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Executives

Nancy O’Donnell – Vice President Investor Relations

Kent J. Hussey – Chief Executive Officer & Director

Anthony L. Genito – Chief Financial Officer & Executive Vice President

Analysts

Grant Jordan – Wachovia Securities

Connie Maneaty – BMO Capital Market

Jason Gere – Wachovia Capital Market

Bill Schmitz – Deutsche Bank

Karru Martinson – Deutsche Bank

[Rob Wetenhall] – Royal Bank of Canada

Alice Longley – Buckingham Research

Chris Ferrara – Merrill Lynch

[Bahara Inaudible] – Lehman Brothers

Joseph Altobello – Oppenheimer

Spectrum Brands, Inc. (SPC) F1Q08 Earnings Call February 7, 2008 9:00 AM ET

Operator

Good morning. My name is April and I will be your conference operator today. At this time I want to welcome everyone to the Spectrum Brands first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the call over to the vice president of investor relations Nancy O’Donnell. Ma’am you may begin your conference.

Nancy O’Donnell

Good morning everyone. Welcome to the Spectrum Brands first quarter conference call. Joining me today are Kent Hussey, Chief Executive Officer of Spectrum Brands and Tony Genito our Chief Financial Officer. Before we begin I want to remind everyone that our comments this morning include forward-looking statements. These forward-looking statements are based on management’s current projections and assumptions and contain an element of uncertainty. Actual results may differ materially. Due to that risk Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release and in our most recent Form 10K and 10Q. We assume no obligation to update any forward-looking statement we make today.

In addition, please note that we discuss certain non-GAAP financial measures during our remarks including adjusted diluted earnings per share and adjusted EBTIDA. The term adjusted EBITDA refers to a number that comprises EBITDA contributions from both continuing operations and discontinued operations and excludes certain elements of earnings that management believes are unusual in nature or not comparable between periods. In management’s opinion these non-GAAP metrics provide incremental valuable information about our results of operations and serve as one addition means to analyze our financial performance. In addition, adjusted EBTIDA can be a useful measure of a company’s ability to service debt and in fact, is one of the measures used to determine debt convent compliance under the terms of our senior credit facility. Non-GAAP metrics while useful supplemental information are not intended to replace the company’s GAAP results and should be read in conjunction with those GAAP results. In table four of our press release we provided a reconciliation of adjusted diluted EPS and adjusted EBTIDA to GAAP results. We’ll also make that reconciliation available on our website.

Thanks for your attention to these details. At this point I’ll turn the call over to Kent.

Kent J. Hussey

Good morning everyone from rain soaked and beautiful Atlanta, Georgia. Thanks for joining us on today’s call. I characterize our 2008 first quarter as one of good progress in an overall challenging retail environment. As I told you in our last call my primary focus this year will be on improving the profitability of our business and as measured by adjusted EBIDTA, we delivered nicely on this goal this quarter with EBTIDA improvement versus the first quarter of 2007 of $8 million or 19% when you include our home and garden business. Our top line performance trends which appear anemic can be a little difficult to interpret from our reported results. [Inaudible] were qualified discussed in our last earnings call; Q1 sales would be impacted by early holiday shipments which I’ll discuss in more detail in a moment and by some intentional selective culling of sales in our battery business. But, overall the long term trends are positive and we believe we’re making good progress on a number of fronts. I expect further improvement in our financial results for the full year 08.

We reported net sales of $561 million from continuing operations a 1% decline as compared with 2007. Adjusted diluted earnings per share from continuing operations before restructuring and other charges were $0.06 compared to $0.12 last year. Tony will discuss some of the tax complexities that are having a significant and often times confusing impact on our reported net income and earnings per share. However, I believe EBTIDA is a better indicator of our businesses healthy and projector. First quarter adjusted EBTIDA from continuing operations was $68 million a 15% improvement over last year. When you include our home and garden business which generates a seasonally loss in the fiscal third quarter, adjusted EBITDA was $49 million versus $41 million last year. That’s a 19% improvement. Our latest 12 month adjusted EBTIDA including home and garden is $285 million which is a 20% increase over where we stood just nine months ago. This is also our third consecutive quarter of double digit adjusted EBTIDA year-over-year growth.

Now, let’s take a look at some of the details by business unit. First, global batteries and personal care where sales declined 2% during Q1. You will recall that last quarter this segment generated 16% growth which we told you at the time was not a representative growth rate. As we said on our last call that 16% growth was influenced by the fact that some of our key customers moved to their holiday [inaudible] earlier than usual this past season and as a result we began shipping in for the holiday as well. If you look at global batteries and personal care sales growth over the past two quarter sales growth averaged 6% which I think is more representative of the holiday season results and which is a number we’re pretty happy with given the retail environment today. Global battery sales were flat in the first quarter versus last year and grew approximately 4% on average the last two quarters compared to the prior year. North American batteries declined by 2% in Q1 but were up 1% for the six months.

Rayovac Q1 alkaline battery sales at retail were down about 3% due to a competitor’s aggressive promotional activity at a very low price point. Our dollar share improved modestly on a sequential basis to 10.2% not where we had hoped but an improvement nonetheless. However, looking at the general battery category which includes heavy duty and rechargeable batteries as well as alkaline our point of sale was up 8% compared to growth of 5% in the category so reasonably good performance. Battery inventories at retail [inaudible] slightly over targeted levels.

European battery sales were down 2% in the quarter. About half of the first quarter sales declines is attributable to our intangible exit from unprofitable or marginally profitable private label as well as some second tier branded business. This reflects our strategy of making this region more profitable. In fact, the profitability of our European business improved significantly in 2007 and this continued into the first quarter of 2008. This comes as a result of focusing on our most profitable customer relationships and products instead of chasing volume for volume sake and also as a result of cost savings from our global realignment. We are satisfied that we are making solid progress on our profitability goals here.

Latin America generated battery sales growth of 8% largely driven by currency. We’ve taken aggressive pricing in this region over the past 12 to 18 months to recover the dramatic input cost increases we experienced over the past two years. In fact, gross margins expanded over 200 basis points during 2007. The region continues to enjoy relative economic stability and we currently anticipate this will continue through 2008. Worldwide demand for oil and other raw materials produced in Latin America should sustain this period of prosperity.

Turning to Remington, Q1 global sales declined by 6% year-over. Remember however, that in the fourth quarter of 2007 Remington sales increased 35% so what we believe is a more representative look at the season is to consider the six month average which comes out to growth of about 10% worldwide versus the six month period last year. In general women’s hair care continues to be the star of this category with very strong double digit sales growth worldwide while shaving and grooming is less robust with growth in the low single digits driven entirely by grooming.

Remington sales in North America declined this quarter and were basically flat over the six month period as the men’s shaving category was down over this holiday season. A lack of retailer promotional support compared to 2007 contributed to the decline. Remington did however maintain share in men’s shaving in grooming and is still the number one brand in units and the number two brands in dollars behind Norelco. Both grooming and women’s hair care point of sales showed strong double digit growth outpacing the category in North America.

