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

Executives

David A. Prichard - Vice President of Investor Relations and Corporate Communications

David R. Lumley - Principal Executive Officer, President of Global Batteries, President of Home & Garden and Director

Anthony L. Genito - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Member of Risk Management Steering Committee

Terry L. Polistina - President of Global Appliances and Director

John A. Heil - President of United Pet Group

Analysts

William Schmitz - Deutsche Bank AG, Research Division

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Hamed Khorsand - BWS Financial Inc.

Reza Vahabzadeh - Barclays Capital Inc.

Karru Martinson - Deutsche Bank AG, Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Spectrum Brands Holdings (SPB) Q1 2012 Earnings Call February 3, 2012 9:00 AM ET

Operator

Good morning. My name is Matthew, and I will be a conference operator today. At this time, I'd like to welcome everyone to the Spectrum Brands Fiscal 2012 First Quarter Earnings Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, February 3, 2012. Thank you. I'd like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

David A. Prichard

Good morning, and welcome to Spectrum Brands Holdings Fiscal 2012 First Quarter Earnings Conference Call and Audio Webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands and moderator for our call today. 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 our Global Pet Supplies.

Our comments today include forward-looking statements, including our outlook for fiscal 2012 and beyond. Now 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 encourages you to review the risk factors and cautionary statements that are outlined in our press release dated February 3, 2012, 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 will both be available on our website in the Investor Relations section.

Now let me briefly review our GAAP results. For the first quarter of fiscal 2012, the company reported net income of $13.1 million or $0.25 per diluted income per share on average shares and common stock equivalents outstanding of 52.6 million. This compared to a net loss of $19.8 million or $0.39 per diluted loss per share in the year-ago quarter, which was based upon average shares and common stock equivalents outstanding of 50.8 million.

By segment for the first quarter of fiscal 2012, the Global Batteries & Appliances segment reported net income of $89.9 million versus $79.4 million a year earlier. The Global Pet Supplies segment reported net income of $13.2 million in fiscal 2012's first quarter versus net income of $13.4 million in fiscal 2011. And finally, the Home and Garden business segment reported a net loss of $6.4 million in the first quarter of fiscal 2012 versus a net loss of $7.5 million in fiscal 2011.

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

David R. Lumley

Thanks, Dave. Thanks for joining us today. We reported a solid first quarter this morning, putting us on target to deliver another year of improved results, strong free cash flow, significant debt paydown and additional shareholder value creation. We posted solid EPS in the quarter, swinging from a net loss last year and perhaps more importantly, achieved the third consecutive first quarter record for adjusted EBITDA of $125 million, a 2% improvement versus 2011. Foreign exchange had a $2.8 million negative impact on our first quarter adjusted EBITDA.

Stringent expense controls, cost containment, cost synergies across the company were significant contributors to our record first quarter EBITDA, as we made excellent progress in sizing our structure and product offerings to match the market needs. Our lower net sales were a function of timing of retailer orders between our first -- our fiscal fourth and our fiscal first quarters this year versus the same quarters in 2010, as well as our previously announced decision to eliminate unprofitable North American appliance promotions in the holiday season. When you compare the combined fourth quarter and first quarters of both 2011 and 2010, our net sales grew 2%.

Given important distribution gains in all of our businesses, new product launches and line extensions and further geographic expansion, coupled with our first quarter acquisitions of Black Flag and FURminator, we see our net sales growth accelerating as we move through fiscal 2012, especially in the last half of our fiscal year.

For fiscal 2012, we continue to expect net sales to increase at or above the GDP, consistent with what we have said before about our revenue growth, generally low-single digits. We see adjusted EBITDA increasing at a faster percentage rate, reflecting not only the leverage we get from higher sales but also from our continuing cost reduction programs and many new higher-margin products.

I want to emphasize that deleveraging and strengthening our balance sheet remains a top strategic and value-creation priority for our company. Just like last year, we plan to use our strong free cash flow of an expected $200 million to continue to pay down debt in fiscal 2012, with payments occurring in the last 2 fiscal quarters of the year, consistent with the peak period of our cash flow generation. As a result, we continue to expect to achieve a leverage ratio of 3.4x or less by the end of fiscal 2012.

During the first quarter, we also executed on a major strategic priority to pursue targeted bolt-on acquisitions, primarily in our Global Pet Supplies and Home and Garden divisions. We're excited about our acquisitions of the Black Flag/TAT brand assets in November for our Home and Garden division and the FURminator pet grooming business in December, both of which are accretive acquisitions, offer compelling synergies and will accelerate our sales and EBITDA growth this year and beyond. We are hard at work integrating both these businesses and starting the process of achieving the many and major synergies that both deals provide.

We believe our Spectrum Value Model is a game changer. We remain pleased with how well it is working in this challenging environment, sluggish consumer spending, tighter retailer inventories, inflationary pressure and rising commodity and Asian supply chain costs. Because our Spectrum Value Model resonates with retailers and consumers, we continue to generally outperform our competition in each category we're in. Our Spectrum Value Model delivers genuine value to the consumer with products that work as well or better than our competitors for a lower cost. It also provides higher margins and lower acquisition costs to our retail customers along with excellent category management. This we continue to believe will serve us well going forward.

