Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Spectrum Brands Holdings (NYSE:SPB)

Q3 2011 Earnings Call

August 11, 2011 9:00 am ET

Executives

David Prichard - Vice President of Investor Relations and Corporate Communications

John Heil - President of United Pet Group

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

David Lumley - Chief Executive Officer and Director

Terry Polistina - President Small Appliances Division and Director

Analysts

Karru Martinson - Deutsche Bank AG

Arthur Roulac - Nomura Securities Co. Ltd.

Hamed Khorsand - BWS Financial Inc.

Torin Eastburn - CJS Securities, Inc.

William Chappell - SunTrust Robinson Humphrey, Inc.

William Schmitz - Deutsche Bank AG

Reza Vahabzadeh - Barclays Capital Inc.

Unknown Analyst -

Operator

Good morning. My name is Tiffany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Third Quarter Fiscal 2011 Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, August 11, 2011. Thank you. I would now like to introduce Mr. David Prichard, Vice President, Investor Relations. Mr. Prichard, you begin your conference.

David Prichard

Good morning and welcome to the Spectrum Brands Holdings Fiscal 2011 Third Quarter and 9-month earnings conference call and audio webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands Holdings 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 of our Global Appliances business; and John Heil, President of Global Pet Supplies.

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 risk, Spectrum Brands Holdings encourages you to review the risk factors and cautionary statement outlined in our press release dated August 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 will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in this morning's press release and 8-K filing, which are both available on our website in the Investor Relations section at www.spectrumbrands.com.

The information is being presented on the basis of our current segment reporting structure of 3 business segments: Global Batteries and Appliances, Global Pet Supplies and Home and Garden. This change from the 4 segments we used previously became effective as of October 1, 2010, and is reflected in our SEC filings.

Now let me take a brief moment to review our GAAP results. For the third quarter of fiscal 2011, the company reported GAAP net income of $28.6 million or $0.56 per diluted income per share on average shares and common stock equivalents of $51 million. This compared with a net loss of $86.5 million or $2.53 per diluted loss per share in the year-ago quarter based upon average shares and common stock equivalents of $34.1 million.

By segment for the third quarter of fiscal 2011, the Global Batteries and Appliances segment reported net income of $39.9 million versus $32.4 million a year earlier. The Global Pet Supplies business segment reported net income of $15.1 million in fiscal 2011 third quarter versus net income of $17.2 million in fiscal 2010. And finally, the Home and Garden business segment reported net income of $42.2 million in the third quarter of fiscal 2011 versus net income of $40.3 million in 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 had been included in Spectrum Brands' portfolio since the beginning of the respective period discussed.

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

David Lumley

Thanks, Dave, and thanks for joining us today. We delivered our third quarter, higher net sales and adjusted EBITDA and increased class cash flow. We reconfirmed fiscal 2011 target to grow adjusted EBITDA to $455 million to $465 million and increased free cash flow to $155 million to $165 million. Our priority is rapid balance sheet de-leveraging. A little more than 2 years ago, our leverage ratio was about 5x. We expect to be at or below 3.5x by the end of fiscal 2011, and as low as 3x by the end of fiscal 2012. We are a strong free cash flow generator. This free cash flow is built on a diversified revenue stream and topped 1, 2, or 3 global market positions.

Our message today is we believe our time has come. Spectrum Brands has many opportunities worldwide for continued market share growth and distribution gains. We are seeing real success based on our Spectrum Value Model. We believe we are outperforming category and competitor results in key markets because of our same performance, less price approach. We are seeing positive point of sales at most of our key accounts, even in categories that are otherwise down or flat. Why? Because our Spectrum Value Model focuses on enhancing retailer margins and lowering their inventory carrying costs, while introducing new products and product line extensions that perform as well or better than premium priced products.

For example, our battery business is growing primarily based on our product performance strategy of last as long for less. Rayovac today is at its highest market share in this century. Our Varta brand is growing in Europe, with more to come with our new 2-year contract with Carrefour the world's second-largest retailer. Following a listing competition with other major global battery users, Spectrum has been chosen as one of the 2 branded battery suppliers for Carrefour. Including our branded alkaline and zinc batteries under the Varta brands in Europe, and the Rayovac brand in Latin America. And next month in Europe, we are proud that we are relaunching an improved Varta alkaline battery that offers best in class performance for the most important battery size, AA.

In North America, we have reached a record level of outlined market share with our compelling value position and with more room to grow. In the last 13 weeks, the Alkaline category has trended up 1.4%, fueled by increases in average price per cell and average pack price. In Latin America, despite unusual competitive pressures, we remain the #1 battery player with the best overall alkaline and zinc carbon performance and share. Plans are in place to improve our performance in fiscal 2012 as the market stabilizes. Finally, we maintain our solid #1 worldwide market share in hearing aid batteries, with very strong growth in Europe and increasing share of U.S. retail.

Our Remington Personal Care business is our fastest growing segment. It continues to outperform or trend higher in key U.S. and European categories. More recently, it is the #1 major hair care brand in both units and dollars in North America. We continue to launch new products and line extensions at a rapid rate. In the fall, using our Spectrum Value Model, we will enter the $2 billion U.S. men's wet shave market with the Remington King of Shaves Azor product line, both handles and systems at major food and drug accounts. We've also achieved a successful extension of our Remington brand name in hair care accessories and brushes at major retailers. And on the heels of a very successful 18-month launch of the products in Europe, we recently received FDA clearance for our unique i-LIGHT Intimate Hair Removal System. We have already secured several key retail distribution outlets for i-LIGHT this holiday season, with more retail plays expected in 2012.