International Remington sales are very encouraging growing at a 11% rate this quarter or 20% for the six months. Favorable currency translation was a contributor but even on a local currency basis Remington continues to grow internationally in the high single digits driven by increased market share and shelf space at existing customers and the continuing roll out of the Remington lineup across Eastern Europe. We are now the number two brand in women’s hair care with a 17% market share in Western Europe.

Global pet had another good quarter generating Q1 sales growth of 3%. The companion animal side of the business continues to be a strong growth driver although it slowed a bit this quarter to around 6%. Retailers were cautious on selling during the quarter but sell through remained healthy up about 5% so we think companion animal prospects for the rest of 2008 remain positive. Aquatic sales grew 2% on a global basis. North American aquatics was soft declining about 5% in line with industry trends but this decline was more than offset by robust aquatics results in Europe and in Asia where our Tetra business grew in double digits. International growth is attributed to strong demand for new products in both indoor and outdoor fish keeping and water conditioning assisted by strong currencies in Europe and Japan.

Our home and garden business reported in discontinued ops saw Q1 net sales decline of $6.8 million. However, as mentioned in our release 2008 only included one month’s revenue from our Canadian home and garden business which was sold on November 1, 2007 compared with three months last year. Excluding Canadian sales from both periods our US business was down slightly for the period. As you know, the first fiscal quarter represents only 7 to 10% of annual sales for this highly seasonal business so we don’t believe Q1 sales are predictive of the year. Retailers are moving towards a more consumption based inventory model and this enacted early season selling. However, POS at our top retailers during Q1 grew in the mid single digit range in virtually all categories and all accounts so the consumer is definitely purchasing home and garden products. Overall, our relationships with our retailers are very strong. As one example we were recently awarded vendor of the year in the lawn and garden category at Ace Hardware, one of our top five accounts. We had year-over-year growth in listings and displays across all retailers and all of our seasonal marketing programs and promotions are ready for execution in Q2 and Q3. For the most part our customers are telling us that they are supportive of and cautiously optimistic about this category this year, that is barring further weather issues.

Effective January 1 we took price increase in the teens for fertalizer and other grown products and low single digit increases in outdoor control products. While there’s some potential exposure from raw material prices this year we think our pricing initiative should be sufficient to offset anticipated increases and will assist in improving gross margin levels. As you know, the home and garden business was hit by a double whammy last year. Horrible weather in much of the country in April and drought covering a large portion of the southeast during the summer and fall. I’m not about to try and predict what mother nature is up to this year but I can say the southeast seems to be returning to a normal weather pattern with regular rain across much of the region. As a matter of fact, in some very welcome news just yesterday, Georgia’s governor announced an easing of out flowing water restrictions in the state. To be clear, restrictions have not been totally lifted but this is a positive first step. Assuming a more normal season in terms of weather this year, we expect to see top line growth and demonstrable EBITDA improvement from home and garden in fiscal 08.

To summarize, our Q1 sales performance was not what we had hoped for this quarter but when examined in light of some of the timing issues between this quarter and last quarter, we think we’re on track to deliver on our plan for the full year. Like everyone else we’re feeling a little cautious about consumer spending in the overall sluggish economic environment. We are seeing retailers very focused on their own inventory levels and cash flow more so then perhaps I’ve seen in my career. We feel reasonably confident that we are well positioned to generate modest top line growth in fiscal 08 despite these challenges through a mixture of selective pricing, geographic expansion and new product introductions. However, as I’ve tried to emphasize in our conversations on previous calls, although growing sales is an important priority, our number one goal for fiscal 08 is to make Spectrum Brands a more profitable entity. To that end I’m feeling confident.

Profitability this quarter measured by adjusted EBITDA improved by 19%. On a trailing 12 month basis EBITDA of $285 million represents a 14 improvement over [inaudible] results and a 20% improvement since the second quarter of 2007. We’re optimistic that we’ll see year-over-year EBTIDA improvement for full year fiscal 08 as well.

At this point I’ll turn the call over to Tony to discuss the financial detail.

Anthony L. Genito

Good morning everybody. Moving our attention to the rest of the income statement, our continuing operations generated gross profit of $208.2 million during Q1. Within cost of sales we incurred restructuring and related charges of about $100,000 related to headcount reductions taken as part of our 2007 global realignment. In Q1 of last year we incurred $5 million of restructuring and related charges. Excluding these charges from both years, gross margin this quarter was 37.2% as compared with 38.1% in Q1 of last year. The impact of negative product mix changes within the Remington product line up accounted for most of this difference.

Operating expense in the quarter were $153 million excluding restructuring and related charges, or 27.3% of sales as compared with an adjusted $170 million or 30.1% of sales last year. We reduced selling, advertising, research & development and G&A expense but saw increases in marketing and distribution. Distribution expense was up due to increased fuel prices as well as increased container costs from Asia.

Reported operating income from continuing operations of $51.7 million compares with the reported $37.5 million last year. Excluding restructuring and related charges from both years, adjusted operating income is $56 million this quarter or 9.9% of sales compared with $45 million or 8% of sales last year. This presents a 24% improvement. We expect improvement in operating income for full year 2008 as well, fueled by the remaining costs savings related to the global reorganization initiatives implemented last year and improving mix in our business as we exit unprofitable or marginally profitable SKUs or accounts and some modest organic growth.

Moving on to segment profitability, our global batteries and personal care segments generated profits of $47.1 million an 18% increase over last year’s results. There were two major drivers for this improvement. The first is the cost savings from our global realignment initiatives in. In addition, we made tactical decision to reduce our television advertising spend this year in the men’s shaving segment. We did this because our early read on category sales told us results were down. We are convinced we made the right decision.

Just as a side note, one of our competitors launched a major new shaving product this season with significant advertising behind it and we understand that results as retail. Remember, our goal is not just growth but profitable growth. The benefit of these cost reductions was offset by some extent by the lower sales volume recorded this quarter. However, the positive impact of the cost savings initiatives on operating income is evident and we believe it represents a sustainable improvement to the profitability to this business segment.

Looking forward to the rest of the year we have hedged about 75% of our forecasted zinc consumption needs and an average price was about $3,250 per metric ton. Fiscal year 07’s average zinc price was around $3,200 per metric ton so we had very little in way of headwinds from commodity costs this year. As a matter of fact, we think we should begin to benefit from lower year-over-year comparisons by the fourth quarter of this year. The current spot price is about $2,400 per metric ton for zinc. Should zinc stay at this level we’ll have good news on the input cost run in 2009. We have already begun to layer in hedges for fiscal 09 and at this point are approximately 45% hedged at approximately $2,700 per metric ton.

Our global pet supply business generated profits of $16.8 million representing 11.8% of sales compared with last year’s $18.3 million or 13.3% of sales. You may remember that last year we recorded a $2.7 million gain from determination of a post retirement benefit at one of the acquired companies in the segment. Absence that gain the prior year profitability margin of 13.3% would have been 11.3% and the year-over-year increase in our reported profitability margin would have been about 50 basis points.