Our battery business continues its growth primarily because of our proven product performance strategy of lasts as long for less. Rayovac remains at its highest market share in this century in North America. We are pursuing new retail accounts in North America and broader shelf space at others, and look forward to updating you all on our progress in the months ahead.

Our VARTA brand continues to grow in Europe, faced by a solid rollout in Carrefour, the world's second-largest retailer and further expansion in Eastern Europe. As we had expected, our Carrefour multiyear branded battery partnership is also opening doors in Europe for other retail distribution wins.

After a challenging fiscal 2011 in Latin America, primarily Brazil, due mainly to unusual competitive activities, we are executing on plans to improve our performance in 2012 now that the Latin American battery market has stabilized. We remain the #1 battery player there with the best overall alkaline and zinc carbon performance and share.

Our global hearing aid battery business continues to shine, as we maintain a very solid #1 worldwide market share position, with growth continuing in the U.S., Europe and now Latin America. This business achieved its highest net sales ever for the first quarter, led by an aging population,an increased awareness and diagnosis of hearing loss, global demographic support, increased hearing aid use in the years ahead.

We see another solid year for our Remington personal care business, as we continue to launch new products and line extensions and expand its market positions in the U.S., Europe and Australia and New Zealand. We are pleased with our early progress in the $2 billion U.S. men's wet shave market in both handles and systems, as well as our success so far in entering the $1 billion U.S. market for women's hair care accessories. Perhaps most excited, the initial and very positive U.S. consumer reception of our unique I-LIGHT Pro intimate hair removal system for women and men, with the launch imminent in the large market of Brazil. A major new initiative in our Remington business is now to rapidly expand and grow our consumables product line at a faster rate than our durables. i-LIGHT, hair care accessories and wet shave are the foundations to advancing the strategic initiative.

In North American home appliances, we saw a good solid holiday season. We successfully launched a new Farberware kitchen appliance line exclusively at a key U.S. retailer with an emphasis on affordable elegance. We believe our Farberware coffee and tea maker, food processor and blender go toe to toe with other well-known brands and outperform many of them with more features, better pricing and higher-end finishes.

Across the pond, Russell Hobbs regional rollout in Eastern Europe is gaining momentum in countries such as Poland, Russia, Hungary, Romania and the Czech Republic. We are also growing share in Russell Hobbs home market in the U.K.

Finally, we have made new customer inroads in Brazil, with George Foreman Grills.

As I mentioned last quarter, while we are growing certain segments and geographies of our small clients business, we will continue to aggressively phase out or replace low-margin appliances here and abroad just as we did in Europe last year. We continue to work with supply and retail partners to eliminate SKUs and brands where it makes sense to sustain our collective margins given the significant cost pressures from Asian suppliers.

In Global Pet Supplies, we see a stronger fiscal 2012 in sales and EBITDA to be accelerated for sure by our late December acquisition of FURminator, the global leader in branded dog and cat grooming products. Pets should enjoy a strong second half, driven by significant recent distribution wins, a full slate of new product launches in the second quarter in both aquatics and companion animal segments, successful pricing actions and a cumulative positive impact of its U.S. plant and distribution center integration initiatives.

Our Home and Garden division's first quarter of 2012 marked the 14th consecutive quarter of year-over-year adjusted EBITDA improvement. On the heels of an outstanding fiscal 2011, we expect even better results from Home and Garden in 2012, especially given any measure of more normal weather this spring.

We have an array of exciting new products and distribution wins in place for this spring and a solid pipeline ready for 2013. The integration of Black Flag/TAT business is progressing smoothly. The Black Flag and TAT brand assets are excellent strategic fit for Home and Garden, strengthening its household insecticide portfolio and bringing significant channel growth opportunities and operation synergies. In short, Home and Garden continues to achieve retail distribution gains combined with aggressive expense management and the over delivery of cost improvement programs. Like our Pet business, Home and Garden continues to selectively evaluate additional tuck-in acquisition candidates as part of its multipronged growth strategy.

On the cost side, we continue to attack the significant commodity and Asian supplier cost increases affecting so many companies today in which we have talked about now for over a year. We made good progress in our sales now [ph] , primarily in our Small Appliance business through continuous improvement programs, integration and restructuring programs, retail wins and distribution gains and select pricing actions. As I mentioned earlier and a point worth emphasizing, we have taken a lot of cost out of our supply chain and out of our overhead G&A to make sure we continue to maintain a very lean operating structure. At the same time however, we are reinvesting in the business through capital expenditures and new product development and cost-reduction initiatives, along with a 10% increase in R&D this year versus 2011. As a reminder, our annual target in each of our businesses is to reduce cost of good sold by 3% to 5%.

We remain ahead of schedule with our Russell Hobbs integration program. As many of you know, we recently raised our annualized cost synergy projection to $35 million to $40 million from $30 million to $35 million and an earlier original target of $25 million to $30 million. Plant and distribution center consolidation activities are moving along ahead of schedule in our Pet business, and we have started to see additional savings of shared services in our new product development process. Accordingly, we raised our annualized cost savings for Pet to $10 million to $15 million from $7 million to $11 million to be realized by the end of 2012. When you combine the Russell Hobbs and Pet cost savings, we are forecasting annualized synergies of $45 million to $55 million by the end of 2012, a key element in our program to help offset higher Asian supply chain costs.