In North American Home, we have seen positive POS at all of our major accounts recently. We expect similar trends to continue as we've secured an increased share of holiday promotions. And we recently announced an extension of our trademark license agreement for the Black & Decker brand through December 31, 2015 in North America, Latin America, excluding Brazil and the Caribbean.

In Global Pet Supplies, we're encouraged by improving volume trends, driven by key distribution gains at several major retailers, including new product launches in our Dingo and Nature Miracles (sic) [Nature's Miracle] lines, as well as in our Tetra aquatics category. On the acquisition front, our Pet business is actively considering a handful of small, bolt-on acquisitions in the companion animal category.

Finally in Home and Garden, recent data shows consumers embracing our value brands, and we are taking market share. Our Later Season Indoor and Repellent products have not been impacted by the extreme weather this spring like most outdoor products. Remember too, our exit from the Retail Fertilizer Seed business 2 years ago has greatly reduced our exposure to weather variability. Home and Garden should still deliver a stronger fiscal 2011 from impressive share gains aggressive expense management and over-delivery of continuous improvement programs. Already through the 9 months of this year, Home and Garden net sales are up 3% and adjusted EBITDA has increased a solid 10%. And like our Pet business, Home and Garden is evaluating several small tuck-in acquisitions.

On the cost side, we've been out front of a significant commodity in Asian supplier cost increases affecting so many companies today. We are aggressively tackling and head on the combination of continuous improvement programs, continued retail wins and distribution expansions and going forward with select price increases. We also believe we are well-protected into fiscal 2012 through our commodity and currency hedging programs such as for zinc and others.

We are ahead of schedule with our Russell Hobbs integration program, an increased cost synergy projection of $30 million to $35 million by the end of fiscal 2012. Other Russell Hobbs opportunities lie ahead. They include capturing new product development strategies as we leverage each company's regional strength in complementary categories, and improve upon Russell Hobbs supply-chain cost structure with continuous improvement and new product development. Our goal with Russell Hobbs, like our other businesses, is to reduce costs of goods sold annually by up to 5%. We are seeing early progress in moving select Russell Hobbs products into Western Europe, and for the first time, into Eastern Europe and China using our established Battery and Personal Care categories. These revenue and supply-chain opportunities are not included in the $30 million to $35 million of forecasted synergies.

Major integration activities continue as well in our Pet business. We continue to forecast annualized cost savings of $7 million to $11 million, and likely, on the higher end of this range by the end of fiscal 2012. When you combine the Russell Hobbs and Pet cost savings, we are forecasting annualized synergies of $37 million to $46 million by the end of fiscal 2012.

As a reminder, our fiscal 2011 guidance was not built upon a consumer spending rebound on economic recovery. Like so many other companies are reporting, we are experiencing rising costs, especially from Asian suppliers. However, we feel we are well positioned for the rest of fiscal 2011 and 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.

Let me emphasize again that most of our products are nondiscretionary, non-premium priced replacement products that provide value, quality and performance to consumers in everyday living. We continue to believe our Spectrum Value Model is the right retail strategy, especially in this period of rising commodity costs and inflationary pressures at the manufacturing retail consumer levels.

Now, I'm going to ask Tony to give you a brief financial review.

Anthony Genito

Thanks, Dave, and good morning, everyone. For our third quarter 2011, consolidated GAAP net sales increased 23% to $805 million. The addition of Russell Hobbs' business as of June 16, 2010 drove the increase. Results were positively impacted by $31 million of foreign exchange. Including last year's third quarter results for Russell Hobbs, this year's third quarter net sales of $805 million increased 2% versus $791 million in 2010.

Third quarter total operating expenses of $215 million increased $22 million from last year, primarily due to the addition of the Russell Hobbs business, which accounted for $19 million of the increase. Corporate expenses for the quarter were $14 million, up from $12 million last year due to a $2 million increase in stock-based compensation expense, a non-cash expense.

For the quarter, the company reported GAAP net income of $29 million or $0.56 diluted income per share versus a net loss of $87 million or $2.53 diluted loss per share in 2010. After adjusting both years for certain items management believes are not indicative of the company's ongoing normalized operations, 2011 third quarter adjusted diluted earnings per share, a non-GAAP measure, was $0.66, representing an increase of 35% compared with adjusted diluted earnings per share of $0.49 last year.

Including the results of Russell Hobbs as it's combined at the beginning of last year's third quarter, 2011 third quarter adjusted EBITDA increased 2% to $127 million from last year's $124 million. Foreign exchange had a $5 million positive impact on adjusted EBITDA in the quarter. We remain on target to achieve our projection of adjusted EBITDA of $455 million to $465 million in fiscal 2011.

In the interest of allowing more time for questions and answers, I will refer you to our earnings press release for details on our third quarter segment results and our consolidated results for the 9 months of fiscal 2011.

Let me review a few more items in our third quarter financial statements. Third quarter interest expense was $40 million compared with $132 million last year. This was primarily due to unusual items totaling approximately $78 million in the same period of fiscal 2010 related to the Russell Hobbs acquisitions, coupled with lower effective interest rates in fiscal 2011. Cash interest payments for the third quarter were $49 million compared to $56 million last year. The payments for 2010 included $16 million of cash items included in the $78 million of unusual expense items related to the Russell Hobbs transaction. Excluding the $50 million of unusual items for 2010, payments for 2011 were higher by $10 million, primarily due to timing and changes in our capital structure. Cash interest payments are expected to approximate $160 million to $165 million in fiscal 2011.

Tax expense for the third quarter was $9 million compared with $12 million last year. Cash tax payments for the quarter were $10 million compared to $8 million last year, primarily due to the Russell Hobbs acquisition and timing. As noted before, based upon the level of NOLs we expect to utilize, we do not anticipate being a U.S. federal taxpayer for at least the next 5 years. However, we will continue to incur a very small amount of state cash taxes and primarily foreign taxes when it comes to cash taxes. And cash taxes are still expected to approximate $45 million to $50 million in fiscal 2011.

Our liquidity position remains solid. We finished the third quarter with a cash balance of $88 million and $55 million drawn on our $300 million ABL working capital facility. The $63 million reduction in borrowings on our ABL from the end of our second fiscal quarter to the end of our third fiscal quarter reflects the normal seasonal timing of our business.

As of the end of the third quarter, total gross debt was $1,763,000,000 which consisted of our term loan of $657 million, senior secured notes of $750 million, subordinated notes of $245 million and a working capital facility draw of $55 million and capital leases and foreign debt of approximately $56 million. In addition, we had approximately $24 million of letters of credit outstanding.

Dave has reaffirmed our fiscal 2011 free cash flow projection of $155 million to $165 million. Capital expenditures should approximate $40 million this year.

We are committed to our primary financial objective using our strong free cash flow to aggressively pay down debt, thereby reaching a leverage ratio of 3.5x or less by the end of fiscal 2011.

Finally, please refer to our earnings press release for details on the recent public offering of our common stock by the company and by Harbinger Capital Partners master fund. The net proceeds to our company from the sale of its 1,150,000 shares, which includes the over-allotment, and after underwriting discounts and estimated expenses, was approximately $30.6 million. We will not receive any proceeds from the sales of the common stock by Harbinger Capital Partners.

And as we've previously stated, we expect to use the net proceeds for general corporate purposes including, among other things, the expansion of our business, acquisitions, working capital needs, the refinancing of existing indebtedness and debt reduction.

Now back to Dave for a few closing remarks.

David Lumley

Thanks, Tony. In summary, we expect to deliver top line growth of 1.5% to 2.5% this year. We project increased adjusted EBITDA of $455 million to $465 million versus $432 million last year, and we continue to forecast free cash flow this year of $155 million to $165 million. Aggressive debt pay down and de-leveraging remains our overriding focus.

We are also offsetting rising commodity and Asian supplier costs with continuous improvement programs, reducing our cost structure and lowering our expenses, continuing distribution of market share gains and pricing actions when and where appropriate.

In today's world of sluggish consumer demand, tighter retailer inventories and rising costs, we believe we have the correct strategy for our portfolio branded and trusted products, delivering superior margin and lower it acquisition costs to our retail customers and offering consumers worldwide the same product performance at a better price or better performance at the same price.

Thank you.

David Prichard

Okay. Thanks to Dave and Tony. Operator, you may now begin that Q&A session, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Bill Schmitz with Deutsche Bank.

William Schmitz - Deutsche Bank AG

Have you taken a stab on what the organic growth was in the quarter x currency and x Russell Hobbs? I was trying to back into it and I was having a pretty tough time.

David Lumley

Bill, it's basically flat, which would mean that it's up in all our categories, because almost all of our categories were flat to down.

William Schmitz - Deutsche Bank AG

Okay. And is that the same thing for the guidance? Like, so you think it'll roughly be flat x currency for the full year also?

David Lumley

Yes maybe a little bit up because we do a lot stronger -- we're a lot stronger in the fourth quarter than the third quarter, because we prepare for holiday. And we've got some -- we're [indiscernible] pretty good right now.

William Schmitz - Deutsche Bank AG

Okay, that's great. And then how about the timing of the Carrefour shipments? So was there a benefit this quarter and is there more going forward?

David Lumley

They've just started, and so we should see it in the fourth quarter and really next year.

William Schmitz - Deutsche Bank AG

Okay. Will there be a big pipeline still, or will it really just be kind of consumption driven?

David Lumley

Their system is a little different than others. It kind of goes country by country, so it will take a while before it's fully engaged. But really, by our new fiscal year, it should be fully in place.

William Schmitz - Deutsche Bank AG

Okay, great. And then just one last one. Is there any specific thing you can give us on pricing, like where you took it? Obviously, we know that the battery pricing is out there and it looks like it's sticking pretty well. But is there any other big notable pricing increases that we should be aware of?

David Lumley

Well, how we do pricing because of our model is -- what we try to do is we do targeted pricing. So that could be low single-digit, and then we also offer a mix of cost improvement and cost reduction, distribution gains and synergies. We kind of put it all together and we really try to work with our suppliers and customers to achieve the right. But we price kind of what the market tries to price with competitively. We try to do more things than just price, because I don't believe just pricing is going to solve all these retail and consumer issues.

William Schmitz - Deutsche Bank AG

Okay, great. And then I'm going to put you on the spot a little bit. So, like given what you know now, how good do you feel about Spectrum 500? It is always a stretch, though, I understand that.

David Lumley

I don't know how I feel about anything over the last 4 days, how about that?

William Schmitz - Deutsche Bank AG

You and me both.

Operator

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

William Chappell - SunTrust Robinson Humphrey, Inc.

Just kind of go back on one of Bill's questions. The way I was looking at some of the numbers, it looks like every division had sales declines, if you take out FX, except for Personal Care. Is that not organic or are you including FX benefits when you're talking about organic growth?

David Lumley

Well, Bill. No, you're wrong. We have some really good gains in certain geographies, and we have some declines in others. It's nice to exclude FX, but then I would like to have credit for all the cost increases in commodities, okay? They tend to offset each other. So it's kind of dangerous for people to start getting caught up in this FX and not understanding how much commodity increases there are. And they tend to -- right now, I'd gladly trade all the FX gains to get rid of all the commodity increases. How about that? So I would say that the reason that our sales looked that way is that 3 quarters of our businesses, and especially geographically, are up pretty nicely. We just have one or 2 that just aren't.

Anthony Genito

Yes. And Tony here, Bill. Just to expand on that a tad, you're absolutely right. What stands out is the Remington Personal Care business that we have that we call Personal Care, Shaving and Grooming and the Hair Care piece and that's worldwide. If you dissect into the batteries, you can see that we had the gains in North America and in Europe. It was Latin America where we got the competitive pressures that updated now. And we're still the #1 battery player and we won the competitive pressures or fight, but there was a high cost to that. And then when you look at the other pieces of the business, Home and Garden, clearly impacted by the weather. But when you look at it on a 9-month basis, that business is up in sales and as Dave said, 10% growth in EBITDA which we think is a very, very strong performance, outstanding performance considering where the competitors were in that category in total. So I think Dave's point is right that on the surface, you can paint it with a white brush and say, "Yes, the exchange, pretty much the category, the business was down. We exclude change on the Personal Care." But when you start to dissect into the details, I think it tells quite a different story. And clearly, as Dave said, categories that are flat to down and we're beating those categories. That's really what I think is the most important takeaway.

William Chappell - SunTrust Robinson Humphrey, Inc.

Okay. Well then let me just dig into it a little more because the 2 areas that I guess I don't understand are European Battery and Pet. On European Battery, if you take out FX, it looks like maybe you gained $1 million in business, which is like a percentage point. So am I missing something there? And then on Pet, taking out FX, Pet was actually down. I thought originally you thought kind of in third and fourth quarter Pet would rebound, we'd see growth in that category. So can you maybe give us some more color on those?

John Heil

Let me answer the Pet question, Bill. In Pet, when you look at it globally, Companion Pet and Aquatics together, you take FX out essentially flat versus a year ago. But when you dissect it further, the Companion Pet business inside of that was actually up almost 7%, Aquatics was down 3% or 4%. So kind of depending on how you look at it, we are very pleased with our growth in Companion Pet, which is what we're hoping to have occur. And we're fighting a battle on Aquatics, which is a very tough category.

William Chappell - SunTrust Robinson Humphrey, Inc.

So you do think we'll see a rebound in Pet as we move to the next couple of quarters?

John Heil

We are seeing growth versus year ago at all of our key customers as Dave explained on a currency basis. We have a lot of aquatics outside of the U.S., which hurts us, obviously. But we are seeing growth in our major accounts in North America on Pet right now.

William Chappell - SunTrust Robinson Humphrey, Inc.

Okay. Then, I'm sorry, on European battery?

David Lumley

European Battery hasn't grown in 4 years, okay? And the fact that we're up a little bit is really good news, and we haven't really shipped Carrefour, we haven't shipped our lithium batteries, we haven't shipped the new batteries we've got places for, so that trends very positive and we've -- actually most of the impossible...

Anthony Genito

It's behind us. It's a little bit...

David Lumley

Yes. I'm very encouraged about where that one is going.

William Chappell - SunTrust Robinson Humphrey, Inc.

Okay. And then just last question, I mean, in light of what's going on over the past 5, 6 days, I mean, have you changed or have you gotten maybe more opportunistic in terms of some of the commodity hedges and kind of how you're looking at some of the headwinds, maybe tailwinds going into next year?

David Lumley

Yes, of course we have.

William Chappell - SunTrust Robinson Humphrey, Inc.

I mean, I didn't know if there's much you can do on zinc since you're already hedged a fair amount out, but is it diesel? Is it oil? Are there areas which you're seeing?

Anthony Genito

Zinc was down, I believe was 60% from Friday into Monday. And as we've said before, we have a very disciplined hedging program. And we do allow ourselves -- what we do is we hedge 6 quarters out and we'll layer in 12% hedges this quarter, and as I said, going 6 quarters out. And then we'll look for opportunities that we think a discretionary hedge is appropriate based upon where the market is. And it just so happens that we're on our next quarter and every quarter we layer in this disciplined edge, and when we saw the zinc prices drop on Monday, we struck while the iron was hot. So we're now in a position where we continue our policy of hedging zinc. And I'll just tell you that for next year, we're about 65% hedged for next year. And of course, this year we're pretty much at our capacity of 75% hedged, which is typically where we'd like to be.

William Chappell - SunTrust Robinson Humphrey, Inc.

So you can actually see some benefit from the drop into fiscal 2012 .

Anthony Genito

Yes. We're hoping. Yes.

Operator

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

Torin Eastburn - CJS Securities, Inc.

In the Home and Garden business, is there any way to try to estimate how much you think weather impacted the results or conversely how much you think you can make up in your fourth quarter?

David Lumley

This is Dave Lumley. The fourth quarter is not a big quarter for Home and Garden, it's repellants and some of the households. So there's some opportunity for the industry to make up some, but it's also a time of the year retailers tend to start shifting their space as they prepare for other things. So it's kind of is where it is. Now the good news for us is that we're pretty heavy in household and repellent, so we're optimistic about where the market is, but we only have 6, 7 weeks left in our fiscal year. I do think that you should feel good about next year, that most likely this amount of unusual weather that hit in the spring, and then one of the all-time droughts in the Southwest should not reoccur. So I would think that everyone should feel better about the next year than this year. If you study Home and Garden 5, 10-year trends, you'll see it kind of levels out. There's x amount of homes, there's x amount of lawns and there certainly is x amount of bugs. So it kind of levels out. If you may remember too, last year was an unusually good year, and everybody was running around and building models to that. You really have to look at the Home and Garden business in 3, and 5, 10-year ranges and not get too excited about in a big year and get too depressed in a down year.

Torin Eastburn - CJS Securities, Inc.

How much do you think the business is impacted by strength and weakness in the housing market?

David Lumley

It is impacted. It's definitely impacted. But that's been going on for more than 2 or 3 years, so I think that's built-in right now. Yes, big things that impact, that helps that it was kind of like when I was in the storage business is, people moving and then a lot less people moving.

Anthony Genito

I think it's fair to say, too, while it does impact our business, there's no doubt about it, it probably impacts us less than when we're in the fertilizer growing immediate business. Because typically there, when you have the housing market, people are doing re-landscaping or new landscaping, I should say. When you look at our products, we sell the herbicides, we're talking Spectracide when it comes to killing weeds. We're talking about insecticide indoor and repellents, obviously, and then outdoor insecticides. So there's an impact, but it's not as egregious of an impact as if when we're in the fertilizer group.

David Lumley

I think it's an important thing to realize is that you can drive top line in the Home and Garden business pretty easily if you want to lose a lot of money, especially in fertilizer seed, mulch, growing media, and especially if you're in the private label business. And to be up 10% in that this year would mean you're losing a lot of money, okay? And we're not in that business anymore, which is why we focus on the case good chemical business, it's much more steady. Yes, we have a controls business that was affected in March, but we have not dominated share there, we're gaining share there. So I think that our model, our stability of our model is very attractive.

Torin Eastburn - CJS Securities, Inc.

All right. And one other question, a follow-up on Bill's question about zinc, you don't give profitability for batteries specifically, but broadly, how do you feel about the margins there now and over the next let's say 12 months or however far you feel comfortable talking about.

David Lumley

I'd tell you I feel, Dave Lumley here, a lot better than I have the last 2 years. I mean, imagine in the last 2 years you've now had rising commodities but an unusual pricing war for distribution among the top 3 battery companies, with bonus packs and all kinds of wild discounting around the world, not just in the United States, especially down in Latin America throughout Europe. All kinds of different things. So you're not only have increasing input costs but you have increasing promotional costs. This is stabilized. Everyone figured that it didn't work, especially for the retailer. And now, they can stabilize it down a little bit and rationale has come back to the market. So I'm cautiously optimistic that margins should improve, especially for retailers because they took a lot of the hit in this war as well.

Operator

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

Hamed Khorsand - BWS Financial Inc.

I'm trying to figure out where were you expecting softness that you were forced to reduce your revenue forecast?

David Lumley

This is Dave Lumley. I forget that we were in Boston and New York, and we explained that. The revenue forecast is down like 1% on average. And that's about -- we have $3 billion of sales, 1% is about $30 million and we said that we missed about $15 million of expected sales in Home and Garden last spring that we know we couldn't make up for in the control segment, which we just talked about. And then we made a strategic decision in our Appliance business, which Terry Polistina runs, not being as aggressive as some of the promotions that were money losers with the current price increases from China. And our retailers, we worked with our retailers and they agreed as well, there's no sense to put out product that we all lost money on. So we took a step back. We're very aggressive in promotions in our clients business and our Personal Care. And that was about $15 million. So you take $30 million out, we only have 6, 7 weeks to go in our fiscal year. Remember, our fiscal year is not the calendar year. Now we fully expect to pick that up in next year as we do things to get stable. It's was that simple. We've had other views saying, "Oh, we have a lot of moving pieces." That's right, we do. But those are very easy to identify things. And frankly, we made those type of decisions across the board right now, because our number one goal is to pay down debt and increase our cash flow. So you don't want to go spend $30 million, $50 million to lose money. So that's kind of what we did.

Hamed Khorsand - BWS Financial Inc.

Okay. My other question is when will we see results from your recent increase in R&D spending?

David Lumley

Oh, I think you're seeing it right now in our distribution gains. In our hearing aid, our mercury-free hearing aid, we've got a great year. And that was -- a lot of that was increased spending. Our Varta relaunch, making it best in class performance in Europe as a direct result. Our new i-LIGHT Intimate Hair Removal FDA clearance in the U.S., that was a very long process and appropriately so. That's coming out by the end of calendar year. And I could go through several other examples in Home and Garden, we've had some formulas and stuff.

David Prichard

Delivery systems. New delivery systems.

David Lumley

Oh yes, our new delivery systems there. So it's happening now and that's frankly why I think we're gaining some share. In any company that has anything unique that's better, these things can happen. We were R&D starved for a while. And as you know, when you spend R&D money, it doesn't immediately results. But it's doing it now, and I think you'll see more next year.

Operator

Your next question comes from the line of Arthur Roulac with Nomura.

Arthur Roulac - Nomura Securities Co. Ltd.

A couple questions. First, on the synergies and sort of cost savings from the acquisition, how should we think about that in terms of modeling next year's EBITDA? Meaning, what's sort of been realized this year and what should we be adding on to the EBITDA, so to speak, due to these synergies?

Anthony Genito

We've said that with respect to the Russell Hobbs transaction, $30 million to $35 million of synergies, I think it's fair to say that it's about 50-50 that we've gotten this year, and you can model 50% of that coming in next year as well. And it's about the same percentage for the Pet side. We say 7 to 11. We've hinted that it's probably going to be at the higher end of those ranges, so use your good judgment, but I'd say use a split of 50-50.

Arthur Roulac - Nomura Securities Co. Ltd.

Okay, great. The next question is, can you just elaborate a little bit your thoughts on some of the bolt-on acquisitions, the sort of nature of them in size and when you anticipate perhaps closing them?

David Lumley

I'll let John Heil talk a little bit about that for Pet. And especially to [ph] say for Home and Garden.

Anthony Genito

But maybe as an overall comment before we switch over to John is that we've said that publicly that the 2 businesses that we're focused on is the Pet business and the Home and Garden business. Why? The Pet business, we'd like to get more companion animal, even out the hold, if you will, between the Companion Animal and our holdings of Aquatics. And obviously, at the high-growth area, the companion animal space. And Home and Garden, because we're the strong #2 player in, whether it be herbicides or in the insecticide side of the business. And it's a high barrier to entry, very profitable business, both the Pet business being in the high teens and over 20% with the Home and Garden business. So that being said, that's where our focus is. And the answer specific to your question, it's kind of difficult to say timing and all, because we continuously look at opportunities. And we're looking at small, bolt-on or tuck-in acquisitions. It's very difficult to say, for instance in the pet space, a lot of those are entrepreneurial type companies that it's relationship building and it's a relatively long process as to when the trigger will ultimately be pulled, pardon my expression. That being said, there's other factors, too, with respect to the price of the property, and does it make good economic sense for us whether the synergies associated with and so on. But we're looking in those 2 categories, primarily for those products that are manufactured products that we could bring into our manufacturing footprint, whether it be Pet or Home and Garden, and not only reap the benefits of the sales in EBITDA of the target company, but also have the normal air approach around synergy, the backlog of the synergies. But more importantly, the synergies associated with manufacturing to further fill up our plans so that we're able to run favorable variances, and really hit on all 3 of those aspects. But John, I don't know if you want add anything to that, specifically to Pet.

John Heil

Tony, I think you've covered most of it. I would just say that in the Pet area, the spaces that we're looking at are principally areas of dog and cat treats, emerging dog and cat foods and health care, all areas that are showing dynamic growth, both in the U.S. and globally. And we do have a global platform. So we are looking globally at properties in different parts of the U.S. that we could use either the brand or the product or the intellectual property and leverage our platform. So we're active. I think Tony said it pretty well. We're not in -- these are not big processes or options. We're working, looking at small emerging companies that could be a nice additional piece to our portfolio.

Arthur Roulac - Nomura Securities Co. Ltd.

Got it. And 2 follow-up questions. One would be, any thoughts, from a Corporate Finance standpoint, of maybe instituting a small dividend with the $40 million restricted payments that you can use?

Anthony Genito

Yes. Well, we always say yes. We're looking at that and it's under consideration. But keep in mind that we do have credit agreements that there's certain hurdles we need to reach to get to those. But bottom line it's absolutely correct, you're absolutely correct. I mean, the potential for a dividend, we look at that and we see that as being a potential down the road. And clearly, a potential buyback as well.

Arthur Roulac - Nomura Securities Co. Ltd.

And finally, I know you've said you'd picked up share in North America Battery. Can you sort of tell us what that share is now versus sort of what it may have been at the beginning of this fiscal year?

David Lumley

Yes, we're almost 17 in alkaline and into the high 20s overall. And it's up about 1, 1.5 share points versus this time last year. Now these things go up and down quite a bit as a lot of -- the battery season is really -- the best season for selling batteries is November, December, January. So that will tell whether we keep going up or not.

Arthur Roulac - Nomura Securities Co. Ltd.

And do you see in battery -- I know, I think Energizer on their call said they thought there had been some sort of hangover from a demand standpoint due to the larger pack that had gone out the last couple of quarters. Are you seeing that in your business at all, or do you think that's more of an Energizer issue, or what's up?

David Lumley

There's a big hangover. It wasn't -- all the companies had to go inspect [ph]. And they had to be pushed to the market. And that's taken some time. So again it appears that, that thing is just about through. They're still pockets in certain retailers that have more or less than others, but I think as we get into Christmas season and after -- again, like I said it appears that a rationality has returned to this market. But if not, then we will respond in kind and immediately.

Operator

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

Reza Vahabzadeh - Barclays Capital Inc.

Just on the cost savings, you talked about the first about the 2011 cost savings. Have you realized any of that so far in FY '11?

Anthony Genito

Which cost savings, Reza? I'm sorry.

Reza Vahabzadeh - Barclays Capital Inc.

On the Russell Hobbs or on the Pet side.

Anthony Genito

Oh, yes. On the Russell Hobbs we've said that we anticipate by the end of fiscal 2012 we should have $30 million to $35 million of annualized synergies. And yes, as I mentioned on the question before, about 50% of that has been earned in 2011, and about 50% will come through next year.

Reza Vahabzadeh - Barclays Capital Inc.

So on a run rate basis, where are you as of the end of your third quarter on the cost savings?

Anthony Genito

It's pretty ratable, I'd say. So I'd say we're probably about maybe 75%, 80% in there, maybe closer to 80% done. So we're starting to see the benefits come through in a good way.

Reza Vahabzadeh - Barclays Capital Inc.

And I assume all of the actions have already been implemented to realize the remaining cost savings on both the Russell Hobbs and the Pet side? It's just a matter of rolling through the P&L?

Anthony Genito

Not entirely, no. We continue to -- it's a process. Russell Hobbs was an $800 million transaction, and I think it's fair to say that all of the back office type items have been completed. And now we're in the process of moving towards the front office and truly integrating the Remington business and the Russell Hobbs business together. So I would say that there's still some more costs that come, but they should be relatively within the next quarter or 2 at the most, I would say.

David Lumley

We're ahead of our schedule in every case, and we have accelerated. And the same is true in Pet. The issue with synergy and integration is that it's usually a 3-step process. Sometimes you get all excited and try to make it a 2-step process. That's why most companies don't achieve any synergy savings at all because then your operations...

Anthony Genito

Suffer.

David Lumley

Well, okay, that's a better word, suffer. Because a more accurate word is they fall part. So we are really on schedule in a 3-phased program. We're well into phase 2 on the Russell Hobbs Remington 1", Phase 3 is always the easiest. And in Pet, they as well are well into Phase 2. I would think by the end of 2012, we should get there faster than the end of 2012. But again, the last 4 or 5 days have made things -- who knows. But we're going -- I think we're pretty good at this, and we're doing really well on it. And I think it's the strength we got out in front of this quite a while ago, and we do so much in China. Most of you may remember, we've been saying we knew this was coming for a year. It seems like certain people in the media just discovered it 4 days ago. But I think this is a really good thing for us and we're ahead of this and we know how to do this.

Reza Vahabzadeh - Barclays Capital Inc.

And then you talked about, David, some distribution gains, as well as some favorable POS trends. Can you elaborate on that and give us some examples besides the Carrefour...

David Lumley

I can give you some general examples. The problem with this is you guys would like a number for worldwide batteries, and that's just misleading, right? But I think if you took Home and Garden, let's go there. We talked about Home and Garden. Our Repellent and Insecticide business is doing extremely well, high single-digit, double-digit POS gains. That's good. The controls business suffered like everyone else's. They weren't positive. Our battery business, except for Latin America, is up in the mid, low to high single-digits depending on what type of battery. Same in Europe. Our Remington business has done extremely well all year, single to double-digits. A lot of that is POS. POS is tied to 2 things. One is how much you have in distribution and whether this is how effective your programs are in working in concert with the retailer. If the retailer is really pushing the category, then you're going to do better than if they're not. You heard John Heil talk about companion animals doing extremely well for him in almost all accounts, yet Aquatics continues to suffer. You add the 2 together and it's flat, right? The consumer worldwide is hunting for value and promotion and buying what they need. And those are the products we sell. So in down categories, we're up. And I have a hard time explaining this. We don't price as aggressively as some of our competition or do these amount of acquisitions they do to show our top line, okay? We try to help grow the category for the retailer organically right now. So if their categories are flat to down and we're the one who's up, we're up, right? But we don't report the negative part of their POS and add that to ours. I don't know if you quite understand what I'm talking about.

Reza Vahabzadeh - Barclays Capital Inc.

I get it.

David Lumley

Yes. The other thing that's going on right now and appropriately, much like we're doing with our suppliers, retailers are doing with their suppliers is, they're not necessarily filling to 100% in the store. So let's say you were selling hand lotion, and your hand lotion business at retailer A was $100 million, and he was selling plus 2%. So you should be $102 million, all things being equal. But let's say that you're selling to at $105 million so you should be $105 million, why are your sales 98%? Because he's not filling to 100%. He's filling the shelves at 90%. Do you understand? That is what's going on too here. And no one's going to rush to take on extra inventory right now because the consumer is fickle, hesitant. So I think all this flushes through this fiscal year and you're going to get better comps next year, but there might not actually be better sale, right? So we have to wait and see. But I do know this, the consumer is shifting his mix from a lot of premium products only to more value products and even some private label products, or more bigger purchases at a warehouse club, and less ships to the store because of cost of gas. In all of those places, I think that the premium brand is important to have and the value brand is important to have. It's just that I think the mix is moving now more to the value brand, especially if the performance is the same or the taste is the same or whatever.

Reza Vahabzadeh - Barclays Capital Inc.

Yes, okay. Let me just slip in one last question, you talked about commodity costs and higher costs from China, can you just talk about what is the rate of cost inflation that you're experiencing in your total cost of goods bucket?

David Lumley

Sure. In the Asian suppliers that make appliances, they have cost increases out there 5% to 15%, in some cases 20%, 25%. Now I'm not saying they're achieving them all, but what's complicating those price increase is also currency change, okay? You've got to look at -- the Chinese currency was 6/8 and 6/5, that's 5%, 6% of price increase right there, okay? And I think that's also starting for retailers who have been buying direct or sourcing direct, I don't care if they're flashlights or coffeemakers, they've got that problem, too. And now we could add the currency problem, it shouldn't be a problem but they had a cost increase and it's all there dead on. So again, I think that certain companies here like ourselves have an opportunity, because we're kind of the buffer in that. Whereas before, let's rush off to Asia, Mr. Retailer A and buy everything direct. Well, then you got all the exposure. So that's another thing that's going on. I actually think, believe it or not, now this is just me speaking, over the last 4 days, that this adjustment, while very upsetting to stock price, is going to help a little bit in Asia in commodities, could alleviate some of the -- should help that a little bit because you can't keep rising there and keep falling over here. It just doesn't work, okay?

Operator

Your next question comes from the line of Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank AG

With the recent, I guess, turmoil as you referenced here in the stock market and everything else, are you seeing any change in the orders for the holidays? Or is there an impact or any concerns that you have going into the holiday season?

David Lumley

Well, of course everyone's concerned and the retailers are concerned. But at the moment, and so far, everything's going forward. People still are going to buy Christmas presents. And I think they're still going to have toast and kill bugs and turn the TV on with batteries. But so far, it's okay. I would just have a more cautious approach at the moment. Now, when the stock market was 12, 5 and people who went into retail had no more money if they were laid off than they have today, right? I mean, you know what I mean? So if that holds, we should be okay, right? Frankly, the best thing that could happen in the world is more people would go back to work. Period. And all of this will get better. And until that happens, then it's a share gain. It's a nice share.

Karru Martinson - Deutsche Bank AG

And how do you feel about the holiday shipments versus the prior year?

David Lumley

Well, like we've said all year, we feel great and now we feel good. And we still feel good because we have significant promotions we won, distribution we won. So we should still do better this year than last year unless there's something else that happens, right? So we feel good. Like I said, I think our time has come a little bit here. Our model and our offering, it's one thing -- I read a lot about consumers trading down, okay? Well, that's fine. But if you're trading down and some of the pace is good, works as well, lasts as long, I don't know if that's a trade down after you've got a good positive experience.

Anthony Genito

The trading down on price, which makes sense because the product works just as good or better than the competing product.

David Lumley

And then I think I've talked a lot about that. Our biggest issue with Spectrum and our brands is simply getting trial, getting someone to try it. I don't care if it's a retailer or a buyer who's a little wary, wants to buy safe, buy the premium brand only. But this trading down or this, I'd rather call it shifting the mix, the consumer tries some new things. As we get trial, we kept holding onto more of those and that's why I believe that the model will continue to get stronger and stronger and stronger.

Karru Martinson - Deutsche Bank AG

Okay. And just lastly, were there any material changes in the Black & Decker license agreement and specifically, was there anything changing in kind of a wind down if the agreement wasn't renewed into 2015?

David Lumley

I'll have Terry, who's been part of that agreement, since the beginning talk.

Terry Polistina

Yes, there was no material changes and it's basically the same type of extension that we've had the last 4 times that we've done it since 1998.

Operator

[Operator Instructions] Your next question comes from the line of Orlando Munchen [ph] with Tyler Investments.

Unknown Analyst -

I have a question about the value model, I'm trying to understand a little bit more how you work with retailers. Your products, because they are lower priced, reduce overall category sales. But their margin is -- obviously, they have a higher margin and a lower cost of inventory. Could you explain how the retailer thinks of that in terms of how their net benefit of carrying some of these brands is?

David Lumley

The better question would be to ask these retailers. I'm not going to speak to specific to a retailer, but I can tell you that we have 2 reactions from retailers. When I have asked retailers, do you want top line growth, margin growth and lower inventory, which one you want? They say, yes. What we usually offer is same performance, less price, better performance, same price or value. I'll give an example. Let's say we have a product and that product could be priced 10% below the premium brand and the top line sales you would assume would be 10% less. That's assuming the same rate of sales. But normally, when you're priced below, you sell more units. So in one case, we catch up that way, right? For the top line, obviously, we're making more margin in both those sales, or we may add more value, we may put more products in the pack and charge the same. So the consumer is actually having a 10% or 15% or 20% price decrease from a value standpoint, meaning that if you had a battery pack with 8 and ours had 12 and the price was the same, then the consumers actually spent less. So you could do it that way. And we do it that way as well. There's always been this idea that the consumer, because they have more of something, more soap, more shampoo, more batteries, they're going to come back and buy less. That old story may have held in the old days. It doesn't appear to be that way anymore. It seems like if you get extra something you use it faster because you know you have it for the most part. Now what did happen this year when the entire industry goes overboard like we did in batteries, then you do slow down the rate and use -- it's kind of almost like Cash for Clunkers. Those who were going to buy it just accelerate it. But that was an extreme example. You just do it in a normal basis, it tends to work out okay. Does that help you?

Unknown Analyst -

Yes, it does. Another question regarding your expectations of your ability to de-lever next year. Could you just talk a little bit about how much room you have to achieve those targets of reducing -- of generating $200 million, $220 million of free cash flow this year with different levels in EBITDA?

Anthony Genito

I think the best way to answer the question is that our #1 objective is to de-lever the balance sheet. We're going to be at 3.5x this year. We're going to be at or below 3x, we believe, by the end of next year. From a cash flow generation standpoint, we believe that the EBITDA, as -- we continue to grow our EBITDA, and again, we haven't given any projections for 2012 with respect to EBITDA. But the point is, is that we don't have a lot of items that impact our cash flow on a negative basis. If you look at our cash taxes the relatively -- $40 million to $50 million, capital spending about $40 million. And we continually pursue ways to maximize our working capital so that we can either grow the business and hold it flat or actually reduce it. So I would say that where we stand right now, based on where we are today, I'd say that we still feel very, very good about generating at least $200 million of cash flow next year and focusing primarily on debt pay down as a result of that. That is the prime directive that we have and that we operate under. Does that help you?

Unknown Analyst -

Yes. And just one follow-up on that subject once you reach say 3x debt to EBITDA, have you thought at all about where you plan to maintain your leverage ratios going forward?

Anthony Genito

Yes. We would probably hold out. We would see a sweet spot of at about that level, between the 2.5x to 3x leverage ratio, which our peer group if you were to pull out the companies that we perceive to be our peers, it's probably in that range of somewhere between high-2s and mid-3s of leverage.

David Prichard

Thank you, Orlando. We can take up some further questions offline, if you'd like, today as well. So I think we're past the top of the hour, and we'll close down the call now. But we do want to thank everybody on behalf of Dave Lumley and Tony Genito, Terry Polistina and John Heil, we again want to thank you for joining us on today's Spectrum Brands Holdings Fiscal 2011 Third Quarter and 9 Months Earnings Conference Call, and we will talk to all of you again on our fiscal 2011 year-end conference call. Have a good day. Thanks.

Anthony Genito

Thank you, everybody.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Spectrum Brands Holdings' CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts