdings, Inc. (NYSE:SPB)

F3Q10 Earnings Call

August 17, 2010 9:00 AM ET

Executives

John Wilson – Senior Vice President and General Counsel

Dave Lumley – Chief Executive Officer

Tony Genito – Chief Financial Officer

John Heil – President, Global Pet Supplies

Terry Polistina – President, Small Appliances

Analysts

Reza Vahabzadeh – Barclays Capital

Bill Chappell – SunTrust

Hamed Khorsand – BWS Financial

Mary Gilbert – Imperial Capital

Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Third Quarter Fiscal 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers prepared remarks there will be a question-and-answer period. (Operator Instructions)

As a reminder ladies and gentlemen, this conference is being recorded today August 17, 2010. Thank you. I would now like to introduce Mr. John Wilson, General Counsel. Mr. Wilson, you may begin your conference.

John Wilson

Good morning. And welcome to the Spectrum Brands third quarter fiscal 2010 earnings call. My name is John Wilson, and I'm the General Counsel for Spectrum Brands, filling in for Carey Phelps, our Head of Investor Relations, who is unable to join us today.

With me this morning are Dave Lumley, our Chief Executive Officer; Tony Genito, our Chief Financial Officer. Also available on the phone to answer questions are John Heil, President of our Global Pet Supplies segment; and Terry Polistina, President of our Small Appliances segment.

Before we begin, let me remind you that our comments this morning include forward looking statements including our outlook for the full year of fiscal 2010 and beyond. These statements are based on management’s current expectations, projections and assumptions and are by nature, uncertain. Actual results may differ materially.

Due to that risk Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated August 17, 2010, and our most recent SEC filings and Spectrum Brands Inc. most recent 10-K. We assume no obligation to update any forward-looking statements.

Additionally, please note that we will discuss certain non-GAAP financial measures during our remarks including adjusted diluted earnings per share, adjusted EBITDA, free cash flow and net sales excluding foreign exchange translations.

Spectrum Brands management uses these metrics because it believes that they one, provide a means of analyzing the company's current and future performance in identifying trends and two, provides further insight into our operating performance because they eliminate certain items that are not comparable either from one period to the next or from one company to another.

Additionally, I should point out that adjusted EBITDA can also be a useful measure of the company's ability to service debt and is one of the measures used for determining the company's debt covenant compliance.

Also, management believes that free cash flow is useful to both managements and investors in their analysis of the company’s ability to service and repay its debt and use its working capital requirements.

Free cash flow should not be considered in isolation or as a substitute for pre-tax income or loss, net income or loss, cash provided by or used in operating activities or other statements of operations or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity. In addition, the calculation of free cash flow does not reflect cash used as service debt and therefore does not reflect funds available for investment or discretionary use.

While Spectrum Brands management believes that these non-GAAP financial measures I just mentioned are useful supplemental information such adjusted results are not intended to replace the company's GAAP financial results and should be read in conjunction with those GAAP results.

I want to caution the audience that although net income is the GAAP measure from which adjusted EBITDA is derived, projected adjusted EBITDA results discussed during this call may differ significantly from net income results due to factors not included in the calculation of adjusted EBITDA.

For completed quarter we provided reconciliations of adjusted EBITDA to the comparable GAAP metrics in table four of our press release dated August 17, 2010, which has been furnished on a Form 8-K filed with the SEC. A copy of the 8-K is available on our website, www.spectrumbrands.com, under the Investor Relations section. And we'll provide reconciliations of net sales excluding foreign exchange during this call.

As a reminder, in connection with the company's emergence from Chapter 11 on August 28, 2009, we adopted Fresh Start reporting on August 30, 2009. At that time, the recorded amount of the company's assets and liabilities were adjusted to reflect their fair value. As a result reported historical financial statements for the predecessor company are not comparable to those of the successor company whose results encompass the results of operations on and after August 30, 2009.

During the course of our comments today, unless we say otherwise, current year results relate to the fiscal third quarter of 2010 while any references to prior year results for the fiscal third of 2009. Also, unless we state otherwise, all results provided today for the quarter and for other periods are provided on a pro forma basis assuming that Russell Hobbs’ results of operation had been included in Spectrum's portfolio since the beginning of the prospective period discussed.

With that, I'll turn the call over to Dave.

Dave Lumley

Thanks, John, and thank you for joining us today. Very exciting time at Spectrum Brands, on June 16th we added the Russell Hobbs' family of small appliance brands to our portfolio, including well-known names such as George Foreman, Black & Decker, Toastmaster, Farberware and LitterMaid. Together we are a $3 billion global consumer products company with compelling opportunities for growth and expansion, as well as the potential for strong free cash flow generation.

Our results of this past quarter, which Tony will review with you in a moment, were strong with a 4.6% topline growth, including the Russell Hobbs' business for the entire quarter and nearly 11% topline growth for the Spectrum legacy businesses, plus the Russell Hobbs’ businesses since our close of that transaction as compared with the year ago.

I'm confident that our businesses are moving in the right direction. All utilizing the Spectrum value model to drive success. This model emphasis providing value to the consumer with products that work as well or better than our competition for a lower cost, while also providing higher retailer margins. We concentrate our efforts to win at the point of sale and on creating and maintaining a low cost efficient operating structure that allows our topline growth to contribute directly to our profitability.

During the quarter we continue to achieve market share gains in many of our key product categories. For example, our Home and Garden business was a resounding success with expanded promotions at our top three retailers and strong double-digit sales growth for the quarter.