First quarter corporate expense was $8.4 million versus last year’s $13.2 million. This improvement is associated with cost savings across the board primarily driven by headcount reductions and effective cost controls across the organization. First quarter interest expense from continuing operations was $45.7 million compared to $31.7 million last year in part due to the change in the allocation of interest expense between continuing and discontinuing operations. As you will recall, in connection with the impairment charge we took in fiscal 2007 and the resulting change in the asset carrying values of our home and garden business we increased the quarterly allocation of interest expense to continuing operations by around $4 million. Total interest expense including both continuing and discontinuing operations was $57 million this quarter versus $49 million last year. The increase is a result of higher interest rates and slightly higher debt levels than we had a year ago. Remember, our major debt refinancing last year took place at the end of the second quarter so we have not yet anniversaried that event.

Our fiscal 2008 average interest rate is projected at approximately 9%. We anticipate full year 2008 interest expense on a consolidated basis of approximately $230 million of which $44 million will be allocated to discontinued operations. Cash interest should be approximately $225 million. First quarter depreciation and amortization expense was $16.2 million. D&A should come in around the $60 million mark for the full year. Our discontinued home and garden operations showed a loss of $33 million in Q1 versus $22 million last year. As Kent noted, sales were down primarily as a result of the sale of our Canadian home and garden business which occurred early in the quarter. Remember that the December quarter represents a very small portion of annual sales thus, we don’t assign much predictive value to the Q1 results.

Home and garden generated an EBITDA loss of $19 million this quarter versus a loss of $18 million last year so there really has been very little measurable change in the operations of this business at this early point in the season. The reason for the increased loss in discontinued operations relates almost solely to taxes. Last year we recorded a tax benefit of about $13 million however, at yearend 2007 you will remember that we recorded a valuation allowance against the deferred tax assets associated with our North American business and as a result we recorded no US tax benefit against our H&G losses in this fiscal first quarter of 2008. Although this has no cash impact the year-over-year P&L impact was a negative $13 million.

Turning to cash flow, including home and garden our Q1 operating cash outflow was $92 million defined as EBITDA adjusted for working capital changes plus cash interest of $53 million, cash taxes of $5 million and $14 million in cash restructuring costs. At quarter end we had $85 million in cash on hand and our $225 million ABL facility was drawn down by $105 million resulting in a net cash draw of only $20 million. We believe we’ll continue to have adequate liquidity to fund the working capital build for the home and garden season during the next three months after which our cash position turns positive in the final two quarters of the year. We expect to end the year with no draw on our ABL. We have not changed our expectation that full year cash flow will be neutral to slightly negative after cash interest of $225 million, cash restructuring of $30 million, cap ex of $30 million and cash tax of $20 million.

Another way to look at this is that once we get beyond the structuring payments this year we’re generating positive cash flow from operations of at least $20 to $25 million. Outstanding net debt at quarter end was approximately $2.5 billion, our senior leverage ratio was 5.04 times well within the 6.25 times maximum ratio allowed under the terms of our credit facility. We spent $7 million in capital spending this quarter. Cap ex for the year should come in around $30 million. We still anticipate full year cash restructuring cost of $30 million and 2008 cash tax payments of around $20 million.

In summary, our first quarter results were, as Kent said, very good in the context of a tough environment once you understand some of the ins and outs behind the numbers. Cash flow of -$92 million beat our internal plan by a significant margin and puts us in a good position to fund the home and garden inventory build over the next few months. We showed solid improvement from a EBITDA standpoint, a 19% increase from the prior year and I’m very confident that we’re doing the hard work we need to do to continue the trend of EBTIDA improvement as long as consumer spending continues at a reasonable pace.

I’ll turn it now over to Kent at this point for his concluding comments.

Kent J. Hussey

Before I conclude I think it’s important to reiterate that we continue to have a desire to sell a strategic asset to reduce our debt and leverage and move to a more comfortable capital structure. As you’re more than aware capital markets have not recovered and are perhaps more challenging now than they were last year. We don’t know when things will get better but I think we know they all will at some point in time. In the meantime we will continue to execute our business plan, drive towards improved profitability and ultimately increased value in each business unit in a consolidated enterprise. We believe we’re doing the right things to improve the profitability of our business model. We’re confident we’re on track to achieve that in fiscal 2008 and we look forward to updating you on our progress next quarter.

With that I’ll turn the call back to our operator and we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Grant Jordan with Wachovia Securities.

Grant Jordan – Wachovia Securities

You gave us some color on the home and garden business but I was just somewhat surprised given kind of where you were last year that we didn’t see more improvement in the overall profitability. I know this is a tough quarter to get a read on but were there any sort of unusual items in the -$19 million EBITDA number that we should be thinking about?

Anthony L. Genito

Yes. Actually Grant there was a $1 million tax related charge, property tax and real property tax item that we recorded this quarter and that was unexpected. It relates to some distribution center property taxes that we had. The good news behind this is that we’re applying for a rebate for a significant portion of that $1 million taxes. We should get at least half I not slightly more than half back so we’ll see that later on in the second or third quarters of this years.

Kent J. Hussey

I think you probably recall that we said last year in the first quarter we had some unusual costs that flowed in from 2006 and one would on the surface expect that since that did not reoccur that we’d see a nice pick up this year. I’d just make two comments, one is during the year we deliberately expanding the organization structure of the home and garden business to make it a fully independent standalone business. So, we’ve given it its own general manager, they have their own finance department, their own IT, etcetera, etcetera. So, we have invested some dollars in building an infrastructure so the business is capable of being fully functional on its own. So there’s an increase in that cost versus the prior period. The second thing is I think if you look at the mix of what we ship during the quarter it wasn’t quite as favorable as we had in the prior year. Again, we don’t see anything that says that we have problem going forward this year and in fact, we’re pretty confident with the SKU lineup that we have planned for the season that we’re on track to hit our numbers for the year.

Grant Jordan – Wachovia Securities

That’s helpful. That was where I was heading with that. My next question, I think you’ve given us good color on this in the past but just the whole European batter market, did you see any further shift to private label? Do you feel like that’s continued to be stable?

Kent J. Hussey

Yeah, I think it’s its relatively stable, I think as we said we have made the decision to exit unprofitable and marginally profitable, when I say marginally profitable, I am talking about gross margins in the single digits which if you really allocate some of the overhead to it it’s probably all unprofitable business. That was probably I think in the order of $6 to $7 million during the quarter. I think the thing that impacted us negatively is we had some quality problems in our plant in China so we actually missed shipments to some of our customers. But if you look at our branded business over there that has stabilized our share is relatively stable. We think we’re at a point now in Europe that what we have seen over the last six to nine months is continuing. We’re optimistic that we’ve reached kind of a equilibrium point.