In conclusion, one of our key strengths is that most of our products are nondiscretionary, non-premium priced replacement products, providing value, quality and performance to consumers in their everyday lives. As we continue to believe our Spectrum Value Model is the best retail strategy, especially in this continuing period of cautious consumer spending, higher commodity costs, higher inflationary pressures at all levels, manufacturing, retail and consumer levels. We also believe, as more and more consumers try our products, our sales volume will continue to increase along with more distribution space in key retailers worldwide. We remain excited about Spectrum Brands' future and our prospects for even better financial performance in fiscal 2012 and beyond.

I'd like to thank you and now move to Tony Genito for a brief financial review.

Anthony L. Genito

Thanks, Dave, and good morning, everyone. For the first quarter of 2012, our consolidated net sales of $849 million fell 1% compared with $861 million last year. As Dave noted, the decline was attributed to the timing of retail orders, primarily in Batteries between the fiscal fourth quarter of 2011 and first quarter of 2012 versus those same periods a year earlier, along with our decision to eliminate certain low-margin North American promotions primarily in kitchen appliances. Our net sales were negatively impacted by $6 million of foreign exchange.

The first quarter total operating expenses of $200 million decreased $30 million or 13% from last year due to synergies being recognized following the merger with Russell Hobbs and savings from our global cost reduction initiatives, coupled with decreased acquisition and integration and restructuring costs of $9 million and $2 million, respectively.

Corporate expenses for the quarter were $9 million, a decrease from $11 million last year, driven by a $1 million decrease in stock compensation expense and savings from our cost reduction initiatives. Due primarily to a continuation of strong expense controls and cost improvement initiatives, operating income in the first quarter of fiscal 2012 grew 21% to $84 million compared with $69 million last year. Operating income as a percentage of net sales improved to 10% versus 8% in fiscal 2011.

We reported net income of $13 million or $0.25 per diluted share for the first quarter on average shares and common stock equivalents of 52.6 million compared with a net loss of $20 million or $0.39 per diluted loss per share in the year-ago quarter based upon average shares and common stock equivalents of 50.8 million. Adjusted for certain items in both years' first quarters, 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 quarter of fiscal 2012, an increase of 47% compared with $0.47 last year.

We are pleased that for the third consecutive year, the company delivered record first quarter consolidated adjusted EBITDA in fiscal 2012 of $125 million, a 2% increase versus $123 million in the prior year. Foreign exchange had a $3 million negative impact on adjusted EBITDA in the first quarter of fiscal 2012.

The Global Batteries and Appliances and Home and Garden segments both reported improve adjusted EBITDA in the first quarter. Adjusted EBITDA is a non-GAAP measurement of profitability, which the company believes is a useful indicator of the operating health of the business and its trends.

In the interest of allowing more time for your questions, I refer you to our earnings press release and tables for details on our first quarter segment results.

Let me review a few more items in our first quarter financial statements. First quarter interest expense was $41 million compared with $53 million last year. This variance was primarily due to lower principal and rates on our term loan and less noncash amortization of deferred original issue discount and financing fees. You may recall that we refinanced our term loan in February of last year, which resulted in significant interest savings going forward. Based on the amount currently outstanding under our term loan of $523 million, savings amounted to approximately $16 million per year. As part of that process, we wrote off approximately $34 million of noncash deferred items in fiscal 2011 related to the refinancing of our term loan and subsequent term loan prepayments. In addition, the $200 million of additional senior secured notes was in place for less than 2 months in this quarter.

Cash interest for the fiscal 2012 first quarter was approximately $49 million compared with approximately $54 million for the same period last year. Cash payments for fiscal 2012 were lower primarily due to lower principal and rates on our term loan.

Tax expense for the fiscal 2012 quarter was $23 million compared with $35 million in fiscal 2011. Cash taxes for the fiscal 2012 first quarter were approximately $21 million compared with $12 million last year. Cash taxes were higher for fiscal 2012 due to higher profits in some of our foreign entities, as well as various timing differences in payments over the year-over-year particularly in Germany.

As I've said before, based upon 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. We will, however, continue to incur foreign and a very small amount of state cash taxes. Cash taxes are expected to be approximately $45 million to $50 million in fiscal 2012.

Let's turn to a review of our solid liquidity position. We finished the first quarter of fiscal 2012 with approximately $11 million drawn on our $300 million ABL working capital facility, which is consistent with normal business seasonality and with a cash balance of about $74 million. As of the end of the quarter, total gross debt was $1,775,000,000, which consisted of a senior secured term loan of $523 million, senior secured notes of $950 million, subordinated notes of $245 million, the working capital facility draw of $11 million and other debt, which is primarily foreign debt and capital leases of $46 million. In addition, we had approximately $29 million of letters of credit outstanding.

Regarding our cash flow projections, as we have previously stated, given the strong cash flow potential of our businesses, our goal is to generate at least $200 million of free cash flow for fiscal 2012. We expect capital expenditures to approximate $45 million in fiscal 2012, of which more than 2/3 represents investments in new product developments and cost reduction projects. As Dave mentioned, we expect to use our strong free cash flow to continue to pay down debt in fiscal '12, with payments occurring in the last 2 quarters of the year, consistent with the peak period of our cash flow generation. As a result, we expect to achieve leverage of 3.4x or less by the end of fiscal 2012.

Finally, we clearly have our sights set on refinancing our $245 million of 12% PIK notes this summer when the initial call date occurs in August.