We continue to expect the gain in both fiscal year 2010 adjusted EBITDA for this segment of over 20% versus fiscal 2009. Including our full year results from the Russell Hobbs’ business lines, we continue to expect adjusted EBITDA for the full year fiscal 2010 of $430 to $440 million with sales growth of 3% to 5%.

Before I turn the call over to Tony to take you through our third quarter results, I’d like to take a few minutes to discuss our newest operating segment, which you may or may not be completely familiar with. As I mentioned earlier, we added Small Appliance segment when we closed the Russell Hobbs’ transaction in mid-June, but you may not be aware of the strong attributes and benefits this brings to our portfolio.

With approximately $800 million in annual revenues, $90 to $92 million in annual projected adjusted EBITDA for fiscal 2010, an average margin of approximately 12%, we're very pleased to have completed a transaction to add the solid and well-known brand names that make up our new small appliance division.

Similar to the work Spectrum Brands has done since 2007 this is a business that for the past several years has been extremely focused on driving free cash flow and creating a strong, stable and predictable business.

Over the past three years, Russell Hobbs’ eliminated duplicate offices and warehouses and cut excess headcount, including the elimination of over 800 positions or nearly 60% of its total headcount. In addition, as Spectrum has focused its attention on profitable growth, Terry Polistina and his team have eliminated over 80 brands and 1,000 SKUs which were unprofitable.

The brands in our Small Appliance segment are top notch with market shares in the top three in most categories they participate in. We have number one shares in six categories with George Foreman, Black & Decker and Breadman. And bringing this business on the Spectrum umbrella will only strengthen what our already solid customer relationships.

Consumer trends in this business are good. In fact, during the recession, as people are staying home, enjoying their vacation and dining out less, the sales of these products have remained stable. Approximately 80% of our Small Appliance segment is kitchen products with major brands such as Black & Decker, George Foreman, Farberware and Russell Hobbs’ complimented by some niche category brands such as Juiceman and Breadman. Like the rest of Spectrum Brands family, our major customers here are the big-box retailers.

The second largest category with about 15% of the annual sales within our small appliance segment is home products, which is primarily comprised of irons. Black & Decker irons are number one in the U.S. and Russell Hobbs’ irons lead sales in the U.K.

Making up the remainder of the revenues for the small appliance segments are some pet and pest products marketed under the Black & Decker and LitterMaid brand names and some personal care products which should all be solid compliments to Spectrum's existing product lines.

Now, let me provide just a little further color on the most notable brands within the Small Appliance category. Black & Decker has been the number one single brand in the kitchen electric category in the United States for many, many years, since the company acquired from the Black -- from Black & Decker, the power tool company in 1998. We extended the license on these products for the third time in May 2010 and enjoy a very strong relationship with the company.

Our second largest brand with an impressive 67% market share in indoor grills is George Foreman. Here we see an opportunity to not only hold on to the strong share we currently have but to also leverage the strong presence and brand name to further expand our healthy cooking option.

Behind George Foreman is the Russell Hobbs’ brand, which has been around since 1952 when the first electric kettle was invented. Here our products are more premium, higher end offerings with strong emphasis on design and trusted British heritage.

And finally, another brand I’d like to highlight for you is Farberware. This brand enjoys a solid 100-year old heritage and is known for quality classic styling, tradition, reliability and value. In April 2010 Russell Hobbs’ purchased the long-term rights to the Farberware brand through the execution of a new 200-year exclusive license. With the exception of Canada, this agreement provides the ability to use the Farberware brand name on portable kitchen electric retail products across the globe.

Hopefully, that provides with you a solid overview of the strong brands and products we've added to our portfolio. Now, let me turn the call over to Tony to discuss with you our third quarter results. Tony?

Tony Genito

Thank you, Dave. It was another strong quarter for the company led by a great home and garden season, as well as over 20% growth in shaving and grooming for the quarter, consolidated net sales for the third quarter were up 4.6% over the same period of last year. Excluding a $5.6 million negative foreign exchange impact, third quarter sales were up 5.3%.

For the quarter, we reported a GAAP net loss of $86.5 million or $2.53 per share, which includes a number of items which we believe are not indicative of the company's ongoing normalized operations. These net of tax items which total an adjustment of $111.4 million or $3.02 per share are explained in detail in this morning's press release and 8-K.

Excluding these adjustments, we reported consolidated adjusted net income per share of $0.49. Adjusted EBITDA for the fiscal third quarter was $124.1 million up 1.1% over the same period last year. Excluding $3.5 million of negative foreign exchange impact, adjusted EBITDA was up 3.9% reflecting our continued focus on creating a more efficient and cost effective operating structure.

Now, I’ll turn to our segment level results. Starting with our global batteries and personal care segment, led by over 20% topline growth for the quarter in the shaving and grooming product category and over 20% topline growth in the Latin American region, where we revamped our marketing efforts and they appear to be driving our strong results.

Segment level sales were $318.9 million for the third quarter or up 7.5% over the same period last year, excluding a negative foreign exchange impact of $4.1 million, sales were up 8.9%. Global battery sales were $194.4 million for the quarter, up 4.8% for the same period last year, excluding a negative foreign exchange impact of $2.3 million, sales and global batteries were up 6% for the quarter.

By region, despite continuing competitive pressures in North America, battery sales in this region were $84 million for the quarter up 9.1% over the same period last year. This amount included a $400,000 positive impact from foreign exchange. We believe that consumers continue to appreciate the value and quality that we offer as we utilize the Spectrum value model.

In Europe, where we were impacted by negative foreign exchange and where we continue to exit low margin private label SKUs, our battery sales declined to $65.7 million from $73 million for the third quarter of fiscal 2009, excluding negative foreign exchange impact of $3.1 million, sales declined 5.8% for the quarter.

I should note that our continued exit of low-margin private label battery sales as part of an ongoing effort to focus only on profitable growth. In fact, since its peak several years ago we have voluntarily shrunk our private label battery product segment in Europe from close to 26% to less than 14% today.

Meanwhile, our sales of VARTA branded alkaline batteries remains strong and profitable, a mix that we clearly like to see. For the quarter, sales of our branded alkaline batteries in Europe were up 13% over the third quarter of fiscal 2009. As a result, profits in Europe were also up a very positive sign that our strategies there are working.

Moving now to Latin America, our results in this region have noticeably strengthened in the last few quarters. Battery sales in this region were $44.7 million for the third quarter up a strong 25.9% compared with the same period last year.

Foreign exchange positively impacted these results by $500,000. It is apparent that mimicking our marketing strategy that has been so successful here in the U.S. is also working for us in that region of the world.

Consumers there will notice labels that proclaim that our products work as well or better than our competitors and they like to find here -- and like they find here, we provide a lower price point per battery. This change in strategy to promote our value proposition has provided some positive momentum in this region which we’re very pleased to see.

Turning now to our personal care product, as both Dave and I pointed out earlier, our shaving and grooming products lead the way for Remington with strong double-digit growth for the quarter. Overall, Remington delivered net sales of $103.4 million for the third quarter up 10.7% over the same period last year. Negatively impacting these results were $1.9 million of foreign exchange.

Of note that Remington this quarter was that we continued to hold the number one world’s shaver brand positioned here in the U.S. and the overall success of our flex and pivot shaver as it continued to gain share in various regions across the globe. In addition, new technology such as our Frizz Therapy straighteners and fashion (inaudible) design for dryers and straighteners led the solid growth here in our U.S. personal care market.

In Europe, our successful launch of the i-Light at Home Laser Hair Removal treatment product is helping to drive growth in key categories within Remington's European business and was the first to market in many countries in that region.

Overall, I'm very pleased with our performance in the global batteries and personal care segment for the quarter. Our products are maintaining high levels of market share and our value positioning continues to drive sales. In addition, with our low cost structure, strength in the topline has allowed us to enjoy benefits to the bottom line.

For the quarter, adjusted EBITDA for this segment was $43.9 million as compared with $43.3 million for the same period last year, excluding a negative foreign exchange impact of $2.6 million, adjusted EBITDA for the global batteries and personal care segment was up 7.5% over the third quarter of fiscal 2009.

Turning now to the Global Pet Supply segment, with an early pond season that materialized in the second quarter this year and a generally soft overall pet category due to macroeconomic factors, this segment delivered net sales of $135.2 million for the quarter, compared with $144.6 for the same period last year. Foreign exchange negatively impacted these results by $1.2 million.

While Nature's Miracle continued to deliver solid growth for the quarter, companion animal sales of our Pet Supply segment declined 6. 8% for the third quarter fiscal 2009. This decline was due in part to less retail and promotional activity in this base coupled with some loss distribution in our grooming business.

The Aquatics business was down 6.3% for the quarter compared with the same period last year driven by continued weakness in the hard goods product categories, coupled with continued overall softness in the aquatics category.

Despite a sales decline, our successful efforts to create a lower cost structure which included the closure and consolidation of some of our pet facilities, coupled with improved product mix resulted in adjusted EBITDA of $24.9 million for the quarter, which was flat with the same period of last year, exchange only slightly impacted these results with a benefit of $400,000. As we continue to consolidate some of our operations and facilities within this business segment, we anticipate capturing an additional $7 to $11 million in cost savings between now and the end of 2012.

Let me move now to Home and Garden segment where the Positive Momentum and solid POS trends that we reported on our second quarter call continued into the heart of the Home and Garden season. For the third quarter, this segment delivered very strong sales of $163.6 million, up 10.5% from $148 million for the same period last year, as we enjoyed solid promotional activity at all three of our top customers and solid distribution gains.

The segment's top-line growth also drove the improved adjusted EBITDA for the quarter of $43.6 million, up from $41.3 million or 5.4% for the same period -- from the same period last year. And as Dave mentioned earlier, our expected full-year fiscal 2010 adjusted EBITDA for this segment which will capture the entire home and garden 2010 season is projected to show at least a 20% improvement over fiscal 2009.

And finally, let me move to our newest segment. The small appliances segment, as Dave discussed, consists of the brands and products that we added to our portfolio as part of the Russell Hobbs’ transaction. As with all of our numbers, I provided so far today, the results for this segment that I'm going to discuss are as if Russell Hobbs’ had been part of us -- had been part of Spectrum Brands for the entire fiscal year. And for comparison purposes, I will provide their results for the quarter ended January 30, 2009 as well.

For our fiscal third quarter, with strong growth in kitchen product, the small appliances segment delivered sales of $173.3 million, up from $167.0 million or 3.7% over the same period last year. With a focus on expanding our presence in the healthy cooking category and leveraging the strength of the George Foreman brand, increased promotional spending resulted in a decline in adjusted EBITDA for the small appliances segment to $19 million for the third quarter of fiscal 2010 compared with $20.7 million for the same period last year.