In Germany which is our home market where we had the most dramatic impact on our business is the last two years, private label is well over 50% of the market now and we’re seeing an interesting trend at some of the retailers who in the rush to private label in Europe are beginning to recognize that is not necessarily as profitable a business as they had hoped and they are actually considering bringing branded products in along with private label so we’ll see how that unfolds in the future, but I think we are at a stable point now.

Grant Jordan – Wachovia Securities

Then my last question, on the last call you talked some about your new promotions on the battery side with Disney, has that helped you with any additional sell out going into the next quarter?

Kent J. Hussey

The only thing in Q1 was we offered the Disney packaged product to Wal-Mart, I think that was a positive for us in the quarter. As I mentioned, one of our major competitors had a very, very aggressive promotion which I think blunted our business, we’re the small guy in the category when a big guerilla decides to do something aggressive. He gained a lot of share in the quarter and the other two guys loss some share. The good news though is that we are just now beginning to place product in a number of other retailers and we are using it as a door opener in accounts where we don’t currently have distribution and then finally we’re just beginning to ship that product actually to the Disney properties, the theme parks and the hotels. So we think the contribution to our battery business in North America will increase as we go through this year.

Operator

Your next question comes from Connie Maneaty with BMO Capital Market

Connie Maneaty – BMO Capital Market

On the discontinued ops a couple of questions. What was the dollar amount of Canadian sales that is going to have an impact on this year, and what was it in the first quarter?

Kent J. Hussey

The amount that came out, the year over year comparison I think we were down about $5 million out of the total short fall.

Anthony L. Genito

In fiscal 2007 first quarter Canadian sales were slightly over $9 million, $9.1 million. In fiscal 2008 first quarter they were $4.7 million resulting in a change of about $4 million to $5 million.

Connie Maneaty – BMO Capital Market

And Canadian sales for the full year, what were they in fiscal ‘07?

Kent J. Hussey

About $80 million, again it’s very seasonal business it’s even more seasonal than North America.

Anthony L. Genito

The Canadian business was more seasonal than the US business because they’re basically a month behind us with respect to the seasons being shorter.

Connie Maneaty – BMO Capital Market

So we’ll see something like $30 - $40 million change in sales in the next couple of quarters just from the exit of Canada?

Anthony L. Genito

That’s correct.

Kent J. Hussey

But remember Canada was not a profit contributor.

Connie Maneaty - BMO Capital Market

The tax penalty that you suffered in discontinued ops, do we see that every quarter or was it a one-time thing?

Anthony L. Genito

Well as long as we have US losses, in the overall from a consolidated standpoint, keep in mind that our North American business is where - when I say North America, our domestic tax entity is where all of the debt resides and the interest burden is there. So we generate losses in the US. Of course, we’re a global company and oversees we’re generating profits so what happening on a consolidated basis what you’re going continue to see is earnings over, outside of the US, being taxed and then where we used to offset that tax expense with a tax benefit in the US since we have a valuation allowance against our deferred tax assets, we do not benefit that loss in the US so we end up with a tax expenses on a consolidated basis. It’s very unusual [inaudible].

Kent J. Hussey

One of the realities is not only do we have to take a valuation allowance against what we had on the balance sheet, we’re no longer to record any additional benefit until we demonstrate to our friends at the IRS that our North America entity is our profit generator and we can begin to use these benefits.

Anthony L. Genito

Correct. Now a couple of points as to what I just said, first that we said it in our prepared remarks and we said it last quarter as well, his valuation allowance impact as a non-cash event, there’s no cash associated with it. In addition, in no way shape or form does it change our belief that we’ll ultimately utilize the deferred tax asset i.e. the operating losses that we generated because they expired effectively in the US 20 years from the date they were incurred. So the first expiration period is 2024, our first loss was generated in 2004. So simply Connie to your question as to discontinued operations, the first quarter because we always, the seasonality of the business, incur a loss I think it’s much more pronounced in this quarter because of that loss, again no tax benefit associated with it. Going forward we should see profitability in this business because of the season and therefore from a discontinued operations standpoint we’re not going see that order of magnitude that we saw in the first quarter.

Connie Maneaty - BMO Capital Market

Just another question on lawn and garden, what are the rules for showing something as a discontinued operation if a sale of that property is not likely in the near term? How much longer can Home and Garden be shown as a discontinued ops?

Anthony L. Genito

You’re absolutely right. There are specific criteria within US accounting literature that specifies whether or not you can or can’t put an asset into discontinued operations. Specifically, this is something that we assess every quarter and based on the first quarter we’ve met the criteria of the accounting pronouncements and hence properly reflected this as a discontinued operations. So I’ll just say that it’s something that we continue to assess and will assess each and every quarter.

Connie Maneaty – BMO Capital Market

Do you think the best presentation of earnings from the sale side should be on a continuing operations basis or consolidated? And from what you see the sale side producing are we all using the same kind of presentation or are we apples and oranges?

Kent J. Hussey

I think there is a lot of apples and oranges relative to our business. It’s very unfortunate that GAAP sometimes is very prescriptive as to how we have to do things. As I said at the beginning of the call, I think for us, in the current evolution of our business EBIDTA is the most meaningful measure and until a business is sold it is our business, we own it, and we operate it. We operate it as if we’re going own it forever even though it is for sale. I think looking at us on a consolidated basis for right now makes more sense.

Operator

Your next question comes from Jason Gere with Wachovia Capital

Jason Gere – Wachovia Capital Market

Just two questions, can you kind of go through each - I guess I’m thinking about the inventory level, where we stand right now, obviously battery sounds like there’s much tougher comparisons. We’ve heard from some of your competitors that the March quarter will probably sounds a little bit liter because of the inventory levels and then also lawn and garden? With Remington with a softer North America can you touch upon how you’re looking about it into the March quarter as well?

Kent J. Hussey

Home and Garden retailers have been extremely cautious, they traditionally would set i.e. bring in inventory four to five weeks in advance of when they felt the season would break. They’re now doing it literally two weeks before the season, so their inventory level are very lean at the moment and we have just seen recently basically the flood gates are opening now in terms of orders coming in and shipments to get the stores set. We think they’re operating on us. We said on the comments in more of a consumption model. They’re relying on their sophisticated suppliers to have the inventory on hand and to have a supply chain capability to get it there quickly and we have that capability. We’re one of the only two people, I think, that really excels at that, us and our major competitor from Ohio. So, I think we’re very well positioned there. Again, if consumption picks up which we think it will this year we’ll be pumping in that product to meet consumer demand.

In Remington, the only part of our business worldwide that it was disappointing was men’s shaving in North America. Obviously, the results were less than we anticipated. We actually funneled money as we got towards the end of the holiday period into trade marketing, promotional money to move the inventory out and I think we felt pretty good by the end of the quarter that we were successful driving inventory levels down as a result of that. So, we don’t see an issue with Remington as well. Battery inventory it kind of varies by SKU. Our read is it’s probably slightly higher than where inventory levels were driven down to last year. Battery inventory levels got down to levels where we were literally running out of stock at one point in time because of the very tight controls. So, we backed up a little bit from that but I don’t see it as a huge issue for us.