In summary, our first quarter was a solid start toward the improved results we expect to deliver in fiscal 2012. We expect to see top line growth in line with or better than GDP in fiscal 2012 with the rate of sales growth stronger in the second half of the year. We also expect a higher percentage increase in adjusted EBITDA. The 2 acquisitions we completed in the first quarter, using the $200 million we raised in our mid-November senior notes tack-on offering, will generate -- will accelerate our adjusted EBITDA and sales growth in 2012 with the objective being to further reduce our leverage later in the year and especially on into 2013.

Now back to Dave for a few closing remarks.

David R. Lumley

Thanks, Tony. We're excited about Spectrum Brands' outlook for value creation, both in the short-term and over the long term. Our company continues to be well positioned for strong financial results as a global value proposition leader in all of our spaces. We expect another year of improved sales and adjusted EBITDA for fiscal 2012, along with net income, significant free cash flow and major debt paydown. We will continue with what we believe is a winning strategy for our businesses: providing superior margins to our customers and offering consumers the same performance at a better price or better performance at the same price. We'll move forward, continue to invest in our businesses, aggressively reduce our cost structure and offset rising supply chain costs. We will continue to launch new products and product extensions, expand geographically, grow EBITDA and generate strong free cash flow for our shareholders.

Spectrum Brands is well positioned seasonally and geographically with diverse products and categories and a growing portfolio of branded, well-known and trusted products. Our Spectrum Value Model is the key to our ability to continue to gain distribution and shelf space, win then at that point of sale,and generally outperform our categories and competitors as a preferred, superior value brand. We are winning in a difficult global climate. Spectrum Brands believes we are truly on the move and posed for either greater growth ahead. Thank you.

David A. Prichard

Okay. Thanks, Dave and Tony. Operator, would you now begin the 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, Research Division

How do you feel about the battery price increase, the Duracell and Energizer one that just won in?

David R. Lumley

This is Dave Lumley. What do you mean how do we feel about it?

William Schmitz - Deutsche Bank AG, Research Division

Why? Are you going to follow the price increase? Or are you going to let it sit for a while and follow later? Or what's the going with you there?

David R. Lumley

Oh, well, it was a necessary price increase based on raw material increases over the last 2 years. We think it's good for the category. We've also priced in many places ourselves. So I think it's good for the category. It remains to be seen whether it will all stick in this consumer environment. But I think it's a good move.

William Schmitz - Deutsche Bank AG, Research Division

Okay. And then it seemed like you guys took a lot of market share this quarter in Batteries. But I know you talked a little bit about the pull forward of sales. Are we kind of normalized now between sort of retail sell-through and shipments?

David R. Lumley

Yes, I believe that there is a significant hangover especially with some of our competitors on those bonus packs, and it's taken holiday to get through that. And I would say, as we've talked before, by March it should be completely clean. I think it's very close now. I think you're getting much closer now to a consumption model. So I think that's in good shape.

William Schmitz - Deutsche Bank AG, Research Division

Okay, good. And then just in terms of Latin America, does that mean that some of the Japanese competitors who are being -- what seems like unbelievably price competitive down there. Have they let up? Is that what's driving the category? Or are you seeing a big volume acceleration?

David R. Lumley

Yes. For those of you who really want to get into it, that's a very unique market because you have a lot of zinc carbon sales where Panasonic is strong and us, and then you have the 3 traditional alkaline companies. And it was like World War II. Everyone got involved. So I think that's all calmed down. There's some unusual promotional activities from 2 of the companies because they're sponsoring World Cup and Olympics and things, so they have a lot going on there. But I think we've finally stabilized there. And I think you'll see a rational market this year. Plus, I think all the companies who had loaded product in for those promotions that has-- the field inventory has sold out.

William Schmitz - Deutsche Bank AG, Research Division

Okay, great. And then just lastly, are there any appliances that are driving growth faster than anything else? Because there wasn't really anything exciting in terms of individual SKUs or individual products.

David R. Lumley

I'll let Terry Polistina answer that. He's on the call. He runs our Appliance business.

Terry L. Polistina

Yes, I think in particular, the hero products that we have coming out on the Remington side and the hair care line. And then we talked about it in the past where we thought when we put the businesses together, we could see real geographic opportunities by leveraging the Spectrum Brands infrastructure in Eastern and Western Europe, and that was something that is starting to kick in for us. So some geographic expansion and then really some nice hero products on the Remington side. And then we've just recently launched the Farberware brand, which is a new -- a more mid-priced point brand, which was pretty good for us in the quarter, and we see that as a nice opportunity going forward.

William Schmitz - Deutsche Bank AG, Research Division

Got you. So sort of the trends of the personal care stuff being pretty solid and maybe a little bit of sluggishness in the kitchen appliances probably continues.

Terry L. Polistina

Yes, I think the kitchen appliance side around the globe will still be GDP type of growth. But our strategy is to focus in on more profitable businesses. So I think that's where you're seeing a little bit of trimming on some of lower margin promotions going forward.

Operator

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

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Just trying to understand a little bit more about the pull forward especially on the Battery business and the impact on this quarter. I mean, can you quantify that? And I guess I'm trying to understand would you have missed the 2011 goals had you not benefited from this pull forward? Or was it just not that meaningful?

