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Spectrum Brands Holdings (NYSE:SPB)

Q2 2011 Earnings Call

May 11, 2011 9:00 am ET

Executives

David Prichard - Vice President of Investor Relations and Corporate Communications

John Heil - President of Global Pet Supplies

Anthony Genito - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

David Lumley - Chief Executive Officer and Director

Terry Polistina - President Small Appliances Division and Director

Analysts

Torin Eastburn - CJS Securities, Inc.

William Chappell - SunTrust Robinson Humphrey, Inc.

Hamed Khorsand - Beating Wall Street, Inc.

Karru Martinson - Deutsche Bank

Reza Vahabzadeh - Lehman Brothers

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 Second Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded today, May 11, 2011. Thank you. I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

David Prichard

Thank you, operator. Good morning, and welcome to Spectrum Brands Fiscal 2011 Second Quarter and First-Half Earnings Conference Call and audio webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands, and your moderator for today's call. With me this morning to lead the call are Dave Lumley, our Chief Executive Officer; and Tony Genito, our Chief Financial Officer. Also with us today for the Q&A session are Terry Polistina, President, Global Appliances; and John Heil, President of Global Pet Supplies.

Now our comments today include forward-looking statements, including our outlook for fiscal 2011 and beyond. These statements are based upon management's current expectations, projections and assumptions and are by nature uncertain. Actual results may differ materially. Due to that risks, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated May 11, 2011, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10-K. We assume no obligation to update any forward-looking statement.

Additionally, please note that we'll 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 translation. Spectrum Brands management uses these metrics because it believes they provide a means of analyzing the company's current and future performance and identifying trends. And the second, they provide further insight in to our operating performance because they eliminate certain items that are not comparable, either from 1 period to the next or from 1 company to another.

Additionally, adjusted EBITDA can also be a useful measure of a company's ability to service debt and is 1 of the major use for determining the company's debt covenants to clients. Also, management believes that free cash flow is useful to both management and investors in their analysis of the company's ability to service and repay its debts and to meet its working capital requirements. Free cash flow should not be considered an isolation or as a substitute for pretax 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 to service debt, and therefore, does not reflect funds available for investment or discretionary uses. While Spectrum Brands management believes that these non-GAAP financial measures 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.

In our press release dated May 11, 2011, which has been furnished on the Form 8-K filed with the SEC, we have provided the reconciliations for the following non-GAAP information in the tables indicated: first, in Table 3, a complete reconciliation of diluted loss per share on a GAAP basis to adjusted diluted EPS for the 3 months and 6 months ended April 30, 2011, and April 4, 2010; second, in Table 4, a reconciliation of GAAP net income or loss to adjusted EBITDA for the 3 and 6 months ended April 3, 2011, and April 4, 2010; third, in Table 6, a reconciliation of GAAP net income to adjusted EBITDA on a consolidated perspective basis for the 12 months ending September 30, 2011, and 4th, Table 7, a reconciliation of net cash provided from operating activities to free cash flow for the 12 months ending September 30, 2011. A copy of the 8-K is available in our website at www.spectrumbrands.com, in the Investors section. We'll provide reconciliation of net sales excluding foreign exchange during this call.

Now effective October 1, 2010, the companies Chief Operating Decision Maker decided to manage the businesses in 3 vertically integrated product focused reporting segments. First, Global Batteries and Appliances which consist of the company's Worldwide Battery, Shaving and Grooming, Personal Care, Small Electric Appliances in the Kitchen and Home Product categories, as well as Portable Lighting business; second, Global Pet Supplies, which consists of the company's Worldwide Pet Supplies business; and third, the Home and Garden business, which consists of the company's Lawn-and-Garden and Insect Control businesses.

This current reporting segment structure reflects the combination of the former Global Batteries and Personal Care segment with substantially all of the former Small Appliances segment, which consist of the Russell Hobbs businesses acquired on June 16, 2010 to form Global Batteries and Appliances. In addition, certain pest control and pet products in the former Small Appliances segment have been reclassified into the Home and Garden business and the Global Pet Supply segments, respectively. These reclassifications have been made for all periods presented.

Now let me take a very quick moment to review our GAAP results. For the second quarter of fiscal 2011, the company reported a GAAP net loss of $50.2 million or $0.99 per diluted loss per share on average shares and common stock equivalent of $50.8 million compared with a net loss of $19 million or $0.63 per diluted loss per share in the year-ago quarter based upon average shares and common stock equivalent of $30 million.

By segment, for the second quarter of fiscal 2011, the Global Batteries and Appliances segment reported net income of $35.5 million versus $27.9 million, a year earlier. The Global Pet Supplies business segment reported net income of $14.4 million in fiscal 2011 second quarter versus net income of $18.3 million in fiscal 2010. And finally, the Home and Garden business segment reported net income of $14.2 million in the second quarter of fiscal 2011 versus net income of $9.4 million in fiscal 2010.

During the course of our comments today, unless we say otherwise, current year results relate to the fiscal second quarter 2011, while any references to prior-year results are for the second quarter of fiscal 2010. Also, unless we state otherwise, all results provided today for the quarter are provided on a pro forma basis, assuming that Russell Hobbs' results of operations have been included in Spectrum's portfolio since the beginning of the respective periods discussed.

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

David Lumley

Thanks, Dave, and thanks to all of you for joining us on the call today. We're now focused on delivering a stronger second half, and we feel very good about where our company is in the halfway of fiscal 2011. We remain optimistic and excited about the future of Spectrum Brands and the initiatives we're undertaking to create even greater value in the future.

We're on track, we're ahead of schedule on our 5 key priorities. One, the strategic development of growth of our businesses; two, exceeding our financial results and targets; three, the strengthening of our balance sheet through consistent debt paydown; four, achieving operating cost reductions worldwide; and five, increasing shareholder value.

We delivered our second quarter with higher sales and adjusted EBITDA, even though as many of you may know, it is Spectrum's least important quarter of the year as an indicator for the full year's overall strength. Our fiscal first quarter is usually our key quarter as the largest one for our Appliance businesses, Russell Hobbs and Remington, and for Batteries, given the typical holiday season. Our third quarter is [indiscernible] driven by the strength [indiscernible] at our Home and Garden. And we finished with a solid fourth quarter as we set for a new holiday period.

In reporting our second results today, we have reconfirmed our full year targets for net sales growth of 3% to 4% and increases in both adjusted EBITDA to $455 million to $465 million, and free cash flow from $155 million to $165 million. We have also raised cost synergy target range for the Russell Hobbs integration to $30 million to $35 million from $25 million to $35 million over the next 2 years. More about that in a moment.

We made 2 voluntary prepayments of $50 million and $20 million in the first half to reduce our original $750 million Senior Secured Term Loan to $680 million. This began a continuous and aggressive debt paydown program to reach our target leverage of 3x or less by the end of fiscal 2012. We still plan cumulative debt reduction on our term loan of at least $200 million during fiscal 2011, which would reduce the principal amount to a minimum of $550 million versus the original $750 million.

I want to stress Spectrum Brands has compelling opportunities for continued market share growth around the world, along with the corresponding increases in EBITDA. We have the means to generate strong free cash flow. This free cash flow was built on a diversified revenue stream, attractive margins and a top 1, 2 or 3 global market position. They are trusted, extendible and enduring brand names in categories with plenty of room for distribution growth in existing and new segments.

We continue to see very real success based on our Spectrum value model. We believe we are outperforming industry sales in key categories because of our same performance, less price approach for products. We are also seeing modest increases at point-of-sale in some categories that are otherwise down. Our model, which is at the heart of our operating approach, focus squarely on enhancing retailer margins and lowering their inventory carrying costs. Introducing new products carved [ph] by extension and rigorously pursuing reduced cost across our company to create the most efficient operating structure we can.

Before Tony reviews our second quarter in detail, I want to touch upon why we feel optimistic about a stronger second half of fiscal 2011 and more growth in fiscal 2012. In short, it's because we believe our value proposition for consumers and retailers is winning the global marketplace.

In our Battery business, we continue to grow our shares globally. Recently, we landed significant new battery distribution at several key worldwide retailers that we will announce shortly. Our Worldwide Battery business continues to grow primarily because of its product performance strategy that lasts as long for less.

In North America, we have reached a record level of outlying share with our value proposition with more room to grow. In Europe and elsewhere, we remain a significant player in all key markets with a solid number 2 position. In Latin America, we remain the number one battery player, with the best overall alkaline and zinc carbon performance and share. And finally, we have the number one worldwide market share in hearing aid batteries. In fact, we were just honored by her Majesty, Queen Elizabeth of Great Britain, for the Quality and Innovation Award[indiscernible]. We are going to continue to launch new products and programs to ensure we continue to win a point-of-sale value performance in our Battery business.

Turning to our Remington business and our Personal Care, where it's outperforming or trending higher in key U.S. and European categories. This is also the number 2 and fastest-growing brand in Latin America, the U.K. and Europe. This business continues to launch new products and line extensions that are greater than 25% date[ph]. For example, we are just entering the nearly $2 billion U.S. men's wet shave market with the Remington King Of Shave line. As well as the women's hair care accessories market in both the U.S. and Australia.

In our Pet Supply segment, we look for much stronger top line in the second half. We have achieved significant new distribution gains at several major retailers led by a number of new product launches in the Dingo and Nature Miracle's line, as well as our Tetra Aquatics category.

Finally, our Home and Garden segment is in the nest of its largest quarter of the year with the spring season in full swing. Even after its strong performance last year, we believe our business is poised for further gains this year with important new listings, new product launches and expanded placements for our key brands with our top U.S. retail customers. We also see growth in the [indiscernible] category, where we are the U.S. market share leader.

Turning to the cost side of our business, we're pleased with the pace of the Russell Hobbs integration. So much so as I said earlier, we have increased our original $25 million to $30 million cost synergy projection to $30 million to $35 million over the next several years.

Other opportunities ahead are capturing additional new product development synergies as we leveraged each company's regional strengths and complementary category and improve [indiscernible] will help supply chain cost structure with continuous improvement and new product development.

Our goal at Russel Hobbs, like our other businesses is to reduce the annual cost of goods sold by up to 5%. In addition, we are starting to see some initial progress in moving Russell Hobbs products more fully into Western Europe and for the first time in the Eastern Europe and China. We do this by using our battery and personal care platforms we have established there.

In China, we are ready in distribution for Russell Hobbs and Remington at a large retailer. I'll remind you, these revenues and supply-chain opportunities are not included in the now $30 million to $35 million of forecasted synergies.

Beyond Russell Hobbs, significant integration activities continue in our Global Pet business. We continue to forecast annualized cost savings of $7 million to $11 million over this year and next as the business complete its major consolidation of U.S. plants and distribution centers.

So, when you combine the increase projection of Russell Hobbs synergies of $30 million to $35 million, the pet cost savings is $7 million to $11 million. We are forecasting total synergies from these restructurings and consolidation of $37 million to $46 million as we move through fiscal '12 and into fiscal 2013. Our fiscal 2011 guidance, as we've said before, is not built upon any expectations for our consumer spending rebound or economic recovery.

Like so many other companies have said, we too are starting to see early signs of rising costs, especially from our Asian suppliers. It's becoming more of it[ph], these cost increases are already starting to affect retailers and consumers. As a company, we feel we are well-positioned for the rest of fiscal 2011. We also have detailed plans in place to help mitigate most of these new supply-chain cost pressures in fiscal 2012. We are reviewing other options as well. In addition, our cost synergies from Russell Hobbs and Global Pet, which are going to pull through our income statement as we move through 2012 and into 2013, will help to temper these cost pressures.

In summary, it's also important to remember, most of our products are nondiscretionary, non-premium priced replacement products that provide value quality performance to consumers in everyday living. Our Spectrum Value Model, we think, is particular key in this time of increasing cost and inflationary pressures at the manufacturing, retail and consumer levels. And finally, our vision is clear: To be the leader in retailer ventures with superior value of consumer products for everyday use.

Let me now turn this over to Tony for more of financial review, and then I'll come back.

Anthony Genito

Thanks, Dave, and good morning, everyone. Our second quarter coming out of the big holiday season and before the spring season, is typically the smallest quarter for us in the fiscal year. However, after the first half, we are on track to achieve the financial targets we have projected for the year. And as Dave pointed out we see a stronger second half of the year versus the first 6 months as we drive for increased top line growth and a higher adjusted EBITDA and free cash flow levels, which in turn, will lead to an acceleration of our debt reduction.

Our second quarter of fiscal 2011, we reported consolidated GAAP net sales of $694 million up 30% from $533 million in the year-ago quarter. The addition of the Russell Hobbs business as of June 16, 2010 drove the net sales increased. These results were positively impacted by $6 million of foreign exchange. When we include the fiscal 2010 second quarter results for Russell Hobbs, net sales for 2011 second quarter of $694 million increased 0.5% versus $690 million last year. The company's gross profit for the second quarter improved to $255 million, an increase of 22% from $210 million for the same period last year.

Total operating expenses for the second quarter were $208 million, up from $164 million for the comparable quarter last year. The increase of about $44 million was primarily driven by $30 million related to the addition of the Russell Hobbs business and $8 million of the acquisition and integration related charges incurred in connection with the Russell Hobbs transaction.

Corporate expenses for the quarter were $15 million, up from $11 million for the same period last year. The increase was attributed to a $5 million increase in stock compensation expense and non-cash expense. As a percentage of consolidated net sales, corporate expense for the second quarter was 2.2%, essentially unchanged from the 2.1% for the 2010 second quarter for the second quarter of fiscal 2011, the company reported a GAAP net loss of $50 million or $0.99 per diluted loss per share, versus a net loss of $19 million or $0.63 per diluted loss per share in 2010.

After adjusting both years for certain items, management beliefs are not indicative of the company's ongoing normalized operations. The company generated adjusted diluted earnings per share of $0.23 a non-GAAP number for the second quarter of 2011, an increase of 156% compared with the adjusted diluted earnings per share of $0.09 in fiscal 2010 second quarter. These adjustments, which aggregated to $1.22 and $0.72 per diluted share in the second quarters of 2011 and 2010 respectively, are still out[ph] in detail in Table 3 of our earnings release. So in the interest of time, I won't go through that here.

2011 second quarter consolidated adjusted EBITDA was $93 million, a 3% increase versus consolidated adjusted EBITDA for the second quarter of fiscal 2010 of $91 million, which includes the results of Russell Hobbs as it's combined with Spectrum Brands as of the beginning of last year second quarter. Foreign exchange had an $8 million positive impact on adjusted EBITDA in the second quarter of 2011. We believe we are on target to achieve our projection of adjusted EBITDA of $455 million to $465 million in fiscal 2011, which when you do the math, means achieving an adjusted EBITDA in the second half of this year of between $239 million and $249 million compared with $216 million in the first half.

Now let me quickly review that our consolidated results for the first half of fiscal 2011. The company reported consolidated GAAP net sales of $1,560,000,000 for the first 6 months of fiscal 2011, a 38% increase compared with $1,130,000,000 for the same period of fiscal 2010. The increase was a result of the Russell Hobbs acquisition, along with higher net sales of the company's Personal Care products and Home and Garden business.

Including the prior year's first half results for Russell Hobbs businesses, net sales of $1,560,000,000 in the first half of fiscal 2011, increased 1.6% compared with $1,530,000,000 in the year-ago period. Spectrum Brands GAAP gross profit of $555 million in the first half of fiscal 2011 increased 41% versus $394 million in the comparable year-ago period.

The company reported a GAAP net loss of $70 million or $1.38 per diluted loss per share for the first 6 months of fiscal 2011, on average shares in common stock equivalents of $50.8 million. This compares with a net loss of $79 million or $2.64 per diluted loss per share in the first half a year-ago, based upon average shares in common stock equivalents of $30 million.

Adjusted for certain items in both years for 6 months, which are presented in Table 3 of this press release, and which management believes are not indicative of the company's ongoing normalized operations. The company generated adjusted diluted earnings per share of $0.69, a non-GAAP number, for the first 6 months of fiscal 2011, representing an increase of 21% versus adjusted diluted earnings per share of $0.57 in fiscal 2010's first half.

Fiscal 2011 first-half consolidated adjusted EBITDA was $216 million. This represented a 4% increase versus consolidated adjusted EBITDA for the first half of fiscal 2010 of $208 million, which includes the result of Russell Hobbs' business as it's combined with Spectrum Brands as of the beginning of last year. Foreign exchange at an $800,000 negative impact on adjusted EBITDA in the first half of fiscal 2011.

Now let's review our second quarter segment results. The Global Batteries and Appliances segment reported fiscal 2011 second quarter net sales of $459 million versus $308 million in the second quarter of last year. Including the Russell Hobbs business, as it's combined with Spectrum in last year's second quarter, the segment 2011 second quarter net sales of $459 million were essentially unchanged versus $461 million a year ago.

Second quarter 2011 segment sales were positively impacted by $5 million of foreign exchange. Total value sales for the second quarter were $198 million compared with $212 million a year earlier or a 6.6% decline due to unusual competitive actions in Latin America and the timing of key North American shipments. Foreign exchange positively impacted these results by $1 million or 1.5%.

North American battery sales were $81 million versus $84 million in the prior year's quarter. European battery sales for the quarter, where the company continued its voluntary exit of low-margin private-label sales were $73 million compared with $76 million during the same period last year.

Because of this reasons focused on profitable growth, despite a smaller top line for the region as a whole compared with a year ago, Europe's Battery business saw an improvement in profits. Finally, in Latin America, battery sales were $41 million for the second quarter, a decline of 18% versus $50 million in the comparable period last year. The net sales decrease in Latin America was driven predominantly by lower pricing and volume in Brazil. Foreign exchange positively impacted Latin American battery sales by $1 million.

Reflecting growth across all geographic regions, net sales for the global personal care product category rose 12% to $108 million in the second quarter of fiscal 2011 versus $96 million for the same period last year. The net sales growth was driven by a combination of new product introduction, line extensions and expanded in-store promotions. Foreign exchange positively impacted these results by $800,000.

The Small Electrical Appliances products of the Global Batteries and Appliances segment reported net sales in the 2011 second quarter of $154 million, essentially unchanged when compared with $153 million in the previous year's quarter after including the Russell Hobbs business with Spectrum Brands in that quarter.

Foreign exchange positively impacted Small Electrical Appliances products net sales by $3 million. With segment net income of $36 million, the Global Batteries and Appliances segment recorded adjusted EBITDA of $57 million for the second quarter of fiscal 2011 versus adjusted EBITDA of $56 million in the year-earlier quarter when segment net income was $28 million. Foreign-exchange positively impacted adjusted EBITDA in the second quarter by $8 million.

Turning now to Global Pet Supplies. This segment reported net sales of $144 million for the second quarter of fiscal 2011, a decline of 3% compared with $148 million in the comparable year-ago period. The reclassification of certain pet products into the Global Pet Supplies business segment from the Small Appliances segment -- from the former Small Appliances segment, accounted for the net sales increase of $3 million in fiscal 2011 second quarter.

The lower revenues were attributed to continued softness in the North American Aquatics category to the macroeconomic factors, partially offset by stronger international performance. Foreign exchange positively impacted these results by $700,000.

Net income for this segment was $14 million for the second quarter of fiscal 2011 versus $18 million in the prior year's quarter. Primarily as a result of the lower net sales, second quarter adjusted EBITDA of $24 million for the segment declined from $28 million in the same period last year.

With the second fiscal quarter marking the start of the season, The Home and Garden business segment recorded net sales of $90 million for the second quarter of fiscal 2011, an increase of 19% from $76 million for the same period last year. The improvement was driven by distribution gains across key customers and as retailers ordered inventory in anticipation of the spring season. Also contributing to the second quarter net sales growth was the reclassification of several pets control products into the Home and Garden business segment from the former Small Appliances segment. Second quarter net sales typically reflect approximately 20% of full year net sales for this segment.

The business segment recorded first quarter net income of $14 million, a 51% improvement compared with net income of $9 million in fiscal 2010 second quarter. As a result of the distribution gain, along with ongoing operational excellence initiatives, the Home and Garden business increased its adjusted EBITDA by 20% to $18 million in the second quarter of fiscal 2011 from $15 million in the same period last year.

Let me review a few more items in our second quarter financial statement. Interest expense for the second quarter of fiscal 2011 was $72 million compared with $48 million for the same period last year. This variance was primarily due to unusual items totaling approximately $29 million related to the refinancing of our term debt during the quarter as previously announced.

In connection with refinancing, the approved noncash cost totaling $24 million for the write-off of unamortized deferred financing fees and original issued discount, plus cash flow of approximately $5 million for a prepayment fee. As a result of the refinancing, we now expect cash interest for full year fiscal 2011 excluding any one-time cost associated with the refinancing to approximate $165 million versus the $170 million we previously provided you.

Furthermore, assuming that the term that balance of approximately $678 million as of April 3, 2011 were to remain unchanged, we would save cash interest of approximately $20 million annually as a result of the refinancing executed in the quarter.

Tax expense for the fiscal 2011 second quarter was $25 million compared with $10 million for the same period last year. As I've said before, they fund the level of NOLs we expect to be able to utilize. We do not anticipate being a U.S. Federal taxpayer for at least the next 5 years and likely longer. However, we will continue to incur foreign and a very small amount of state cash taxes. Cash taxes are still expected to approximate $45 million to $50 million in fiscal 2011.

Let's turn to a review of our liquidity position which continues to be solid. We finished the second quarter of fiscal 2011 with a cash balance of $73 million and $118 million drawn on our $300 million ABL working capital facility. This reflects the normal timing of peak business seasonality for the company. As many of you know, the latter part of our second fiscal quarter is always a period of temporarily higher inventory build, primarily in anticipation of the spring season of our Home and Garden business.

As of the end of the second quarter, total gross debt was $1,840,000,000, which consisted of our Senior Secured Term Loan of $678 million, senior secured notes of $750 million, subordinated notes of $245 million to working capital facility draw of $118 million and capital leases and foreign debt of approximately $49 million. In addition, we had approximately $36 million of letters of credit outstanding.

Regarding our cash flow projections that we have previously stated, given the strong cash flow potential of our businesses, we expect to generate between $155 million and $165 million of free cash flow for fiscal 2011 and more than $200 million for fiscal 2012 and beyond. We still expect capital expenditures to approximate $40 million in 2011, of which more than 2/3 represents investments in product development and cost-reduction projects.

As disclosed previously, we have made voluntary prepayment totaling $70 million in the first half of fiscal 2011 to reduce our original $750 million senior secured term loan to $680 million. Let me note here that term loan is technically now at $678 million as a result of scheduled amortization.

With our target of at least $200 million of debt reduction this year, this obviously means we'll be making larger and more frequent prepayments of the term loan balance in the second half of this year starting later this month. We remain committed to implementing our primary corporate financial objectives, using our strong free cash flow to aggressively pay down debt, thereby reaching a leverage of 3.5x or less by the end of fiscal 2011 and our target leverage of 3x or less by the end of fiscal 2012. Let me remind you that the difference between our $200 million cumulative debt reduction target in fiscal 2011 and our estimated free cash flow of $155 million to $165 million is due to a reduction on our cash balance for the end of fiscal 2010.

Lastly, as many of you are aware, on April 21, 2011, we completed the amendment of our existing $300 million ABL Revolver. This amendment provides a reduced pricing through lower interest rates, the extension of the maturity date of the ABL by 22 months to April 2016 and the favorable realignment of certain structural attributes consistent with current market conditions while providing us with additional overall operating flexibility.

Assuming average utilization of cash draws and outstanding letters of credit totaling approximately $80 million, the new pricing would reduce our annual cash interest and related administrative expenses associated with the ABL by approximately $2 million a year.

In summary, with our second quarter results now under our belt, we remain on track to achieve all of our announced targets for fiscal 2011. To reiterate, we expect to see top line growth of 3% to 4% in fiscal 2011, driven by stronger second half performance most notably from new distribution gains and product placements in our Pet and Home and Garden segments and continued strength in our Remington Personal Care category.

We also expect to increase adjusted EBITDA this year of $455 million to $465 million versus $432 million last year and we continue to project that free cash flow will reach $155 million to $165 million in fiscal 2011 and at least $200 million in fiscal 2012 and beyond. This will allow us to set the stage for additional voluntary debt repayments, even as we continue to expand our businesses with new product development, line extension and increased in-store placements while we continue to create a low-cost and efficient operating structure.

Finally, as a reminder, we have targeted in creating an additional $1 billion of shareholder value over the next several years through a combination of EBITDA growth and debt reduction. Our management team remains focused on delivering greater shareholder value and growth in the quarters and years ahead.

Let me now turn it back to Dave for a few closing remarks before our question-and-answer period.

David Lumley

Thanks, Tony. We're excited about Spectrum Brands prospects of value creation, both in the short-term and the long-term. As a global value proposition leader in our space, we think our company is well positioned for solid, ongoing and consistent financial results. As we have explained, we expect a stronger second half of fiscal 2011 and another year of increased net sales and strong increases and adjusted EBITDA and free cash flow. And more than a $200 million of term debt reduction Tony talked about.

This will give our company an even stronger balance sheet and significantly reduce leverage over the next several years. More so than ever, today's consumer environment of rising prices, we will continue to pursue what we believe is the right strategy for our businesses, delivering superior margins and lower acquisition costs through our retail customers. And offering consumers worldwide the same product performance at a better price or better product performance at the same price.

What can you look for from Spectrum Brands going forward? Five points: one, continued investment in our business; two, reducing our cost structure on an ongoing basis; three, launching new products and product extensions every year; four, expanding geographically, growing our market shares with trusted brands in new retail channels and expanding the placement at existing retails; and five, increasing our EBITDA by delivering strong free cash flow and reduced leverage for our shareholders.

I want to thank you for joining us today. I'm going to turn it back to Dave Prichard. Thank you.

David Prichard

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Bill Chappell of SunTrust.

William Chappell - SunTrust Robinson Humphrey, Inc.

Two questions. I guess, first on the top line outlook. Am I right in saying you need about 4%, 5% organic growth in the back half to hit the midpoint of your range? And then, maybe you could give some color on how we get there in terms of price for new products or shelf space gains because I'm just trying to look at this quarter and my guess is the only real divisions that mattered this quarter for seasonal purposes were Home and Garden and Remington. So I just want to make sure I'm looking at that right.

David Lumley

Your first question, the answer is yes. The second question is that were typically stronger on the second half and our ability to grow sales and that's because the full Home and Garden is in our fiscal third quarter with the line extensions and distribution we've grown. And the significant distribution we've grown and had in North American Russell Hobbs will all come in, in late third quarter and fourth quarter. So I mean, that's the simplest way I can put it, as well as that the battery retailers, especially in the United States, are more involved in battery business on the second half. So I think all those things combined to us, feeling good about that.

William Chappell - SunTrust Robinson Humphrey, Inc.

And, right in saying that battery would still be weak this coming June quarter, just as they slash off the leftover bonus packs and then really rebound in the September quarter? And I think you were saying that Pets really bounced back with Aquatics by the September quarter as well.

Anthony Genito

I think everything you said though, is accretive. I think batteries are getting stronger everyday as that excess inventory of the promo packs around the world, frankly, not just in the United States and in part of the world we'll soar to get to that inventory. But you're right, as it goes through between now and summer, things should just get better for the retailers after that.

William Chappell - SunTrust Robinson Humphrey, Inc.

Just switching to cost. I understand that you reiterated the EBITDA guidance. But I've got to think in the bad 3 months, some of your input costs have spiked pretty dramatically. I know you're hedged on zinc[ph] and some other things, but can you talk about the change of scene despite the willingness to reiterate the EBITDA guidance?

David Lumley

The cost that are coming, we've anticipated because it started in some of the raw materials and but mostly in what I would call the Asian businesses, where they're making finished goods. But it is coming in at a measured way. So it hasn't been like a dramatic spike like you would see in some of the commodities or the finished goods as we used to be in, like for a larger and growing media. I think that will just be a steady climb as we go through the year. And speaking with many of our top retailers and our suppliers that we moved[ph] just in China for 2 months with 11-man team, man-woman team, they're there, they're coming.

As normal, there's a lot of hope here that they're not coming, in a lot of denial, but they're here and they're coming. But I think they're coming in a measured way over the period, giving everyone a chance to deal with it. So I don't want anyone to think that this boom will all be right at one-time. I think, you need to separate food and clothing from finished goods a little bit. As long as its raw materials that tend to come in and a little bit more measured basis.

William Chappell - SunTrust Robinson Humphrey, Inc.

Last one, I might have missed it, but can you give what you're all outlet share was in the U.S. for Battery? Just trying to understand that versus the year-over-year drop in sales.

Anthony Genito

The year-to-year drop in sales is simply a timing issue. Couple of our key retailers as we are able to move in large shipments of promotions. So that's not indicative of our Battery business. If you look at our Battery business in the first 6 months. So I think sometimes -- which is your guys job, you kind of overreact to a month or a week. Excuse me, didn't you guys don't quite cooperate the way that you would like because their sales tend to flow in that Store Operations and the flow on that. So I think that's in pretty good shape. I'm not too worried about that.

Operator

Your next question comes from the line of Torin Eastburn of CJS Securities.

Torin Eastburn - CJS Securities, Inc.

My first question is about the distribution gains embedded in battery. Can you give a sense of what you think, an annualized revenue contribution might be?

David Lumley

Well, let's take this up while we are happy to have our President's honer, John Heil, President of Pet division. He can give you some range in color on that on the pet. We'd come back to the batteries. But I mean, we don't usually give exact numbers. I don't think you can because you don't really know the sell-through but I think you can talk in terms of distribution percentage gains and usually that corresponds to the sales. John, you want to tackle pet for a sec?

John Heil

Yes, we have, we've been fortunate to get a lot of new distribution gains on our Dingo business and our Nature's Miracle business, as well as Tetra in some major customers in North America. And expectations from my side would be that we would reverse the flat to negative volume trends that we had and turn it into positive growth in the 3% to 4% range going forward.

David Lumley

Speaking of batteries, the good news is this is an industry that had seen dollar decline in industry in the United States and most world markets above or minus 8, which now has kind of almost go back to almost flat. I'm going to answer your questions above in a minute. However, the actual cells sold were pretty flat year-on-year, and in fact over the last 52 weeks, our numbers tilted slightly. Just maybe it's gone a little positive. But it shows that the Battery business, it's life like a lot of consumption businesses, as long as there are toys and devices and more people it's going to go back to normality when the industry isn't giving away a whole bunch of extra batteries and which the [indiscernible] towards getting back to a more rational pack sizes.

Our gains are pretty well documented. We have talked publicly about how we've just about doubled our alkaline share in the United States over the last 4 years now. That still puts us in the mid-to-high teens that the other 2 are still much larger than us in the United States. Our worldwide, our share is in the low 20s and we've been growing a point or so a year in both of those categories, and I would think that we have the opportunity to continue to do that as we go forward. I think that the opportunity in batteries is that the consumer and the retailer started to realize that foreign source batteries, especially from Asia, have a very difficult time meeting the performance criteria of batteries made on certain equipment in the United States and Europe. And that's starting to provide more opportunities for what I would call locally sourced performance batteries. So I don't know if that answers your question, but I think it gives you a good sense of where this is going.

Torin Eastburn - CJS Securities, Inc.

And in Home and Garden, it was a very good quarter from a revenue standpoint. Do you think the level of gains you have this quarter is sustainable for the rest of the year?

David Lumley

Yes, Home and Garden sold principally through of what and where we compete through 3 big retailers and then the food and drug channel on household items. Again, it tends to be a consumption based business. There are x amount of people, x amount of homes. The bugs come every year. It doesn't matter if it rains or [indiscernible] and in fact, bugs are increasing as the lack of new chemicals to keep their croaks [ph] down has become harder and harder to getting through. So I think that you will see that. I think a lot of times, we overreact to -- it was a great March and huge shipment and sell-through and then it rained in April. It was a terrible month.

If you look at Home and Garden sales over the last 10 years, each quarter kind of comes out to what is going to come out. It may start fast and end slow, start slow end fast. Now there are certain items in there on the FGm side that has, [indiscernible] could be more affected by this. We sell chemical. and for the most part, I think it's going to be good. So I think it's sustainable and certainly historically it shown that. I don't think all you guys should overreact to last year's April and this year's April, frankly. I was just at a retailer yesterday, and we were commenting that last year's Home and Garden season is the greatest April in 10 years. Two years ago, was pretty good, and most people did that because this April, but compared to that is that -- This is really something you have to look at them quarterly based.

Torin Eastburn - CJS Securities, Inc.

And last question, I assume you've had pricing discussions with your retailers. What is their receptivity of this point to price increases?

David Lumley

Retailers are smart. They have a lot of room in private label. They have their own purchasing department they understand the same thing. Of course you know how pricing in works. No manufacturer thinks they should get any in and no recharging that should get in here [indiscernible]. Consumers are starting to think prices just go down every year. And I'm kind of joking with, that's kind of the environment we've lived in. That environment is changing, certainly with gasoline and food and a little change in a lot of the products that consumer package goods as well. I think the retailers are realistic. But again, prices in these categories come in kind of a phased basis. There's a lot of inventory out there so no one's really feeling into the level yet, but as that inventory sells through, a new one comes in.

And I think the retailers are realistic. No 1 say no we can have price but I think everyone should understand something. When you price in an intensely fierce consumer market worldwide, you're going to see volume declines in those categories. So the retailers know that too. So the challenge is how do you do that mix? How do you achieve that mix? And that's what we all working at. I think you got to keep both those into mind. Getting that next ride in gaining distribution in that environment is key. Now, if you have a same performance for less priced product, you should do better in that part. Than a premium price product, that performs the same. So what are you paying for, right? So I think that you'll see pricing in the marketplace. It always comes later than you think and then it comes higher than you think. And then there is volume adjustments. So I think everyone's got a rational view on it. There is no cookie-cutter approach. I guess that's a good way to say it.

Operator

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

Hamed Khorsand - Beating Wall Street, Inc.

Just a couple of questions here. On the distribution gains that you got on the Pet and Home and Garden. Where -- Displacement of competitors or was this just brand-new shelf space that opened up for you?

David Lumley

I'll let John talk about Pet, we'll talk about Home and Garden next.

John Heil

On the Pet side, on Aquatics, it was the displacement of some competitors on the Duck[ph]-- the Dingo. It was just some innovative new products that they added to the category.

David Lumley

In Home and Garden, it's a combination for us of new products like we entered the Cleaning business and that's all new to us. We have expanded Bed Bug which is new to everybody. So about half of our gains were new products, new entries, new segments, new applications, new sprays. And then of course, we have 2 very good competitors, or more than 2 but it depends which category. They've got good products, they've got good things. So there's always some trade in between the companies based on price and promotions. But I think our focus to be in the Chemical business, and not try to be so broad-based into several categories like the fertilizer and [indiscernible] has led us to be better in winning some things that before we had lost and/or that we didn't really want. So I would say it's about half and half.

Hamed Khorsand - Beating Wall Street, Inc.

My other question was that, your inventory was up sequentially this quarter. Was there a specific reason why? Usually I would thought that it would go down after the holiday period.

Anthony Genito

Let me take it up, Hamed. The rise in inventory is really a seasonal issue. You got the Home and Garden business, we did some strategic pre-buys of inventory in anticipation of the season which worked out well for us. In addition, we did some pre-buys in certain of the other businesses because of some concerns on rising prices. We had some inventory purchases in the Small Appliances business, as well as in some key raw materials within the battery, within the Battery sub-business.

In addition, keep in mind that we are going through a facility consolidation, primarily focused on our pet region. So what we've done is we've built some strategic inventories in that regard as well. But with all that being said, the inventories were slightly higher this quarter. However, our plans are again to reduce that back down to our planned levels by the end of our fiscal year. And we have a specific pathway to get there. And I'm happy to say that we're executing our plan and not only are we on that plan, we are actually ahead of that plan to get those inventories down through a combination of sales and as we utilize the inventory that was strategically built.

Hamed Khorsand - Beating Wall Street, Inc.

Was this increase in inventory the reasoning behind that figure increasing from last quarter?

Anthony Genito

That was a small piece of it. But the really lion's share of that is driven by the seasonal peak of the Home and Garden business.

Operator

Your next question comes from the line of Reza Vahabzadeh with Barclays Capital

Reza Vahabzadeh - Lehman Brothers

On your guidance for EBITDA, are you including the benefits of FX that you have realized so far and maybe realize the backup of the year as well?

Reza Vahabzadeh - Lehman Brothers

And how much of it is FX benefit then?

Anthony Genito

I think we've said that for the first half of the year, it was basically negligible, like $700,000 or $800,000 of impact which -- oddly enough, if you look at the -- we'll just use the Euro as a surrogate at this point, because obviously, we operate in over 120 countries, but a lot of different currencies. But the average euro in 2009 was 1.35 -- 1.35 euro, 1.36 euro, in that neighborhood. Believe it or not, the average euro in 2010 was 1.35 euro, 1.36 euro. And you want to get what the average euro was in the first half of 2011? You got it, 1.35 euro 1.36 euro. So, yes, it is included but obviously, we're U.S.-based comp framework, and I had to dollar base the companies though. We report dollars [indiscernible] at 4.55 to 4.65 guidance that you can get, and that was in dollars which is all in, whether it's positive or negative exchange.

Reza Vahabzadeh - Lehman Brothers

Can you talk about consumption trends, sell through trends in your various product categories to the extent that you can share that with us for this March quarter? And anything you're seeing so far in the June quarter?

David Lumley

This is Dave, I can -- and I'm from -- on a house Terry Polistina jumped in here on our finances because he's still on ignore over there. Let's take batteries. I think I trust that. This is an industry that the cell count is back, actually never went away, kind of flat. Actually may have gone a little positive as these bonus packs are going back to normal pack sizes. Batteries should follow the GDP, it's consumption-based on toys and devices. And I think you'll see a slow growth. But batteries is always going around zero to 3% and then you'll get back to that. I think were getting there. I didn't think I could go up a little bit at the back half and be a little better with a more rational approach by retailers and manufacturers there. In the Home and Garden business, that's a business that's been trending up for everybody. I know timing something. That's in mid-single-digit that industry does pretty well. I'll let Terry here talk about appliances, and you know Remington's been a superstar for us but, Personal Care business isn't going very well or I bet that Terry talk about those 2.

Terry Polistina

I think in general, Home and Personal Care business is around the globe followed GDP, and they have historically. I think the 1 exception, and you heard us talk about it in the quarter and year-to-date is our Personal Care business is really bucking that trend around the globe and it's a direct result of the Hero products that we've come out with in each of the categories because of the Spectrum Value Model and the global NPD process. So I think in general, we're seeing consumption, kind of follow the GDP with the exception being that Personal Care business is bucking that trend, really, all around the globe.

John Heil

This is John Heil. You we may want to talk about the Pet business.

Terry Polistina

I would say in general the aquatics business has been soft, flat to slight declines across the globe. We have been gaining or holding or gaining share in most markets across the globe in the Aquatics side. On the companion pets side, on dog and cat, volumes are a little better, up 1% or 2% consumption wise and the Birds, Small Animal business -- Birds, Small and Reptile being up 1% or 2% as well so. Aquatics slightly down, companion pets slightly up.

Reza Vahabzadeh - Lehman Brothers

You talked in your press release about rising commodity cost and inflationary pressures which, some other folks already asked you about. But as far as COGS[ph] inflation for the second half, excluding your cost savings, what kind of inflation should we be expecting. Are we talking about mid-single digits or higher?

David Lumley

This is Dave Lumley I think for this year, you're talking single digits and I think it depends on the business. It could be low, it could be mid. I think in 2012, a lot will have to do with not only commodities in China but their ability to get the right labor, the ability to consolidate and get their own cost savings. But also the U.S. dollar versus the Chinese currency, which I think everyone's forgetting that's already 4%, 5% hit to tap and to ready. And I think those are the things you should watch and we'll see.

Anthony Genito

This is Tony. Keep in mind that for the remainder of 2011, as everyone's aware of phone pack that was mentioned, that we do hedge zinc while we don't hedge because of the lack in the market world. [indiscernible] who are for instance for batteries or nickel or but we do, do some prebuying with that, I'll say long-term contracts, long-term defined as for the year. We're protected in that regard.

And also with respect to our businesses, we do enter into contracts even on the appliance side, with manufacturers over in Asia early on in the season. And again, they extend out for -- to cover pretty much the fiscal year. So for the remainder of 2011, we feel pretty good because of protection that we've developed ourselves and the way we are protected in general. 2012 again, headwinds on the horizon that we see coming and I think anybody who watches the news or picks up a newspaper, looks on the Internet, is aware of it. But they said we'll have to play it out and see how it goes.

But from a standpoint, from a company perspective, we are in pretty good shape with the fact that we do have the Russell Hobbs business and the synergy opportunities associated with that. And some of the restructuring that we're doing with the rationalization within Pet, that is a further way for us to protect ourselves.

Operator

For your final question comes from the line of Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank

Just want to follow-up on the cost side here. What are we looking at for shipping as we head in the second half of the year and into the holiday season for early 2012?

David Lumley

Could you clarify what you mean by shipping?

Karru Martinson - Deutsche Bank

Well, in terms of coming out of Asia, freight costs spikes last year, kind of around the labor day time period, as people rushed to get orders in. Should we expect that type of costs flow through your P&L this year?

David Lumley

Like I said, I think this is slow gradual build. You'll hear things that prices in China for goods are going up 5% to 15%. That's their cost, which typically they didn't have cost reductions. We have cost reductions, but that again, phases in. I know all you guys want one number and apply it, that won't work that way, okay? And we have 5 different businesses, and they are all different and I know it's hard to follow. But it just tends to be somewhere between 0% to 3%. Should they have word[ph]it, and many time it is. And then it depends on [indiscernible] volume ships to certain supplier over there, just less and tired expense with the retail, I want to, they want stand in the category or the price category.

I think the general message is, will goods cost more in '12? Yes. And it will come down to how well the supply chain of companies and how well they work with retailers will determine how much of that is mitigated. The rest will translate into price. And price will translate into some artificial top lines for a while and a reduction in unit volume. And then those who do that best will win and those that don't are going to get hurt.

Karru Martinson - Deutsche Bank

On Home and Garden, as you guys exhibit the growing media, do you feel that business is less weather-sensitive now or how should we think of that, given the historical track record for that category?

David Lumley

When we were in the fertilizer growing media, soil, feed, all those things, it's more susceptible to weather, by the very nature of it is planting things, you're protecting things, you're fertilizing things, it's kind of a 4 step process. One of our key competitors has very good explanation of that 4 step process out there on their web site which pretty explained it.

So one of those steps are washed out or droughted[ph] out or whatever and I don't droughted[ph] out is a word. Than they would be affected, right? I think when you're in the case good business, which deals a lot more with herbicides and pesticides, a lot of them inside the house or in your backyard, you're much less susceptible to wild weather swings. And to answer your question were less than susceptible. But again, weather has been pretty consistent in the beginning of time it's just a matter of which we can happens.

Karru Martinson - Deutsche Bank

And then switching gears to Battery. Latin America, we had lower pricing and lower volumes in Brazil. Is there anything specific that was flowing through this quarter in that market?

David Lumley

Yes, there is a very, very unusual price war there, in the last 6 months. And there are different competitors there than you're used to in the United States. There's actually a fourth Battery company that's there. But all the Battery companies got involved in an extreme case of what we call jokily called the battery wars. And it was quite a toll and we end up growing our share, that was the good news but the consumers benefited dramatically in the last 6 months there and I think you'll see rationality returning to that market as well.

There's a lot of unusual thanks happening in claims, sponsorships to the World Cup, wholesalers and distributors and national retailers and that happens. You know much about the Latin market, it's the one that has a lot of emotion and a lot of different challenges and taxes and prices and all that. So it was one of the most unusual [indiscernible] of the rational behavior a at all levels. But I do believe that, that is society, and again, rational return.

Karru Martinson - Deutsche Bank

Just lastly, while we're definitely encouraged by the $200 million paydown of the term loan target for the year, I can't help but wonder why you're not targeting some of your more expensive debt, also wondering what your capacity under European baskets are due to tackle and buying the 12 so all the thing is secured in the open market?

Anthony Genito

As you're well aware, we do have that, that proceeds these subordinated notes. And subordinate notes are at 12%. Yes, they are on our radar screen, it's something that we look at continuously from a standpoint of - as an opportunity possibly of trying trekking [ph], we are trying include our pick to capital structure.

I think overall, we're in very good shape in the capital structure's standpoint, but those focus that notes, obviously do stand out. They do have a note for provision that really doesn't expire until August of 2012. And then they're global at a 6% premium. The RP baskets that we have, we've been working on that as we've been working on our debt. The term debt repricing or refinancing that we did and then the amendment to the ABL, we've gotten some language in there that get to increase the size. It's not nirvana, but it's something more than what we had before, which is as the $40 million RP basket Subordinated Notes.

Obviously, we haven't addressed the 9.5 notes because we haven't done anything with those but again, the point is something that we're looking at and again, the term debt is our first and foremost, focus right now because we can pay that down. And that's what we're doing. But as time goes on, we'll continue to assess what we can do and then we'll just assure you that the 12% notes are on our radar screen to our grid.

David Prichard

Thanks to everybody. And on behalf of Dave Lumley, Tony Genito, Terry Polistina and John Heil, we do want to thank you for joining us on today's Spectrum Brands Fiscal 2011 Second Quarter Earnings Conference Call. And we will talk to you next quarter. Have a good day.

Operator

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

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