Male Analyst

Another question, can you talk about into a slowing US economy here, the balance of your market spending between advertising, promotional spending especially with some new innovation coming out as well, how you can convince the US consumer that your price points which are typically much lower than some of your competitors out there, how they’re getting the bang for the buck?

Kent J. Hussey

We are in many of our categories, as you well know, batteries, Remington, even in home and garden primarily the value position players here, our value proposition is a product as good or better than the competition for less. In many cases how we operate is at the point of sale. We don’t spend extensively on TV advertising, we can’t afford to do that versus our much larger competitors. Where we excel is the quality of the packaging, the quality of our displays, getting extra in aisle displays and doing an excellent job of merchandising and communicating with the consumer at the store level. I think that’s where we continue to focus, we continue to focus with our key retailers on in store promotional activity, circulars and ads that bring consumers in looking for the product and we have found that in our business model to be the most effective way, cost effective way to connect with consumers.

We believe that in most of our categories while the economy appears to be slowing, we’re not dealing in $50,000 SUVs and $25,000 kitchen remodeling and $5,000 flat screen TVs. We’re selling bags of fertilizer, AA batteries, fish food, etcetera, etcetera. So, we’re hopeful that we will be less impacted by an economic slowdown than some other categories. And then, as being the value alternative as consumers are trying to watch their pennies we think they may pay more attention to our value proposition.

Male Analyst

Just a last question and then I’ll jump off, of the $35 million in costs savings your anticipating this year, how much was realized in the first quarter?

Kent J. Hussey

I don’t actually have a number for you but we are tracking on delivering that number for the full year so assume there’s probably $7 or $8.

Operator

Your next question comes from Bill Schmitz with Deutsche Bank.

Bill Schmitz – Deutsche Bank

Can you just run through those cash flow assumptions again? It was a little quick and I didn’t catch them all for 2008.

Anthony L. Genito

We talked about cap ex, we said that would be about $30 million. Cash restructuring about $30 million. We said cash interest should be about $225 million. Cash taxes, again, we generate NOLs in the US but we pay some state taxes here in the states as well as internationally, that cash tax number should be about $20 million.

Bill Schmitz – Deutsche Bank

Can you just break down both the US and international what the battery growth split was between alkaline and carbon? Because, it looks like you got a lot of zinc carbon distribution this quarter.

Kent J. Hussey

Yeah, we did. Actually, in the US we said that our alkaline battery dollar sales were down about 3% versus the category was up about 4 and I talked about the fact that one of our competitors ran a really, really aggressive promotion that probably hurt us. Some of our key retailers I think anticipating kind of the recessionary environment have put heavy duty back into distribution in order to hit lower price points. We have had very strong double digit growth in heavy duty and also for the first time in a few quarters we’re actually seeing a resurgence because of some new products in rechargeable categories as well. As I said, when you look at POS for the quarter, alkaline down slightly but general batteries we were actually up about 8% in dollars versus the category which was up about 5%.

Bill Schmitz – Deutsche Bank

Just in terms of receivable days, I know there’s a big shift in last quarter but it looks like days were actually up year-over-year in the fourth quarter. Why is that happening?

Kent J. Hussey

It’s mostly just a mix of customers.

Anthony L. Genito

Well, it was customer mix and also keep in mind that while we get a benefit on exchange in our top line in sales it also increases the value of our receivables in Europe, our European or international receivables so there’s an exchange impact on that.

Bill Schmitz – Deutsche Bank

Right. But, don’t you manufacture in local currency too? So, it should be [inaudible].

Kent J. Hussey

There’s nothing out of the ordinary there. It’s just the mix of customers, I think.

Bill Schmitz – Deutsche Bank

So what does that mean? You’re selling more to customers that pay later? Is that fair to say?

Anthony L. Genito

We have terms arranged from 30 to 60 and in some international jurisdictions as much as 90 days. So, there’s nothing out of the ordinary going on there.

Bill Schmitz – Deutsche Bank

How long does it take for a battery to go through the supply chain so we can kind of get a feel for when you get the impact of the zinc price reduction coming through even with the hedges?

Kent J. Hussey

The production cycle is actually relevantly short. It’s a couple of days to make batteries and package them. We then have them in inventory and the actual supply chain, assuming that you had no inventory and you got an order, from start to finish from actually making the battery, packaging, delivering it you’re talking a matter of a couple of weeks. Now, we do have work in process, we build what is called a battery bank. We build batteries to a forecast, we package somewhat to a forecast, we also have raw materials on hand in all of our plants all around the world. So, we’re actually predicting, and again we’re hedged for most of this year, 75% of our requirements are hedged, so you probably won’t see any benefit from the lower zinc until probably the last three or four months of the year.

Bill Schmitz – Deutsche Bank

Is there like a number for how long it takes a spot zinc price to kind of work through the P&L

Anthony L. Genito

It really depends upon when and how much was hedged.

Kent J. Hussey

How much was hedged.

Anthony L. Genito

Again, our hedging program is very disciplined it is [inaudible] in nature where we put in layers every quarter so there’s a step down approach. But, just to give you a sense I would say that based on where the current spots are today we could probably see somewhere between two and four million dollars of benefits if those spots where to hold sometime occurring in the last three to four or five months of the year, so let’s call it the second half of the year. But, keep in mind this quarter for instance, zinc negatively impacted us by about $2 million because that hedging that we did last year when the prices where high, that was in there sort of at the full boat, if you will, were actually negative $2 million in this quarter. But then, we’ll see some offsets as the year turns forward.

Bill Schmitz – Deutsche Bank

Great. One quick last one, because the retail supply chain and lawn and garden seems to be shrinking, taking inventory closer to sell through, is that going to help the seasonal working capital going forward?

Anthony L. Genito

Slightly. There will be some benefit to that.

Operator

The next question comes from Karru Martinson with Deutsche Bank.

Karru Martinson – Deutsche Bank

In terms of the asset sale progress, what is your comfort level that you can get a deal done when markets return kind of as multiples have contracted? Is this still going to be a deleveraging event in your minds?

Kent J. Hussey

That’s our objective. Two things, one is the businesses I think are improving every day. We’ve said, we expect all of our businesses to deliver improved EBTIDA in 2008 versus 2007 so that’s a good thing. Secondly, there continues to be good active interest in the assets but the people who are interested are all suffering as most people in the acquisition world are from the terrible conditions in credit markets. So, I think both sides are waiting for that condition to improve.

Karru Martinson – Deutsche Bank

If I was to characterize that, that is people calling you guys and saying, “Hey we’re still interested, we’re just waiting on the markets.”

Kent J. Hussey

That is correct. Because, people know that we have publically stated we intend to sell strategic assets, I get regular calls and letters from people logging their inquiries on things we haven’t even talked about as expressing interest in other segments of our business. So, there’s a fair amount of interest in the portfolio brands and businesses that we have and as I said before we have no intention of just cherry picking off little pieces of the business our goal is to do a larger business unit transaction that has a significant impact on debt and is a deleveraging transaction.

Karru Martinson – Deutsche Bank

In terms of those debt levels what’s the peak to trough kind of draw on the ABL here?

Kent J. Hussey

About $150 million.

Anthony L. Genito

About $150 is the peak draw on the ABL driven by the phone card business.

Karru Martinson – Deutsche Bank

So, we’ll be hitting that sometime here in the near future as we build up these inventories.

Kent J. Hussey

Right. In March or April.

Anthony L. Genito

During this quarter.

Karru Martinson – Deutsche Bank

In terms of the product mix on home and garden that kind of hurt the profit margin, what was the difference this year versus last? We’re actually shipping some soils and grass seeds that are relatively lower margin. The controlled business which is the highest margin business really begins to take off as we’re shipping in for the summer season.

Karru Martinson – Deutsche Bank

In terms of your response to the promotional activity on alkaline batteries, what can you do to try and control your destiny there?

Kent J. Hussey

Batteries are still very much an impulse purchase item. We’ve said before probably 85% of sales actually are impulse at retail. So, for us we have plans to offer some very attractive promotions. For example Disney, all we were able to do because of the late breaking consummation of that agreement was put Disney characters on the package. What really makes that licensing agreement more exciting is when we can begin to promote along with the various Disney movies and other activities. So, there is a whole range of call it consumer promotional activities surrounding Disney for example, that will be rolled out as we go through the balance of the year. But, I would be the first to say that if the gorilla decides to do something dramatic like he did in Q4 it’s very hard for us to counter that just because of the strength of their brand and the breadth of their distribution. But, trade promotion, consumer promotion, is really the key thing I think that attracts the consumer. We have a lot of that planned for the balance of 2008.

Karru Martinson – Deutsche Bank

Lastly, in terms of your cash interest expectations, what kind of LIBOR rates are you baking into those numbers and are you adjusting an amount for the recent declines.

Kent J. Hussey

I think we’ve [inaudible] at this stage.

Anthony L. Genito

We’ve kept them relatively constant. I can get you an exact number here, bare with me for a moment. When we built our plan it was about 4.5. We’ve taken it down about 50 basis points to just slightly over 4%, 4.1, 4.2%.

Kent J. Hussey

And it’s now what 3.5?

Anthony L. Genito

So, we’ve got some potential upside. Now, keep in mind that we do hedge our interest to fix the interest rate on our floating debt.

Kent J. Hussey

Not a lot of opportunity.

Anthony L. Genito

Not a lot of opportunity this year but there’d be some slight benefit.

Operator

Your next question comes from [Rob Wetenhall] with Royal Bank of Canada.

[Rob Wetenhall] – Royal Bank of Canada

I wanted to ask a few question about working capital, if you expect it to be a source or use of cash in 08?

Kent J. Hussey

You’ve got to be careful there. If you give too many data points to you guys and you get certain numbers. I think we had a plan of a slight use of cash. I think we’ve built a relatively conservative plan and I would say internally we certainly hope that will not be the case.

[Rob Wetenhall] – Royal Bank of Canada

And relevant to that as well, I guess the sale of Nu-Gro frees up, what probably $20 million of working capital investment?

Kent J. Hussey

Absolutely. I think the average, or let’s call it the trough peak for them was about $30 million so that’s $30 million less we have to pump into a business that wasn’t generating a return.

[Rob Wetenhall] – Royal Bank of Canada

I assume you also got cash proceeds from the asset sale during the first quarter.

Kent J. Hussey

Yeah, that was recorded.

[Rob Wetenhall] – Royal Bank of Canada

That’s what approximately $25 million?

Kent J. Hussey

No, it was actually about $15 million.

[Rob Wetenhall] – Royal Bank of Canada

Okay. Does your free cash flow neutral forecast 08, you were kind of enough to reiterate cap ex and interest expense, is that also factoring working capital?

Kent J. Hussey

Yes. It’s everything.

[Rob Wetenhall] – Royal Bank of Canada

Great. Essentially, if you’re saving $30 million in working capital this year that’s through the sale of Nu-Gro and you received $15 million in asset sales proceed that’s contributing in total $45 million of additional cash?

Anthony L. Genito

Well, we’ve got $15 million of cash being generated in proceeds.

Kent J. Hussey

You’ve got to remember the working capital all comes back to this business in September.

Anthony L. Genito

Right.

Kent J. Hussey

It’s a seasonal peak and we get it all back so we don’t get that $30 million of working capital as a gain for the year. It’s a timing issue. But, we basically get in our pocket $15 million from the sale of the asset.

[Rob Wetenhall] – Royal Bank of Canada

Got it. But, at the same time you don’t have to reinvest that money into that business during the seasonal.

Kent J. Hussey

During the year, during the season, that’s correct.

Anthony L. Genito

But, as Kent said its timing and keep in mind Bob, the timing that’s Nu-Gro Canada, the buildup of that peak was about a month, at least, later than what we had experienced in the US. So, that peak was in the month of May.

[Rob Wetenhall] – Royal Bank of Canada

I saw your cash balance is approximately $85 million.

Anthony L. Genito

Yes.

[Rob Wetenhall] – Royal Bank of Canada

Is that typically higher than normal?

Anthony L. Genito

Yes.

Kent J. Hussey

What happen was because of the yearend holiday season a lot of cash came in, got trapped in lock boxes and they were not able to be applied. That’s why the ABL was doing 105 if we actually had applied as we normally would, the ABL would have been like 20ish, 20 to 30ish. There’s always some cash floating in the system that you can’t apply to the ABL.

[Rob Wetenhall] – Royal Bank of Canada

Sure. Sure. Essentially your total net debt outstanding reflects but not your gross debt the fact that your cash balance is high because you couldn’t repay the ABL.

Anthony L. Genito

That’s right. I believe our growth debt was $2,570,000 gross.

[Rob Wetenhall] – Royal Bank of Canada

That’s right.

Anthony L. Genito

And then $85 million of cash so our net debt would be slightly below $2.5 billion.

[Rob Wetenhall] – Royal Bank of Canada

Good. Okay. So, you’re still on track then cash from operations minus cash from investing to be neutral for the year it sounds like.

Kent J. Hussey

That’s correct.

Anthony L. Genito

That’s what we’re looking at. As we said on the last call, we ended last year, fiscal year September 30th at $2.4 billion worth of debt and that’s where we plan on ending at this point in time.

[Rob Wetenhall] – Royal Bank of Canada

Your assumption that you can generate net free cash of $25 to $30 million in 09 is based on the absence of restructuring charges in that year, correct?

Kent J. Hussey

That’s correct.

Anthony L. Genito

Right. That’s correct.

Operator

The next question comes from Alice Longley with Buckingham Research.

Alice Longley – Buckingham Research

I was looking for an update on the mix of some of your businesses. Could you tell us in the battery business roughly on an annual basis what percent is Europe, US, Latin America?

Kent J. Hussey

Europe and the US in batteries are about the same size. If you look at battery sales being 100% Europe may be slightly bigger than the US at this stage in the game actually and then Latin America’s about 20% of the total.

Alice Longley – Buckingham Research

Okay. Within Europe now what percentage of your business is private label?

Kent J. Hussey

Over 50%.

Alice Longley – Buckingham Research

Even after you terminated some of those?

Kent J. Hussey

Yes. But, that’s relatively small compared to the total business, the amount we walked away from. We got out of some last year, we’re continuing to step away from unprofitable business and the challenge for us is to replace those sales with profitable sales so that’s what we’re working on.

Alice Longley – Buckingham Research

So you don’t want to stop making private label precipitously because you hope to replace soft bids of private label with branded?

Kent J. Hussey

Correct. In Europe, Alice as you’re aware there is a huge amount of segmentation and many different price points, including in Europe as many as three different price points for private label starting with junk and going to value private label and then premium private label and then you get your branded product. So, we’re moving out of trying to compete for the low end of private label which is truly a commodity and trying to appeal to the retailers there that if they do carry private label they need to carry a reasonably quality product where both of us can make some kind of a return.

Alice Longley – Buckingham Research

Moving over to Remington, what percentage of Remington is US versus Europe now?

Kent J. Hussey

I’m guessing two thirds and a third.

Alice Longley – Buckingham Research

Two thirds is which?

Kent J. Hussey

US.

Alice Longley – Buckingham Research

Okay.

Kent J. Hussey

Maybe 60/40. Everybody is scrambling to look up the numbers.

Nancy O’Donnell

Yeah. I think it’s closer to 60/40.

Kent J. Hussey

60/40 now because Europe has grown pretty dramatically in the last periods.

Alice Longley – Buckingham Research

That’s what I was thinking. Pet, what’s the mix now in Pet?

Kent J. Hussey

Pet is probably two thirds domestic and about a third international.

Alice Longley – Buckingham Research

And what percentage of pets is aquatics now?

Kent J. Hussey

Still two third aquatics and one third companion.

Operator

The next question comes from Chris Ferrara with Merrill Lynch.

Chris Ferrara – Merrill Lynch

I wanted to talk about batteries in the US and with respect to zinc carbon I thought people kind of understood, or the consumer understood that zinc carbon isn’t really a high value proposition for them. So, do retailers come to you and request zinc carbon? Or, is that something that you come to them and say, “Hey I think this will fit your planogram.”

Kent J. Hussey

No basically retailers like to carry it. I think a couple of years ago a couple of retailers pushed hard on zinc carbon. We tried to convince them that all that did was trade consumers down from alkaline to lower price point, lower margin zinc carbon and consumers don’t necessarily understand the proper applications and uses of zinc carbon and so that leads to potential consumer dissatisfaction. So we’re not proponents of it, particularly in the North American market. However, for competitive reasons a variety of retailers want to carry that as part of their assortment because it’s a relatively low cost open price point kind of a product. There has been a resurgence of heavy duty product here in North America in the last six to nine months.

Chris Ferrara – Merrill Lynch

Just on home and garden and I know again it’s a seasonally small quarter and you never really know what to conclude in the December quarter but, the numbers you guys are talking about in home and garden obviously they don’t compare very favorable to what your big Ohio competitor said for the quarter. In particular their takeaway and sell in were double digit. So, what do you make of that? What conclusion, if any, can you draw from that? If they’re selling in at a greater rate and their takeaway is at a greater rate, is there a shelf space game there for them?

Kent J. Hussey

To a certain extent we have a different product portfolio than they do. We’re probably much heavier weighed in controls. They’re the big gun in fertilizer and soils. So, perhaps they’re product assortment is shipping in a little earlier than ours. Remember, they’re two thirds of the fertilizer market, we’re 20%. They’re three quarters of the soil market, we’re 15%. But, when you get into the controls business that’s half of our business. I think it’s just a function of the mix and the seasonality of the mix of products. I’m not reading anything more than that into where we’re at this stage of the game.

Chris Ferrara – Merrill Lynch

Great. I guess bigger picture, how do you balance sort of what you’re trying to do, sort of lean down the businesses to show more favorable cost structure for any potential buyer with almost what inevitably has to sort of become almost second priority which is getting innovation and getting the top line up. How do you strike that balance as you go through this year and know that the end game is a sale?

Kent J. Hussey

I think a number of things, I keep harping on the fact that we’re looking for profitable growth not growth. We’re looking to eliminate unprofitable accounts, unprofitable SKUs. We’re going through a massive SKU reduction here at the company. I shouldn’t use these words but SKUs got somewhat out of control in terms of its quest to generate sales which lead to huge complexity and an explosion of the number of SKUs in a lot of different parts of our business, all of which when you really look at it were not contributing significantly to profitability. So, we’ve skinnied down the organization, we have centralized our global battery and personal care business. Instead of running it as three independent systems we’re now running it on a global basis. We’re eliminating a lot of activity that was not generating profitability. So, we are applying highly motivated resources that are very focused in a very disciplined fashion to bring to market those products that we think will generate the highest level of return to the company.

I think it’s a different mindset, it’s a different discipline and I think it’s something that world class companies do extremely well and we’re trying to emulate those kinds of people. I don’t think that it’s a mutually exclusive activity. I think by getting more focused, by having the right structure now where people are experts in business, or experts in shaving and grooming, or experts in home and garden who are totally 100% focused on executing the business plan in an area where they have expertise are able to operate much more effectively. We’ve eliminated this hugely confusing matrix structure where we had a total autonomous global operations group that was leading to a lot of inefficiency, a lot of poor communication, a lot of dropped handoffs, etcetera, etcetera. Now, the guys running these businesses have their arms around all the resources and everything it takes to execute their business plan.

We really feel good that we’ve taken a lot of costs out, we’ve taken layers out, we’ve taken inefficiency out. We’re very focused now and able to execute on the things we think will really drive the profitability of the business. I think when buyers come in and look at us this year and later this year they’re going to see a much better asset then they would have seen a year or two ago in terms of its structure and its ability to execute. I feel very good about where we’re at. I have absolutely no qualms about the cost cutting has had a negative impact on the business. In fact, I think the converse is true.

Chris Ferrara – Merrill Lynch

Then just one other quick one, I thought you guys had said that the case performance for you guys this quarter was better than you had expected.

Kent J. Hussey

That is correct.

Chris Ferrara – Merrill Lynch

But, I get the sense that the sales performance is not. So, why was cash better even in light of sales not being better?

Kent J. Hussey

Working capital management. Think about this, if you’ve got 2,000 SKUs you’ve got to carry some inventory on 2,000 SKUs. Let’s for just sake of simplicity say that you reduce it to 1,000 SKUs. You’ve now taken a huge amount of inventory out of the system. You may carry more of the high selling SKUs but you’re eliminating a lot of stuff that maybe wasn’t contributing any value. This whole focusing the organization now, really understanding where the profit pools and the profit drivers are has a huge benefit not only in terms of the cost of operating the business but I has a huge benefit in terms of the working capital particularly in inventory.

Chris Ferrara – Merrill Lynch

Are you pacing ahead of where you thought you would be considering you’re saying cash flow is better than you thought it would be?

Kent J. Hussey

Yeah.

Operator

The next question comes from [Bahara Inaudible] from Lehman Brothers.

[Bahara Inaudible] – Lehman Brothers

Just a couple of housekeeping items and by the way thanks for all the information you provided this morning. Advertising spending you mentioned that you brought it down because you didn’t think you were going to get the bang for the buck. What was the magnitude of the reduction in advertising spending?

Kent J. Hussey

Year-over-year was something in excess of $10 million. I can’t tell you the exact amount of significant chunk of that was channeled into promotional dollars to drive the inventory out at retail of the Remington products.

[Bahara Inaudible] – Lehman Brothers

So, the net reduction, if any, of the advertising/promotion would have been may single digit, kind of million?

Kent J. Hussey

Yes, single digit after you offset it with the amount that we rechanneled into call it markdown money and promotional money to make sure that the inventory at retail did sell through and we were very successful at doing that.

[Bahara Inaudible] – Lehman Brothers

Are you going to reinvest the remaining, let’s just say $4 to $6 million into your business in the next three quarters?

Kent J. Hussey

We’ve got, particularly in Remington and Remington as we’ve said over and over again is a category that is really driven by hot innovative products. We’ve had some huge winners in the last few years like wet to straight, we’ve had some bombs like our every shaver last year. But, I think we’ve got some very exciting product hitting retailer shelves starting active this quarter and then through the summer and fall time period so we will put advertising behind those products to make sure we connect with consumers.

[Bahara Inaudible] – Lehman Brothers

And as far as the inventory levels that you mentioned were a little higher than Target levels.

Kent J. Hussey

No the inventory level is lower. Are you talking about battery inventory at retail?

[Bahara Inaudible] – Lehman Brothers

Right.

Kent J. Hussey

Well we didn’t sell through as much as we had hoped during the holiday season so there’s a little bit of an overhang there.

[Bahara Inaudible] – Lehman Brothers

And do you see that correction taking place here in the March quarter or after that?

Kent J. Hussey

Yes, no I think it’ll be back to normal by the end of this quarter.

[Bahara Inaudible] – Lehman Brothers

And when you mentioned at the beginning challenging retail environment, how would you say that is going to manifest itself in your top line or bottom line

Kent J. Hussey

Just in the sense that retailers are being cautious in their order patterns and they’re watching their PLS very, very carefully. They’re trying to control their inventory levels down to what I would call historically low levels of weeks on hand and that’s fairly common in the retail trade right now.

[Bahara Inaudible] – Lehman Brothers

Then aquatics in the US business, was that down or up, I couldn’t tell?

Kent J. Hussey

Well actually US was down, that was the only segment of our pet business that was down, it was down about 5% which is pretty much in line with the category, but we are hopeful that we will do a little bit better in the back half of the year. We’ll be anniversarying the loss of some of the business, live fish business at Wal-Mart.

[Bahara Inaudible] – Lehman Brothers

In the European business I thought you said this quarters business was -2 last quarter was plus 11. Is the difference primarily the rationalizations of SKUs of is there something else as well?

Kent J. Hussey

In Europe the biggest single factor is exiting on profitable private label business, where we literally chose not to bid on new contracts and have actually negotiated to exit certain business with customers where we were losing money. That is the biggest single thing that impacted the business this quarter.

[Bahara Inaudible] – Lehman Brothers

Lastly, the inefficiencies that you had in the prior year impacting the home and garden EBIDTA. Is that still something that you expect to reverse this year as you go through the course of the year?

Kent J. Hussey

Yes, we have reversed that.

[Bahara Inaudible] – Lehman Brothers

You have. And so the P&L will benefit from that as we go into the next couple of quarters?

Kent J. Hussey

Yeah, I think a lot of the inefficiencies that carried over into early 2007 is behind us; our plants are operating properly now so a lot of the manufacturing inefficiencies that were flowing through cost of sales are behind us. Our plants now have settled down, they’re operating at standard for the most part so as we go through this ramp up period of building inventory for the season the plants are operating very efficiently.

Operator

One more question form Joe Altobello with Oppenheimer

Joseph Altobello – Oppenheimer

Just a couple of quick ones, first in lawn and garden are you guys contemplating any midseason increases given the run up in your urea?

Kent J. Hussey

We have done a little bit of that.

Joseph Altobello – Oppenheimer

Can you give us a sense of how much?

Kent J. Hussey

Just low single digits, because urea as you know spiked to about $430 a ton as recently backed down to about $375 but when it was over 400, in this range is above what we had contemplated and so we did decide to go out and implement a small low single digit price increase on fertilizer.

Joseph Altobello – Oppenheimer

Secondly on the marketing line, I think Tony said that marketing spend this quarter was up year over, was that the case?

Kent J. Hussey

As I said we diverted some money from advertising to promotional activities that shows up on the marketing line.

Joseph Altobello – Oppenheimer

The year before I thought included about a $15 million incremental spend on marketing.

Kent J. Hussey

Yeah, it did, we spend very heavily, we deliberately were going throttle that back somewhat because I think we realized that we overspent, particularly in Europe last year to try and build distribution, and then as we saw the season unfold, major retailers didn’t run circulars and promotional ads during November and December as they had last year. And so we actually pulled back the original campaign that we had planned for the holiday season as I said diverted some of that money, the advertising dollars over to marketing and promotion funds.

Joseph Altobello – Oppenheimer

With selling down $14 million and promo op, it seems advertising was down pretty significantly?

Kent J. Hussey

Over $10 million, that’s correct.

Operator

At this time we have no further questions. Ms. O’Donnell do you have any closing remarks.

Kent J. Hussey

Let me just make a couple of comments, if I could. I know our business is very complex and hard to understand. Unfortunately that is the circumstance of where this business is at the stage of evolution. I want to reiterate again I think that we are doing all the right things to improve the profitability of the business. There is lot of activity under the way between our three business units; we are focused on driving top line growth. We’re not satisfied with Q1, but we think the programs we have in place for the rest of the year should stimulate some modest top line growth, which we think is essential and hopefully as we get into 2009 even better growth prospects. Again, when it comes to asset sales, I think our businesses are getting healthier every day. They’re improving in terms of their profitability so the value is increasing, so when the credit markets allow us to, I think will be able to successfully consummate the sale that we have contemplating now for some period of time.

With that I hope we have your continued support and look forward to continuing delivering good news to you as we go through 2008. Have a good day, thanks.

Operator

This concludes the Spectrum Brands first quarter earnings conference call you may now disconnect.

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Source: Spectrum Brands F1Q08 (Qtr End 12/31/07) Earnings Call Transcript
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