David R. Lumley

This is Dave Lumley. Several retailers -- and I think you heard this on the other call, wanted the batteries shipped in September this year as they wanted to set up earlier. It's less than $10 million. We wouldn't have missed last year, but it still affected year-on-year in North America. With us, we also have the Latin America situation where we had significantly less batteries going in this quarter, as we had to ramp our factories back up because it had been down so long. So we did not catch those sales. We're getting them now. So those 2 things added together with the battery story. The bigger story was our, as I -- we've discussed at length our decision 6 months ago, which would take you through the fourth quarter and first quarter, not to participate in up to tens of millions of dollars of small appliance promotions that were all saying they were low margin would be an aspirational goal. That's really what drove the sales this quarter. We could have shipped those and lost several million of EBITDA and had a nice top line. But that's really not our strategy.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then just switching gears, I don't believe you've disclosed kind of what the recent acquisitions add in terms of EBITDA this year. And so just trying to understand how that plays into your cash flow forecast since I think you reiterated most of the guidance but those things have happened in between.

Anthony L. Genito

Yes. This is Tony. Yes, we really haven't given specific guidance on that, Bill. But what I can tell you is that with respect to the Black Flag acquisition, we're very pleased with where we are to date on that from a integration standpoint. Basically, it's virtually done with the exception of just bringing a few other products because of registration timings, which should be brought into the factory by the -- into our factory by the end of this summer. In the case of FURminator, very, very pleased where we are so far. John Heil and his team have a very detailed integration plan that's in place, and they will be implementing that over the next several months, so again, very, very happy with that. And I think that we'll see clearly growth this year as a result of those acquisitions that will contribute to our EBITDA as well as our free cash flow generation. And I guess really stay tuned as the...

David R. Lumley

This is Dave Lumley. Let me put it another way for you. Do we need those 2 acquisitions to make our $200 million of cash flow? No.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

But in effect by raise -- I mean, maintaining guidance, you're not actually lowering the base businesses in terms of your expectations now?

David R. Lumley

No.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Okay. I'm just trying to understand, but since you're just reiterating guidance, but you've made 2 acquisitions inter-quarter, how I should factor that in.

David R. Lumley

Yes, I think those will be -- those are why we say cash flow 200 plus. That's why we say GDP, at least GDP. That's why we say EBITDA better than that. We just want to get them integrated. We want to make sure everything goes right. We don't want to do anything wrong. So we see them all as upside to the guidance.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

And switching to currency, I mean, can you give us kind of any guidelines on kind of current spot rates? What the impact would be the top and EBITDA for 2012? Is it negative 3? Is it negative 5?

Anthony L. Genito

It's kind of a tough one to answer, Bill, only because, I mean, with our global business, I mean, about 15% of our business in the euro for instance [ph] . I'm sure that's what you're focused on right now. I mean, if you look at where the euro was for the first quarter on average, it was at 135. What the average was for last year was 136 for the euro. Right now, the euro's spot rates are about 132. I don't see it as being a significant impact in our business, considering that the euro represents about 15% of our -- 1-5, that's 15%. Don't let my accent to throw you guys off there. 15% of the -- of our consolidated revenues. So I would not see that as a material impact on sales. And I think that the impact on our profits would be relatively de minimis that we'd be able to overcome that impact at those rates right now.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

You're probably talking about this current quarter obviously gets tougher comps as we get to June and September.

Anthony L. Genito

Yes. Well, I mean, again, I mean, I don't have a crystal ball as to where the rates will be, but I'm just looking at a spot rate of 132 today if that was to be extrapolated into the remaining quarters. As I said, I don't see it as being a large impact. It will be an impact but not a large one.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then just last one, just on the acquisitions and debt, I mean, I understand, I think, your goal is back to -- you're currently, from what we can tell because I don't have the EBITDA of the acquisitions, at 4.4x leverage and the goal to get that down to 3.4 by year end. Is that -- that's obviously exclusive of making other acquisitions issuing more debt. Is that correct?

Anthony L. Genito

I don't know. You lost me at the 4.4 leverage. If I take our LTM EBITDA and divide it by our gross debt of -- take 17.75 and divide it into 4.60, come up with about 3.8 on a gross basis. And what the said is that the plan on being at 3.4 or lower by the end of this fiscal year. So we do anticipate on the latter half typical with our normal cash flow generation timing to generate cash flow and with that cash flow continue to resume our focus on paying down debt.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So I mean, I can ask this offline but I was just trying to understand. I assume you're looking at other acquisitions you may issue more debt that 3.4 goal is exclusive of that.

Anthony L. Genito

Right, the 3.4 is what I know today, correct or what we know today I should say. If some extremely very interesting acquisition was to come by between now and then -- now and the end of the fiscal year and we were to jump on that then we'd recalculate that -- those numbers. But right now, that's based on what we know today, Bill. You're absolutely right.

Operator

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

Hamed Khorsand - BWS Financial Inc.

Just continuing on this conversation about the debt here and acquisition strategy, last fiscal year, you guys generated $220 million free cash flow. This year, you're guiding at the $200 million free cash flow, but at the same time, you've issued $200 million of new debt. So it doesn't seem like you're moving away from deleveraging scenario you've been talking about.