Before turning the call over to Dave for his closing remarks, let me address a few of the key details within our financial statements. As you know, our financial statements are prepared in accordance with GAAP, therefore unless I note otherwise the items I will now discuss include the results of Russell Hobbs’ for only the period from the close of the transaction on January 16, 2010, to the end of the quarter on July 4.

With a strong Home and Garden season coupled with continuing solid market shares in many of our key product categories, the company's gross profit for the quarter improved to $252.9 million, up 9.8% from $230.3 million for the same period last year. Had Russell Hobbs’ been part of our portfolio for all of both Q3 2009 and Q3 2010, gross profit would have improved approximately $15 million from $283.5 million to $298.3 million.

Operating expenses for the third quarter were $193.3 million, up from $146.6 million for the same period last year. The increase of $46.7 million which was driven by several items including $9.8 million due to the addition of the Russell Hobbs’ portfolio, $15.5 million of legal and professional fees related to the Russell Hobbs’ transaction, $12 million of increased selling expenses driven by increased sales volume and many of our product categories leading to higher variable costs, $5 million of increased amortization associated with the revaluation of intangible assets in connection with our adoption of fresh start reporting, $2.8 million of incremental restrictive stock amortization and $1.5 million primarily related to restructuring and related charges incurred as a result of the Russell Hobbs’ transaction.

Corporate expenses for the quarter increased to $9.8 million compared with $8.2 million for the same period last year. This increase of $1.6 million was primarily due to $2.8 million of incremental restrictive stock amortization recorded during the third quarter of fiscal 2010 offset by decreased legal and professional fees.

Interest expense for the third quarter was $132.2 million compared with $48.6 million for the same period last year. The variance was primarily due to several unusual items totaling $82.1 million relating to the refinancing associated with the Russell Hobbs’ combination.

This included $61.4 million of non-cash costs related to the write-off of unamortized net discounts and financing fees on the company's previously existing debt that was paid off at the time of our closing of the Russell Hobbs’ transaction, $4.2 million in cash costs related to prepayment fees for the company's ABL and supplemental loans that were paid off at the closing, $13 million of cash costs related to fees, primarily for the unused bridge loan and backstop commitments and $3.5 million of cash costs primarily related to the early termination of an interest rate swap relating to our previously outstanding debt that was paid off at closing.

Cash interest for Q3 2010 excluding the unusual items noted above was approximately $40 million compared to approximately $10 million for Q3 2009. Cash payments for Q3 2009 were lower primarily due to interest payments on term debt being stayed during dependency of our Chapter 11.

Looking forward, including the $82 million of unusual items that I just discussed, we now expect full-year fiscal 2010 interest expense to approximate $275 million and our cash interest for fiscal 2010 to approximate $115 million. The difference between interest expense and cash interest for fiscal 2010 is made up of the following.

The $82 million of unusual items, I mentioned earlier, pick interest on our 12% notes of $25 million, $25 million of amortization and financing fees and fair value adjustments primarily relating to our previously issued debt, and lastly, $28 million which relates to higher interest accruals at the end of fiscal 2010 versus fiscal 2009.

Tax expense for the quarter was $12.5 million compared with $7.9 million for the same period last year. Cash taxes for the quarter were $8.2 million compared with $4.6 million for the third quarter of fiscal 2009, as we experienced profit improvements in some of our foreign entities as well as various timing differences and payments year-over-year.

As I have said previously, based on the level of NOLs we expect to be able to utilize, including those that were at the Russell Hobbs’ entity, we do not anticipate being a U.S. federal taxpayer for at least the next five years. We will, however, continue to incur some foreign and state taxes, cash taxes are expected to approximate $45 million to $50 million annually beginning with fiscal 2011.

Let me turn now to our liquidity. As we ended the third quarter with approximately $116 million in cash, at the end of the quarter approximately $1,563 million was outstanding under our senior credit facilities, which consists of a senior secured term note of $750 million and senior secured notes of $750 million.

In addition, approximately $63 million was outstanding under our $300 million ABL working capital facility, which included cash drawn of $22 million and outstanding letters of credit of $41 million. We anticipate finishing our fiscal year on September 30, 2010, with a cash balance of approximately $75 million, zero cash drawn on our ABL facility and with approximately $40 million committed under letters of credit.

Now, moving on to our free cash flow projections, we said during our July 27 Analyst Day presentation, that considering the strong free cash flow potential of our businesses, we expect to generate between $155 million and $165 million in free cash flow for fiscal 2011 and 200 million plus for fiscal 2012. GAAP reconciliations for these projections are available in the appendix of the Analyst Day presentation which is available on our website.

Our primary focus for this free cash flow will be to pay down debt as we aim to hit our target leverage of three times. Unlike the solid positive free cash flow projected in future years, fiscal 2010 will be impacted in large part by the cash costs associated with the Russell Hobbs’ transaction and the associated refinancing.

Our fiscal 2010 free cash flow is now expected to be a use of approximately $100 million, calculated by assuming approximately $75 million in cash from operations, less $35 million in capital expenditures and $141 million in cash costs related to the Russell Hobbs’ transaction.

While the cash provided by our operations is actually expected to be slightly higher than the numbers that we discussed on prior earnings calls, the full year projection of cash flow has gone down due to the $141 million of cash costs related to the Russell Hobbs’ transaction.

These cash costs are comprised of the following. $56 million of financing fees on our new debt which will be accounted for as deferred financing fee and amortized interest expense over the life of the debt; $25 million of original issue discount on the new term debt and senior notes which will be charged to interest expense and a corresponding increases to the debt balance over the life of the debt; $22 million which was used to may off the outstanding Russell Hobbs’ revolver at closing; $21 million in fees and expenses associated with the transaction and $17 million of various cash charges related to the write-offs and prepayment penalties that I mentioned in my discussions of interest expense.

In summary, despite what I considered to be unusual items impacting our GAAP results, the operations of our businesses remain strong through the third quarter and I believe they will remain solid going forward. With a focus on delivering profitable growth and creating a low cost and efficient operating structure, our consolidated results provided growth in sales and adjusted EBITDA for the quarter.

As we move into our final quarter of fiscal 2010, our businesses are well positioned to continue to deliver strong results and to deliver value to our shareholders.

With that, I'll turn the call back over to Dave.

Dave Lumley

Thanks, Tony. As you have heard from Tony, the third quarter was a positive one for Spectrum Brands with improved top-line growth and adjusted EBITDA. We are very pleased with the success of our superior value brand strategy is driving. We're maintaining or growing share in most of our key product categories and we're continuing to drive our cost structure down.

As I talked about at the start of the call, during this quarter, we successfully added the Russell Hobbs’ portfolio of widely respected brands to our offering, and in the process significantly improved the financial profile of the company. Our integration efforts associated with this transaction are well underway.

We're confident we can achieve the target we've set forth of delivering at least $25 million to $30 million in cost synergies over the next few years. In addition, we believe there are additional opportunities to capture revenue and new product development synergies as we begin leveraging each company's regional strengths in complimentary categories.

Looking forward, despite fewer calendar days during the fourth quarter 2010 versus a year ago, differences in retailer shipment timing and some increases in commodity costs and foreign exchange fluctuations, we continue to expect full-year adjusted EBITDA of $430 million to $440 million for fiscal 2010, an improvement of at least 10% over fiscal 2009.

Beyond 2010, we expect to enjoy strong free cash flow generation from our business units to pay down debt as we target three times leverage or less. Spectrum Brands is well positioned to continue its strong financial results of the global value proposition leader in our space. While macroeconomic trends are likely to remain challenging, we believe that providing superior margins to our customers and offering consumers the same performance at a better price or better performance at the same price, than most of our product categories will be a winning strategy as we move forward, providing the strong free cash flow generation that we believe our businesses are capable of delivering.

With that, let me turn the call back to the operator to facilitate any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Reza Vahabzadeh with Barclays Capital. Your line is open.

Reza Vahabzadeh – Barclays Capital

Good morning.

Dave Lumley

Good morning, Reza.

Reza Vahabzadeh – Barclays Capital

You talked about the third quarter sales which were strong in many of the segments, but then you talked about retailer shipment timing differences in the fourth quarter. Can you elaborate on that and sort of reconcile the third quarter with your comments on the fourth quarter as well?

Dave Lumley

Sure. We have six fewer shipment days or total days in the fourth quarter, so that in itself is six days out of 90 is significant, so some of that went in the third quarter. You have the same amount of days in every year. In addition, retailers are being a little more cautious about when they bring in inventory and just because our year ends September 30 and a lot of our businesses October, November, December is a big period of holiday sales, so that's simply what I meant.

Reza Vahabzadeh – Barclays Capital

And is six days the fourth quarter is missing, was that all in third quarter or was that spread throughout the first three quarters?

Dave Lumley

That was spread throughout the quarters, but I believe that one day, Q1 was four days and so it was spread throughout the quarters, Reza.

Reza Vahabzadeh – Barclays Capital

Right. And then, Tony, what is the fourth quarter EBITDA that we are comparing to, including Russell Hobbs? What is 4Q '09 pro forma EBITDA including Russell Hobbs?

Tony Genito

I don't have that in front of me right now. Was that inside the Analyst Day presentation?

Reza Vahabzadeh – Barclays Capital

I'll take a look at it if that's what you think.

Tony Genito

Hold on a second. We're looking at for Q4, this is Russell Hobbs, 21.7. Yeah. It looks like the projected for EBITDA for Russell Hobbs, you want to know what it was for 2009, right, Reza?

Reza Vahabzadeh – Barclays Capital

Yeah.

Tony Genito

That’s $24.5 million, roughly.

Reza Vahabzadeh – Barclays Capital

Right. And then Spectrum did 91, so the combined business did 110, roughly.

Dave Lumley

Let us confirm.

Tony Genito

Yeah, I don't want to necessarily write down…

Dave Lumley

We can get back to you. Should be ….

Tony Genito

Should be inside the Analyst Day, because I believe we had a reconciliation for the full year, 430 to 440 estimated results so we should -- it should be inside that appendix.

Reza Vahabzadeh – Barclays Capital

Got it. And then Dave, you touched on commodity costs affecting fourth quarter. Can you also elaborate on that, seems like you've been able to address that in preceding quarters, but you highlighted that for the fourth quarter?

Dave Lumley

That's a good question. The commodities, whether it be raw materials or -- that we buy directly for batteries or for our plants, those commodities that go into our finished goods, have gone from be going that we could manage to being a little bit higher now, especially in the battery business, as there are significant increases in a lot of those raw materials and those are coming in play. Also, when foreign exchange rates change like they have, they also pack those same commodities.

So you do have -- this would be for the battery industry in general, higher commodity costs starting now, this year and going forward for a while and they are what they are. And they're higher and they're having an impact.

Also, all of you on the call, while we've done a very good job of hedging FX and we continue to do so, there's significant difference between the euro now than there was last year. And that will continue for the entire fourth quarter, first quarter.

Reza Vahabzadeh – Barclays Capital

And then which commodity costs are you referring to? Is it primarily zinc or other stuff as well?

Dave Lumley

There's several chemical things, some of these letters will not mean anything to you, but besides zinc, there's other -- magnesium or other things like that that go into batteries that are restrained on production and have higher costs in the world market as well as, although it's not a commodity, transportation costs, container costs and all that are much different this year than last year for all businesses. So these are affecting all companies right now and they're affecting us to the point that we haven't hedged or you cannot.

Tony Genito

Right. Just to add on to that, we focus in on zinc a lot because zinc is historically a commodity that is used in battery manufacturing and we're able to hedge that. And we do a very good job as I think everybody on the call is aware that we have a very disciplined hedging program when it comes to our zinc purchases. But there are other commodities, whether they be raw material inputs into the manufacturing process of our products, which again we manufacture around the world.

And as well as Dave said, fuel costs, which is a commodity, obviously, but one that may not necessarily go directly into our production but impacts our transportation and shipping costs. But with that being said, where we can hedge, namely zinc, we do. Foreign exchange, obviously, I know we're talking about commodities here, but we hedge that as well from a transactional standpoint.

But one of the chief reasons why we have such an aggressive cost improvement program within our manufacturing operations processes, exactly for this reason, because there's a lot of things that I will say go bump in the night, nothing that were linear in business as we're all well aware.

And we are always looking for ways to be more cost effective, whether it be more efficient in our manufacturing processes and also within our administrative type expenses, our back room and the related SG&A various categories. So we're always looking for ways to try and be smarter and more efficient and more effective to adjust for these kinds of things that are constantly coming down the pike.

Reza Vahabzadeh – Barclays Capital

Thanks so much.

Dave Lumley

Okay. Next?

Operator

Your next question comes from the line of Bill Chappell with SunTrust. Your line is open.

Bill Chappell – SunTrust

Good morning.

Dave Lumley

Good morning. Hi, Bill.

Bill Chappell – SunTrust

Couple of questions on margins and I’m trying to understand them. Certainly, the top line is impressive across the difference lines, but especially on the personal care and battery line, it looks like the EBITDA margin was down on a year-over-year basis and if I actually take the accelerated D&A out, EBIT was down maybe close to 200, 300 basis points year-over-year. So I'm just trying to understand what I’m missing in terms of -- if they're issues in profitability or if there's some one-time charges or something baked in that?

Tony Genito

Hi, Bill. This is Tony. I would have to go back and look at the numbers, but quite honestly, when you extract out and I think I heard you say you extracted out the fresh start impacts, our margins are actually looking pretty good. I don't know if I agree with the 200 to 300 basis points that you mentioned.

Bill Chappell – SunTrust

I'm just looking at the numbers. It looks like most EBITDA growth year-over-year growth came from higher D&A.

Tony Genito

From an operating expense standpoint, obviously higher D&A is as a result of our fresh start reporting that's absolutely correct. I mean, just to kind of give you a general sense, on a quarterly impact basis, per quarter, we're looking at about $5 million of incremental depreciation in our gross profit margin and $5 million in operating expenses for the amortization side of long-lived intangible assets. So it's about $10 million a quarter that we're incurring on a consolidated basis directly as a result of fresh start and obviously that's for the second, third and fourth quarters.

In the first quarter we had that impact as well as the impact of the write-up of inventories that rolled through in the first quarter, which was an additional $34 million, which really blew up our GAAP gross profit margin in the first quarter, so there should be -- are you adjusting it for a total of $10 million per quarter?

Bill Chappell – SunTrust

Yeah. No, I’m just looking at the numbers that have been reported, so that's why I'm trying to understand. Again, I understand that there's EBITDA growth, but it seams lake most of that came from the D&A growth, instead of at the EBIT. I mean, I can ask more off-line. I guess it's more of a general question, are you comfortable with the profit margins and should they improve as we go forward, or have you largely done most of the cost cutting of the core business.

Dave Lumley

This is Dave Lumley. I think in light of everything that's going on in the battery business, I think everyone should be very enthused with our margins. If you consider that all the battery companies have added approximately 20% of product for no price for this year, to the majority of our battery packs, plus increased commodities with no pricing, I think you will see that ours is doing pretty well.

We also did some investment this year in our business after the bankruptcy. So I'm very bullish as we go forward as we’ve well discussed and the direction the battery business may go. But you can feel very confident about our margins. It's a very stable cash business. It's a very stable good business, one we're gaining share in. So I think you will -- your real question is, am I concerned, no. Should it get better? Yeah.

Bill Chappell – SunTrust

In the next few quarters I should see year-over-year margin improvement.

Dave Lumley

You should.

Bill Chappell – SunTrust

Okay. And then just going – same kind of same line, if I look at the Russell Hobbs’ business, from what I can tell, it looks like the margins are relatively flat year-over-year With most of the cost cutting kind of done a year ago and so we're kind of in a transition phase before you get the next line of synergies, or should I see year-over-year improvement as we go into the bigger holiday season?

Dave Lumley

Well, I'll let Terry answer that. But I think that we're in dramatic integration situation now. They are coming out of lot of work and they have a lot of exciting new product. Terry Polistina, why don't you jump in on this one?

Terry Polistina

Yeah. I think the big cost cutting that's going to move forward will be from the integration of the Spectrum Brands. Everything we've done in the past is done and finished, but we have a lot of cost reduction efforts associated with the integration of Spectrum Brands and Russell Hobbs. And Dave said, on the prepared remarks that we're very, very confident in achieving those costs -- those cost synergies, which will help our overall EBITDA margins.

The other thing that are impacting our margins that are keeping us relatively flat to what you were describing is the big investment that we have in George Foreman healthy cooking promotion and advertising activities and that's really probably the biggest offset that you are seeing, is keeping our margins flat.

Bill Chappell – SunTrust

Okay. Just one last one, kind of on the top line, on the battery business. In the U.S. sales, certainly impressive, especially with the higher pack counts. I’m just trying to understand, is that just continued consumer take-away at existing accounts, or were there any new account wins in the past six months that may translate going into the holiday season?

Dave Lumley

Yeah. We're growing at a lot of different accounts and we also have strength in channels that aren't reported by [Nelson], like in our industrial channel and our hearing aid battery channel, as well as our general battery categories through different accounts that we have made pretty good inroads in.

Those of you, as you know, cover the battery industry realize this is not a quick process when you put a battery in or batteries come out. Typically takes years. So we're making very good progress on that. So it's just not one or two accounts. It's a slow but steady process and as I've said before, I'm very optimistic about the battery business. As long as there's more people in the world using more devices, they're going to need batteries.

Bill Chappell – SunTrust

So it's safe to say you've got both same-store sales growth as well as new accounts contributing to that top line.

Dave Lumley

Yeah. And we talk a lot, Bill, about the battery business. We have to report shipments to you. But we run our battery business on take-away, not load in shipment numbers and that's what we focus on. And we focus very much on having fast turns and very little inventory. So ours tends to be a consumption model.

Bill Chappell – SunTrust

Great. Thanks so much.

Operator

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

Hamed Khorsand – BWS Financial

Hi. Good morning. Just two questions here. One is, do you have some sort of preset kind of a timeline as to how you would be applying your free cash flow to paying down debt or is it just purely opportunistic?

Dave Lumley

The time line is going to be as we generate that free cash flow, which as we've publicly stated, 2011 and forward we will be in a positive free cash flow position, somewhere between 155 and 165 next year and $20 plus million going forward 2012 and beyond.

From a timeline standpoint, as that cash flow is generated, we will be using it to -- our primary focus will be on de-levering the company and getting to a leverage ratio target in the three times area which would be consistent with our peer group. So from a timing standpoint, it's going to be as that cash is generated, we will be paying down debt. In fact, during the fourth quarter of this year, we're looking to do that exactly.

Hamed Khorsand – BWS Financial

Okay. My other question is related to inventory. Could you give us a sense as now with Russell Hobbs, what kind of inventory structure you will be having, especially going into calendar Q4, your fiscal first quarter?

Dave Lumley

I'll let Terry answer that but I'm not sure what you mean. You mean what inventory in the field or our inventory?

Hamed Khorsand – BWS Financial

Yeah, your inventory build and how much you would be carrying into Q1 from Q4?

Terry Polistina

Let he me try and take a stab at that, maybe where you are going with this. Our business has some seasonality to it. We know that similar to the batteries and personal care business, the Russell Hobbs’ business has a seasonal peak during the holiday season so it would be in the quarter that we're coming in, we're seeing that peak starting to material materialize.

And we have a second peak, obviously in the home and garden business in the springtime frame, that peak being April to May timeframe. I would say that typically the buildup of inventories has its conversion into receivables and then ultimate cash collection occurs for our battery and -- battery, battery Remington and Russell Hobbs’ business in our fourth quarter and into our first quarter of the fiscal year.

So that would be building inventory, say in September, October and then collecting cash ultimately in January. I would say that the draw -- the working capital needs is probably about a peak of $80 million at that point, so it's not that significant. Obviously from our -- with our refinancing and having put in place a $300 million ABL, we will be in strong liquidity position going forward. And I will also say that the higher peak is going to be the working capital needs of the home and garden business in the spring timeframe and that's probably $100 to $110 million of peak need and again, well within a comfortable zone for us, based on the numbers that we've run for our modeling purposes going forward.

Again, in a very strong liquid position and again, as I mentioned in my prepared remarks, the beauty of the business is that our low is from a working capital needs is the end of our fiscal year, September 30. And we will be completely out of the revolver from a cash draw standpoint. The only thing outstanding would be any letters of credit – letters of credit that we have against the ABL facility. So, again, from a liquidity standpoint we consider ourselves in a very good position. Does that help you? I'm not sure if that was your specific question.

Hamed Khorsand – BWS Financial

Yeah, that helps. Thank you.

Operator

Your final question comes from the line of Mary Gilbert with Imperial Capital. Your line is open.

Mary Gilbert – Imperial Capital

Good morning. Could you discuss on the pet side of the business? Some of the -- we're seeing some weak trends obviously on the aquatic side related to the bigger ticket items and then also on the companion pet side where there might have been some loss distribution? Can you talk about how we might see that shifting going forward?

Dave Lumley

Sure. John Heil, do you want to comment on that?

John Heil

Sure. First, on the aquatic side, we had a second quarter, third quarter shift essentially for the year for aquatics globally we're flat for the year. But we had an early pond season in Europe. Ponds are very large part of our European business and our aquatics business in the second quarter was up 6.9% overall and we were down 6.3% in the third quarter, so that's two-thirds of our business aquatics and the second quarter and third quarter kind of offset each other so we're essential flat for the year.

Consumption on aquatics by part of the world is flat to down slightly and we're doing just fine, frankly. Our performance is good from a share perspective on an account level and a category. We're doing better on the consumables than on the equipment. High cost equipment, sales are down everywhere because of economic issues. People aren't spending is money for very large aquariums and equipment, but consumables is actually doing quite well.

On companion, a different situation, we did lose some business. We lost some grooming business at a large account in North America and that's about half of the loss that we had in the quarter versus year ago. We're also anniversarying a very difficult quarter. Year ago, the third quarter was up a little over 8%. So, on a year-over-year basis we were anniversarying one of our fastest growing quarters. So those two combinations would explain the companion animal side.

Mary Gilbert – Imperial Capital

Okay. Have you identified any opportunities to offset that lost business from that major account with new account?

John Heil

We have picked up some additional grooming business at other smaller accounts, but not to offset the size of the account that we lost, no.

Mary Gilbert – Imperial Capital

Okay. Great.

John Heil

So I will be facing that for the next two quarters actually.

Mary Gilbert – Imperial Capital

Okay. Thank you.

Tony Genito

Hey Mary. This is Tony. Just an add on, I know you talked about sales, but I think one of the -- the positive things that we saw with our pet business this quarter is, albeit, there was a drop in sales for reasons that John mentioned. We're very pleased with the fact that John has -- and his team has done a great job of initiating a variety of projects that have allowed us to streamline the organization at least begin that process in earnest and we're seeing the EBITDA, even with a decline in sales this quarter, EBITDA held flat with last year and we're bullish on the opportunities that lie ahead. As I mentioned in the prepared remarks and we talked about this on Analyst Day as well, $7 to 11 million of opportunity falling directly to the bottom line as a result of some of the actions that John and his team are taking today and soon to be taking to achieve that prize.

Mary Gilbert – Imperial Capital

Yeah. Thanks.

John Heil

Additionally, we are, like Dave mentioned earlier, on another one of his businesses, we're being very careful on managing our mix -- product and geography mix. You look at the gross profit performance. A request portion of that is also driven by selling the more profitable items and letting some of the less profitable items fall away.

Mary Gilbert – Imperial Capital

Okay. Got it. So, yeah, so in other words, for example, the grooming business that you lost, was that related to that or no?

John Heil

No, that one was not. That one was an account that we just lost the business. It was a much lower bid and we decided to take a pass on it.

Mary Gilbert – Imperial Capital

Okay. Okay. Got it. That's very helpful. Also, just going back to the battery business and following up on an earlier question, the strength and the sales was pretty incredible, wasn't it, given the fact that you're essentially giving away batteries, two and yet you're still getting the strength. I wondered, could you give us an idea of what percent or what portion of the sales represented comp sales growth within existing account? And then what represented either new accounts and then also, are you getting health expansion with an existing account? Can you give us a little more granularity on that?

Dave Lumley

I can give you a flavor. I can't give you all those numbers off the top of my head. I can tell you in general that our take-away sales have tended to be flat up to single digits at most accounts, in a market that's down, anywhere from 2 to 10%. I can tell that you we've had a good portion of our sales are take-away shipments. I would say the next portion is some new accounts and finally, some of the other sales of those things are wins in the bat tree business in general.

I think a lot of people tend to think of the battery business as only alkaline batteries. We've had very good growth in rechargeables and other hearing aids and things like that where we tend to be stronger than in this area where the batteries are being promoted and these larger packs on alkaline. So that has helped us. Very much so in North America and then worldwide, the shift to emphasizing our VARTA and deemphasizing the private label

And again as I've explained to you guys, in Europe -- in America, private label is just one price. It's the open price point. In Europe there are four layers of private label pricing. So as we've exited two, almost three of those layers and moved it more to a – our VARTA branded product, we've done better. So you add all that together, it's kind of how the whole battery business is doing. But in North America, it's mostly take-away at some new accounts and then a lot better distribution gains on the non alkaline batteries as well.

Mary Gilbert – Imperial Capital

Okay. Yeah, it sounds to me, okay, that the alkaline battery is the part where you're saying that it's kind of flat to up and that a big piece reflects the strength in rechargeables and hearing aids, which is kind of intriguing. Are you seeing a big pickup in rechargeables, given a focus on going green or anything like that, because you kind of talked about on the Analyst Day that there's still a big focus on convenience in the immediacy with batteries?

Dave Lumley

Not seen the type of pickup in rechargeables, like I said in Analyst Day that people would like to think there are. In our case, we have taken a more aggressive pricing value proposal with rechargeables, which has been one of the biggest barriers to entry for the users, despite the convenience. It also costs more sometimes to get into it.

So I think you're seeing that being the biggest change, that the consumers are actually trying it. And as well as they're looking for an alternative to a higher priced lithium battery option for their cameras.

Mary Gilbert – Imperial Capital

Got it. That's very helpful. Thank you.

Dave Lumley

Okay. All right.

Operator

Ladies and gentlemen, now we have run out of allotted time. I would like to thank everyone for your participation in today’s conference call. This concludes the program. You may now disconnect.

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