Anthony L. Genito

Well, I'm -- this is Tony. I'm sorry. Last year, we generated $191 million of free cash flow not $220 million. We paid down $225 million of term debt. And again just to refresh everyone's memory, that was driven by 2 factors. One is the cash flow generation that we achieved last year of 190 plus. In addition to that, we had higher cash balances starting the year from the prior year, which we had consciously said we wanted to reduce those balances, as we exited further from the Chapter 11 that we had 3 years ago that we would be able to utilize some of that cash and pay down debt, which is what we did. So just to get the numbers straight, it was $191 million of free cash flow generation last year and term debt of $225 million. We've said, again, where we reiterated our guidance that we plan on -- our goal is to generate free cash flow of at least $200 million, and again, our primary focus -- and I picked up in your question, you are correct. We haven't taken our eye off the ball in the sense that we are focused on deleveraging. So again, we did the 9.5%, the $200 million tack-on back in mid-November, and the purpose of that was to fund the acquisitions that we consummated. And again, as we generate free cash flow this year, we will be focused on paying down debt.

Hamed Khorsand - BWS Financial Inc.

Okay. And then as far as the product strategy goes and moving away from the low-margin business, how much of that is going to show up in gross margin? And how much of it is going to show up in the operating line?

David R. Lumley

This is Dave Lumley, and I'll let Terry jump in. Most of those are promotions, and they don't have much gross margin. So those are virtually very difficult to do when you have the type of cost increases that are coming out of Asia. So it's more or less margin -- negative margin avoidance, would be a better way to say it -- just to help maintain our margin. I don't know, Terry, if you want to add anything.

Terry L. Polistina

Yes, I know, I think that's right. If you didn't have the low-margin stuff, it would help your gross margin moving forward. So you have lower sales and better gross margins from the core business.

Hamed Khorsand - BWS Financial Inc.

Okay. And my last question is just a follow-up. How much do we expect to see as far as going forward goes, as far as these discontinuation promotions have impact on revenue?

David R. Lumley

Well, I would say -- this is Dave Lumley -- that I think that since we've now done it, it shouldn't go down anymore unless there's significantly more cost increases. And you have to just wait and see when you see what the cost of the good when you go to the promotion. The Small Appliance business does a significant amount of revenue in this area. It's been a loss leader for years for retailers and the manufacturers. But right now, those things cost so much you're going to have to price them higher. So I wouldn't anticipate dramatic reductions in the future, but if costs keep going up, then you're going to have to price up. So we'll see. Okay?

Operator

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

Reza Vahabzadeh - Barclays Capital Inc.

Just on kitchen appliances, just to round that conversation out a bit, are you seeing any discipline in that category right now? Obviously, input costs, as in sourcing costs, are what they are, and obviously, you are taking some action in terms of both cost savings and SKU rationalization. But is that -- are you seeing that from other competitors as well?

David R. Lumley

Again, I'll ask -- let Terry answer that. I'll only say on a macro basis, it's moving in that direction. This is also an industry where there are some significant private label brands even though you know the brand name. And you're going to see prices move here and you're going to see it happen soon. Terry, you want to jump in?

Terry L. Polistina

Yes, I guess I won't speak for the other competitors, but I can -- I would say the same thing Dave said, that costs are continuing to rise. We're going to be disciplined about dealing with it and focusing in on the profitability of this business, and then we'd hope other competitors are also paying attention to rising costs and create their -- or do the same thing they need to do to their business. But I couldn't tell you if they are on at this point.

Reza Vahabzadeh - Barclays Capital Inc.

Right. Okay. And then as far as overall sell-through across your product lines, can you make some comments on that? Just excluding the shipments, timing from fourth quarter to first quarter or second quarter, obviously, overall sales trends for the fourth quarter, at least in North America, were mixed. But what did you see in your particular product lines?

David R. Lumley

You mean overall?

Reza Vahabzadeh - Barclays Capital Inc.

Yes.

David R. Lumley

In virtually every category of ours, we saw positive POS comps versus the year before, especially when you look at what's called selling to your space. So let's say you had 20 slots on the shelf and everyone else totaled 60 slots, selling your space would mean that you would sell at a rate that would be the -- equal to better than anyone else selling for those slots. And actually, this is where we've been down coming to experience now. So if you're on the shelf side by side and you have like performance and a lower acquisition price, and that's really the key here that I think a lot of people miss. It's lower acquisition price, too. Just because you might sell -- we're not in the car business. You sell a Mercedes for 20 off, they're still not going to buy because they can't afford the acquisition price. So we've been seeing very, very good movement this year outselling our space with positive deals in almost every situation we're in. And I think that's because of this lower acquisition price movement by the consumer. If they had a tag of $20 to spend or $100 to spend and 10% to 15% of that now is being consumed by, what I would call, non-value-added gasoline, milk, bread, et cetera, et cetera, they have less to spend. So they have to find a way to still get the same goods that have before but with the same amount of money. In fact, maybe even less money because healthcare costs more, everything costs more. So to answer your question is yes, we're pretty positive.

Reza Vahabzadeh - Barclays Capital Inc.

And so retailer inventories for your products and in your categories are in reasonable shape?

David R. Lumley

Very good. We try to operate on a GMROI basis or on the consumption model with the minimum amount of inventory, so as it sells, we to ship. And retailers try to achieve this as well. So I would say that if anything, we're in a low inventory position because most retailers' fiscal year just ended in January. So that's why I'm very bullish on our shipments between now and the end of the year. With -- you take our POS, our distribution gains and the low inventory position. We're very excited about the rest of the year especially in our -- second half of our fiscal year. Remember that means through the end of September.

Reza Vahabzadeh - Barclays Capital Inc.

Right. And then as far as distribution gains that you noted that in your comments, just to be clear on that, these distribution gains are taking place in which categories?

David R. Lumley

All of them. The highest one's in Pet, very strong in Home and Garden, very strong in Remington across the board, very strong in Appliances, except for North -- small kitchen appliances except for North America where we talked about, and Batteries have been doing very well worldwide. So I think you're going to see a very good trend as we go forward. Yes.

Reza Vahabzadeh - Barclays Capital Inc.

Got it. And then if I may ask one last question, as far as cash taxes and cash restructuring expenses, could you just repeat those numbers, please, Tony?

Anthony L. Genito

Sure, sure. Cash taxes, we said, are going to be about $40 million to $45 million -- $45 million to $50 million -- in that $45 million to $50 million, I'm sorry, for this fiscal year, which is consistent with where we typically fall out. And then we haven't given a hard number yet on cash restructuring and integration charges, but with the various programs that we have in place, we're probably looking at about $35 million to $40 million in that neighborhood.

Operator

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

Karru Martinson - Deutsche Bank AG, Research Division

So the $45 million to $55 million synergy savings, just so we're clear, that's a run rate level that you expect to be at when we exit the year, correct?

Anthony L. Genito

That's the cumulative -- correct. At the end of this year, we'll have completed the various projects that have been initiated between Pet and the Russell Hobbs and within the Spectrum businesses. And yes, that is what the all-in cumulative impact will be on a go-forward basis.

Karru Martinson - Deutsche Bank AG, Research Division

We're experiencing a lot warmer winter than normal, and I was wondering how that's kind of impacting your Home and Garden in terms of early shipments and how is the shelf space looking for the spring start of the season.

David R. Lumley

Yes, the -- it's good. It's helping a little bit in the -- below the Mason-Dixon Line, your Texas and Florida. The tail of the tape is March. So we just got to wait and see what the weather's like in March. We do have significant distribution gains in place, and they'll be on the shelf. So we just got to hope that groundhog was right and that March is good month.

Anthony L. Genito

Yes, Karru, as you're well aware, our Home and Garden business, it's -- our first fiscal quarter represents less than 10% of the revenues of that business. That being said, the POS, as Dave mentioned, to date has been very, very positive for this period in time. Our products are selling very well, and as Dave said earlier to the last question about shelf space and going forward, we are very excited with our placements that we'll have for the 2012 season. So I guess kind of stay tuned because the Home and Garden business will really be dictated by the month of March, April, May, June.

Karru Martinson - Deutsche Bank AG, Research Division

Okay. And when you guys talked about growing EBITDA at a faster rate than sales, you referenced some new higher margin products. I was wondering if you could provide a little color. What types of products are we looking at here and perhaps some examples on when they will be on the shelf?

David R. Lumley

Sure. The consumables part of our Remington business, the i-LIGHT Pro with its replaceable bulb and intense pulse light technology, think of i-LIGHT really as our razor, razorblade, once the base unit's there, they continue to replace the bulb. Wet shave and wet goods for us even though we're very small in it, it's a huge category, very profitable category. Hair accessories is the same. So these are disproportionally higher margins than the durable business. So this is a really good new mix for us and also should help us better compete with many of our competitors who have both durables and consumables in this space. The growth of our -- certain parts of our Battery business around the world and segments within are doing better. Especially things like hearing aid, certain rechargeable batteries are better than others than, let's say, zinc carbon batteries, which have a disproportionate amount of zinc in it. I think in the Pet business, the -- John, you may want to jump in with some of the products that you've put out there but especially even in aquatics, which is very, very high margin to start with. I'll let John jump in for a minute.

John A. Heil

Yes. We've had some really nice success with some of our new aquatics kits and combos with the LED lighting, and that has generated some excitement in the category and has spurred some growth in our food and chemical business, which is very profitable for us. So that's been really good. We've had some great success in Nature's Miracle with some new line extensions, and our new acquisition, FURminator, will be really a very positive impact on overall margin structure going forward.

David R. Lumley

Correct, and that's why a lot of people have questions about that. That is a very, very good business. And then in our Home and Garden, which starts as very strong margin to start with, our dramatic and accelerated growth in the Bed Bug category, which is all liquid based from virtually a few million dollars to significant amounts, is really driving the margins. And that is in full distribution this year. And again, I'd like to thank all of you guys from New York and Boston for helping drive this business, and just keep traveling and bringing those suitcases home, and that will keep it going for us. So New York is our #1 market. So that -- those are some examples.

Karru Martinson - Deutsche Bank AG, Research Division

Very good, I didn't think of that . But Dave, just lastly on aquatics, we've weathered a couple of years of downtrends in North America. It seems to be turning around. What are you seeing when it comes to some of the big retailers like Walmart and kind of shelf space outlook for that category?

John A. Heil

Sure, we've actually had a pretty good run on aquatics now for about 2, maybe 2 quarters, and on a go-forward basis, we feel good about some of the new listings we have, and it's the driven by some innovation on our part with these new kits and combos, typically smaller in size, LED lighting, different sizes and shapes. And the retailers have embraced that, and they've added some additional promotional activity. And the larger retailers in North America are showing a positive POS for the first time in a while. And we're just very excited about it and trying to keep it going.

Operator

Your next question comes from the line of Carla Casella with JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

You talked about a great lineup of new product introductions for second quarter, specifically in Pet. How much will the advertising increase be in that quarter? Or is it more generally spread across the year?

David R. Lumley

John, you may want to address that. I mean, we use the word advertising here at Spectrum as everything we spend and selling out the door. So John, do you want to address that a little bit?

John A. Heil

Well, we have a lot of new listings. We don't really have a lot of advertising, I guess, in the traditional sense. So we picked up some major listings in our grooming business and our stain and odor business. We picked up some major new listings, as I was saying in the earlier call, on our kits and combos, which we're very excited about. And we've had some new products, some new line extensions in our Dingo line, which are new and innovative and creative and have added some excitement to that business. So combination of multiple categories, multiple new listings at our major retailers and promotions around that is really what we're excited about.

Carla Casella - JP Morgan Chase & Co, Research Division

I guess my question more is, is it focused in the second quarter around the launch? Or do you set the listing where -- evenly out for the year?

John A. Heil

The listings are flowing into the marketplace during the second quarter. And so I'm talking about when they ship to the retailer. Then, the retailer has to put them on the shelf, and by the time they go through the system, they're set up and in place late second quarter, early third quarter.

David R. Lumley

John, those in the last 6 months, 9 months before the next set, that maybe issues in that [ph] .

John A. Heil

Yes.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then JCPenney announced a major change in pricing strategy. I guess, can you just talk about your relationship with Penney and if that -- if you expect that to change at all given their change in pricing stance or if it affects the way you deal with them in terms of either listings or markdown support or any of your business with them?

David R. Lumley

Most of our business with JCPenney is in the appliance area, and I know that our people are very excited when they read something like because a lot of retailers say they want to be everyday low priced, and they want to provide low pricing, but they struggle to get there. So I applaud JCPenney. That's where the market is. But Terry, maybe you want to talk a little bit about JCPenney.

Terry L. Polistina

Yes. No, it's an opportunity because it's much more in line with the Spectrum Value Model, and we'll continue to pursue that, as we are much more aligned with their go-forward strategy than what their strategy has been in the past.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. And then just one quick question on the -- you talked about gaining share in Home and Garden, getting retail distribution gains -- you said gains -- I'm sorry, retail distribution gains. Does that imply you're gaining share? And if you are, who are typically taking it from? Or is it coming from different categories?

David R. Lumley

Well, you have to go business by business. In our Battery business, there was a time we were only 9 share, okay, in alkaline and about 12 overall, and now we're about double that both numbers. And that really just comes from gaining some distribution where we weren't before, and we're getting trials kind of across the board among all the people who sell Batteries. I think in relationship to Remington, again, we're entering new categories on the consumables, but the share we've taken against the traditional competitors in men's and women's there. And it would just go across the board that way. Sometimes we're taking it from private label as retailers are realizing they can't sustain that anymore with the Asian supply chain costs. In Home and Garden, we have 3 principal competitors, and they take some share from us. We take some from them. But again, I think entering into the -- take Home and Garden for instance with Black Flag, we've been relatively weak in the food and drug market, and one our competitor is very strong. Now we have a viable alternative. That was very important. So that's big place to gain share. So I think as we enter Eastern Europe, we really weren't in there except for Batteries, and now Remington and appliances are charging in there. And there's -- well, in appliances, there's 30 people. So I think it's not where you can say, "Oh gosh, they have taken it from these 4 guys." It's just kind of price point driven, and if we have the product with the right price point, then whoever isn't there, is moved somewhere else or moved out.

Carla Casella - JP Morgan Chase & Co, Research Division

And would you say you're better or worse penetrated in the dollar stores than some of your competitors?

David R. Lumley

Well, by category, in some cases, we're not in there at all, and in others, we've been in there a long time. We just got a significant win in that category with Remington, and we constantly push the other one. So we're growing in there those categories right now because there's a lot of -- there's a lot of movement around in that value category in the dollar stores and of course with the other big retailers, and I think a lot of them are realizing that you got to provide products for those price points about those people coming in your store. So if no one comes in your store, doesn't matter. You have no sale. Right? I mean, I know it sounds funny, but -- so I think the retailers around the world are donning on this. You could have seen the new announcement from Carrefour. Right? I mean, most of us, here on this call, thinking only about the United States, but they're world's second-largest retailer. Their announcement basically was we've got to get the value. They got a new CEO. JCPenney, we have to get the value. And I could go right down the list of other retailers. Got to get the value. That's where we are.

David A. Prichard

Carla, thank you, we'll be happy to follow up offline, if you like, today or next week. So we appreciate that.

I think we've reached the top of the hour, and with that, I do want to thank Dave and Tony, as well as Terry and John. And at this point, we'll now close down our first quarter conference call. On behalf of Spectrum Brands, we do want to thank all of you for participating in our earnings conference call this morning. We'll certainly talk with you again next quarter, and everybody, have a great day and a very good weekend. Thanks again. Operator, we are now finished. Thank you.

Operator

You're welcome, and 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 Management Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts