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Executives

Kent J. Hussey - Chief Executive Officer

Anthony L. Genito - Executive Vice President and Chief Financial Officer

Carey Skinner – DVP Investor Relations

Analysts

Bill Chappell – SunTrust Robinson Humphrey

Connie Maneaty – BMO Capital

Joe Altobello – Oppenheimer & Co.

Bill Schmitz – Deutsche Bank

Carla Casella – JP Morgan

Jason Gere - Wachovia

Mike [Shredgast] – No Company Listed

[Resa Bahad Vaday] – No Company Listed

Bob [Wetinghoff] – No Company Listed

Bill Chappell – SunTrust Robinson Humphrey

Spectrum Brands, Inc. (SPC) F2Q08 Earnings Call May 6, 2008 8:30 AM ET

Operator

Good morning. My name is Justin and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Spectrum Brands second quarter fiscal 2008 earnings conference call.

(Operator Instructions)

As a reminder ladies and gentlemen this conference is being recorded today, Tuesday, May 6.

I’d like to introduce Ms. Carey Skinner, DVP Investor Relations. Ms. Skinner you may begin your conference.

Carey Skinner

Thank you Justin. Good morning everyone and welcome to the Spectrum Brands second quarter conference call. As Justin said my name is Carey Skinner and I have recently joined the Company heading up the Investor Relations Department. I’m very excited about this new opportunity and look forward to getting to know each of you as we work together in the quarters and years ahead. You can find my phone number on this morning’s press release as well as on our website.

With me today are Kent Hussey, our Chief Executive Officer and Tony Genito our Chief Executive Officer.

Before we begin let me remind you that our comments this morning include forward-looking statements which are based on management’s current expectations, projections and assumptions and by nature are uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release and in our most recent forms 10K and 10Q. We assume no obligation to update any forward-looking statements.

You saw in our 8K release on Friday and in our press release this morning that the Home and Garden segment is now being reported in continuing operations. To assist with your analysis we have added some tables to our earnings press release this morning that reflect selected financial data for fiscal 2007 by quarter and the first and second quarters of fiscal 2008 as if our Home and Garden business had always been part of continuing operations.

This will provide you an apples-to-apples comparison with historical results. Additionally, please note we will discuss certain non-GAAP financial measures during our remarks including adjusted diluted earnings per share and adjusted EBITDA. The term EBITDA refers to a number that comprises EBITDA contributions from only continuing operations and excludes certain items that management believes are unusual in nature or are not comparable between periods.

In management’s opinion each of these non-GAAP metrics provide incremental valuable information about our results of operations and serves as one additional means to analyze our financial performance. In addition, adjusted EBITDA can be a useful measure of a company’s ability to service debt and is one of the measures used for determining debt covenant compliance under the terms of our senior debt facility.

Non-GAAP metrics, while useful supplemental information, are not intended to replace the company’s most comparable GAAP results and should be read in conjunction with those GAAP results. In tables 3 and 6 of our press release we provide reconciliation’s of adjusted diluted EPS and adjusted EBITDA to GAAP results respectively. That press release is available on our website.

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

Kent Hussey

Thanks Carey. Good morning everyone and thank you for joining us on our Q2 earnings call. As you saw in our 8K and in this morning’s press release our Home and Garden segment will no longer be counted as a discontinued operation. Therefore all results that we will discuss this morning refer to the results of continuing operations which include our Home and Garden business and for comparison purposes exclude the historical results from our Canadian Home and Garden division which was sold on November 1, 2007.

Let me assure you that this reclassification of Home and Garden should not be taken as a sign that our desire to explore strategic options including divesting certain assets is wavering. Rather at this time we are not in active discussions with potential buyers for Home and Garden in large part due to tough credit market conditions. Therefore with no active sales process underway the timing or even probability of the transaction for Home and Garden is very uncertain. We are, however, still intent on finding an appropriate strategic alternative that allows us to reduce our current debt levels. We are optimistic that the current credit crisis has peaked and that we are slowly seeing some signs of recovery.

As we have said before we currently have adequate footing to run our businesses. With that piece of business behind us let me move to our second quarter results.

Starting with our top line results, led by strong growth by our Women’s Personal Care and Companion Pet Product segments and a favorable currency impact of $27 million we reported net sales of $647 million, a 2% increase over Q2 2007. Partially offsetting these positive trends was the impact of a sluggish U.S. economy and continuing tight inventory controls in the retail community. This has impacted sales in both our Home and Garden and North American battery business. More about that in a few minutes.

More importantly we delivered positive results in our primary area of focus; profitability. Adjusted EBITDA improved by $12 million or 23% over the second quarter of 2007. This marks the fourth consecutive quarter of double-digit year-over-year improvement, an achievement we are very proud of particularly in light of the challenging retail environment and rising input costs facing our businesses.

Latest twelve-month adjusted EBITDA now stands at $296 million, an increase of $61 million over the same measurement taken at the end of the second quarter of fiscal 2007. A strong 26% improvement and demonstrates that our initiatives are working.

Before diving into the details of the quarter let me point out some important facts to keep in mind as backdrops to all of our segment results. I think you have seen these trends in published financial and economic data, as well as recently released earnings reports from both retailers and other consumer product companies including our direct competitors.

First, the less than robust U.S. economy is having an impact on foot traffic in stores obviously impacting retail sales and our sales growth across all business units.

Second, we saw no improvement in the tight inventory controls being imposed by retailers. In many cases they have moved to a consumption-based inventory model. While this trend is noticeable across all three of our business segments it is most pronounced in our Home and Garden division where a late break in the season led to later than normal orders on the part of the retailers. Store sets in this segment are now staged only weeks before predicted demand. Also, we are experiencing rising commodity prices and input cost increases in all of our business units. All three of our primary commodity inputs in Home and Garden, urea and pot ash, are at all-time highs. Zinc for our battery business while lower today than its peak in late 2006 is still higher than we have become accustomed to historically.

As a result where possible we have used pricing as a means to mitigate these cost increases including two rounds of price increases in our Home and Garden division as well as pricing in Pet this year.

Finally, the cost to do business in China has increased significantly in recent quarters. With the recent change in Chinese government VAT tax subsidies, new labor legislation, increased materials cost in China and the increased cost to transport goods out of the Far East, we are beginning to experience higher costs for products purchased in China. To counter these pressures we have been and will continue to press for justifiable price increases and will our focus on improving our operating efficiencies and on reducing or eliminating any non-value added costs in our businesses.

To deal with these growing cost pressures we are taking additional steps to continue to make all of our businesses more profitable including continuing to exit from unprofitable or marginally profitable SKU’s, product lines and customers. Increasing efficiencies associated with our shipments especially in Home and Garden by maximizing loads in each truck leaving our facilities. Increasing capital spending devoted to product [inaudible] production and operating efficiencies and to avoid any large and negative surprises we will continue to follow our disciplined hedging program for select commodities and currencies which Tony will update you on shortly.

With that serving as a backdrop let me move into our segment results.

Starting with global Batteries and Personal Care, sales for this segment grew by 3.5% over last year to $308 million as a result of favorable foreign exchange of $22 million and global growth of the Personal Care segment of $16 million offset by lower battery sales. Global battery sales were $195.1 million, down 1.4% versus last year due primarily to lower alkaline sales of $7.9 million or 8% largely offset by improved specialty battery sales. Specialty batteries include zinc, carbon, rechargeable and our micro-batteries such as hearing aid batteries. The entire alkaline battery shortfall occurred in North America where the category declined about 3% due to economic conditions and to inventory restocking at selected retailers. Including our lights products total Rayovac sales declined 1.6% from last year.

European battery sales were up 3.3% in the quarter benefiting from positive foreign exchange effects partially offset by the year-over-year ship from branded to private labels in Europe. However, we have seen no further erosion in our brand of battery sales resulting from this shift and believe this trend has stabilized and may in fact be reversing. Combined battery and lighting product sales in Europe were up 3.7%.

Latin America’s battery sales were also up, growing 7.3% over last year. As I told you on the last call we are now seeing the favorable impacts of the aggressive pricing we have taken in the region to recover higher input costs. The region is also benefiting from positive economic growth in many countries which is expected to continue for the balance of 2008.

Taking a look at Remington results, Q2 global sales were $90.7 million, an increase of 18.1% over last year driven by extremely robust results in Personal Care. Women’s hair care in particular continues to grow at a strong double-digit rate in every geographic region. The strength of the Remington brand coupled with the continuous flow of appealing new products is driving this growth. On a year-to-date basis our Personal Care product line has grown to be almost as large as our shaving and grooming business.

Shaving and grooming products on the other hand were a slight drag to the category for the quarter with sales 5% less than last year’s level. The good news for this segment is their long awaited new line of rotary shavers begins shipping this summer. This is the most sophisticated rotary shaving system we have ever produced and we believe this product will get our men’s shaving business back on track after two disappointing holiday seasons.

We are also launching a major upgrade of our most popular grooming SKU this fall which will continue to drive the good results we have had in this fast growing segment. Remington’s North American sales for the quarter came in at $40.8 million or up 2% over last year driven by a double-digit increase in Personal Care offset by some weakness in shaving and grooming as retailers wait for the new products to arrive.

However, in international markets both our Personal Care and Shaving and Grooming product lines grew year-over-year with total Remington sales for Europe up 31% and Latin America up 67% as compared to last year.

Turning to our global Pet business, again this quarter we are pleased with the performance of this segment where we delivered 4.1% overall sales growth. Net sales increased to $148.5 million, up almost $6 million from last year in spite of soft retail conditions. In Q2 we experienced solid sales growth in international markets which is Europe and the Pacific Rim and our companion animal products which were up 10% improving on the 6% growth we experienced in Q1.

Our lager continues to be North American aquatics which were down about 8%. The good news is that beginning in Q3 we will anniverse our loss of aquatic equipment and consumable products at WalMart due to the elimination of live fish in some of their stores. Sales in Europe, which were up 20% over the same period last year, are benefiting from the launch of our companion animal product line, expansion into Eastern Europe and of course favorable foreign exchange rates.

Overall the trend for our pet supply business looked good. When we look at this industry we continue to see great macro trends, all factors that should enable us to continue growing in spite of the economic slow down.

Turning to our Home and Garden business, I sit here today talking to you from beautiful, sunny Atlanta, Georgia where we have seen warm weather conditions for over a month now, combined with enough rain to green up our lawns hopefully bringing an end to the horrendous drought conditions we saw last year. As you are well aware what helps drive growth in this business more than anything is good weather. While March was poor and wetter than normal, April has been better in most of the country. This has resulted in about a one-month later start to the season. We saw definite pick ups in late March and throughout April so we are still optimistic that 2008 will be a solid year for our Home and Garden segment.

Focusing only on our second quarter results weather conditions throughout the quarter were not as strong as in recent weeks as cold temperatures, flooding and tornados hit various parts of the country. As I said, the season really didn’t break until the latter part of March or early April. Therefore looking in isolation at our Q2, comping against a great weather month in March 2007, sales in our Home and Garden business declined a modest 1.8% to $191.1 million. This was due almost entirely to the slow sales in January.

To give you a sense of the dramatic seasonality in this business, in the almost unbelievable ramp up in production and shipments to provide service to our customers I’ll share our monthly sales data for Q2. Beginning in January our shipments were at $25 million. February grew to $60 million and our March shipments were well over $100 million. You can appreciate the challenges of responding to customer orders that are so dependent on weather patterns. We believe we are one of only two companies in our industry that can do this.

As a result of year-over-year growth in listings across our customer base and our new TV, radio and print ad campaigns which are focused on our national brands, we believe we are well positioned to capitalize on this year’s [inaudible] seasons, which should produce positive results for us during the third quarter.

POS for April was up strong double-digits in virtually all product categories over last year’s level, which we believe has restored retailer confidence in the 2008 lawn and garden season. As a result of the rising input costs mentioned earlier we have implemented rounds of price increases in Home and Garden leading up to this year’s season with the largest increases in our fertilizer products which have been most impacted by rising commodity costs. However, as the value player in this category we expect to benefit by offering the cautious consumer more value for his money, a value proposition we believe should stimulate our business in these trying economic times.

I’d like to also point out that our Home and Garden business is more diversified than our major competitor. Over half of our revenue comes from the sale of high margin control products such as herbicides, pesticides, rodenticides and personal accounts. Sales of these products are weighted more in the back half of the fiscal year. Input cost increases for these products are much more consistent with general inflation, not the unprecedented increases we are seeing in fertilizer raw materials. For your information, fertilizer products account for approximately ¼ of our revenue in the Home and Garden business.

With that let me turn the call over to Tony to discuss some financial details.

Anthony Genito

Thanks Kent. Good morning everyone. Let me start with a quick review of those items that occurred in the second quarter that I would refer to as unusual. In light of the move of the Home and Garden segment back into continuing operations there are two housekeeping items that would be helpful to review with you.

First, I’d like to refer you to Tables 4, 5 and 6 of our press release. This expanded disclosure is intended to help you bridge the reclassification of Home and Garden as part of continuing operations. We are providing selected data from all of fiscal 2007 by quarter and the first and second quarters of 2008 to show the results included in our U.S. Home and Garden business as they have always been included in continuing operations.

In addition we have excluded the Canadian H&G business which we sold in November. This should help you in your analysis as all comparisons will then be on an apples-to-apples basis.

Second, while being accounted for in discontinued operations since October 1, 2006, in accordance with generally accepted accounting principles, we have ceased recording depreciation and amortization associated with the Home and Garden business. As a result of our reclassification in continuing operations again in accordance with GAAP we have recorded a catch-up in D&A of $17.1 million or $10.7 million net of tax, which reflects the five quarters’ impact and is shown as an unusual item in our press release.

In addition, keep in mind that the second quarter results from continuing operation of our H&G business also includes D&A of $3.5 million or $2.3 million net of tax.

Third, GAAP prescribes that the assets are reclassified from held-for-sale to held-and-used, those assets are measured individually at the lower of their carrying value prior to being classified as discontinued or their current fair value. We performed a fair value analysis of all of our Home and Garden assets and as a result during Q2 we reported an impairment charge of $13.2 million or $[?].3 million net of tax related to the write down of certain trade names. This impairment charge will not result in future cash expenditures.

Finally, in addition to the items I just mentioned we reported $5.2 million or $3.5 million net of tax in restructuring and related charges in the quarter which primarily related to an additional cost for our 2007 global realignment.

With those items behind us let me move on to our income statement.

The adjusted diluted loss per share before restructuring and related charges and other items was $0.14 compared to a loss of $0.30 last year. Please refer to Table 3 in our press release for a full reconciliation of our adjusted diluted loss per share to our GAAP loss per share.

Gross profit for the quarter of $234.6 million was up 4.8% over last year’s level of $223.8 million. Within cost of sales we incurred restructuring and related charges of about $200,000 this quarter related to headcount reductions taken as part of our 2007 global realignment while we recorded $6.7 million in restructuring related charges in Q2 of fiscal 2007.

Gross margin for the quarter was 36.3% versus 35.3% for the same period last year.

Operating expenses for the second quarter were up $222.9 million which included a non-cash intangible asset impairment related to our H&G business of $13.2 million and restructuring and related charges of $5.2 million. Last year’s operating expenses for the second quarter were $420.3 million but included a non-cash $214 million impairment of good will and $11.2 million of restructuring and related charges.

Reported operating income for the quarter was $11.7 million as compared to an operating loss of $196.5 million last year. In addition to the improved operating results from our businesses this increase in operating income was primarily due to significantly lower impairment charges this year versus last year. As Kent mentioned one area that we are particularly proud of is our growth in adjusted EBITDA.

For the quarter consolidated adjusted EBITDA was $66.2 million, a 23% improvement over last year.

Moving on to segment profitability, our Global Battery and Personal Care segment generated profit of $24.7 million, an 11.78% increase over last year’s results. Similar with last quarter the two major drivers for improvement were the cost savings associated with our global realignment and a 40 basis point improvement on gross margin which was due to more efficient operation of our manufacturing plants.

The Global Pet Supply segment generated profits of $15.3 million as compared with $16.4 million last year, down 6.7%. This decrease was due to higher input costs and foreign exchange effects. Price increases have already been implemented and should benefit our profit in the back half of the year.

In Home and Garden we generated a second loss of $500,000 as compared with profits of $14.8 million last year. Included in this year’s expenses were $20.5 million related to higher depreciation and amortization. As I mentioned earlier, $17.1 million related to the five quarter catch up and $3.5 million related to the D&A that would normally be recorded in the quarter for this segment, none of which was included in 2007’s numbers.

Excluding the catch up, the improvement in operating profit was primarily due to product mix, price increases and cost controls we have implemented. Our distribution costs at Home and Garden improved this quarter despite higher fuel costs due to some efficiency improvements we have made consolidate shipments.

Before moving on let me run down our hedge position since commodity price increases are certainly impacting our cost to do business. Currently our hedge positions for our two largest commodity needs are as follows:

For zinc we are currently hedged to 75% for 2008 at an average price of $3,245 per metric ton. Averaged zinc prices last year were $3,181 per metric ton. The current spot price of zinc which topped out in November 2006 at about $4,500 per metric ton is now just over $2,100 per metric ton. Since we are hedged 75% for 2008 we will see some benefit from the lower spot prices in the second half of this year.

However, the lower zinc prices will have a much larger impact on 2009. As an aside we have hedged 49% of our forecasted zinc requirements for 2009 at an average price of $2,700 per metric ton.

For urea we are currently hedged 53% for 2008 at an average price of $337 per ton. Also, we have purchased 36% of our 2008 requirements at market prices effectively locking in roughly 90% of our forecasted requirements at an average price per ton of approximately $375. Average urea prices last year were $243 per ton. Unfortunately the current spot price for urea is approximately $600 per ton, which is a record high driven by worldwide demand. As we have mentioned on previous calls we typically cannot hedge urea beyond 6-9 months forward due to the illiquidity of the market for this commodity. Given the volatility in cost for urea and other key raw material inputs for our fertilizer business it is difficult to predict the cost impact on 2009 at this time.

Moving on, second quarter corporate expenses were $9.2 million slashed by almost half of last year’s $17.9 million. Last year corporate expenses included a $4 million charge in the second quarter of 2007 related to the write off of professional fees incurred in connection with the failed attempt to sell the Home and Garden business. The remainder of the variance is driven by cost savings, primarily lower executive compensation expense and other corporate overhead expense reductions.

Interest expense for the quarter was $58.3 million compared to $85.2 million last year. However, let me remind you we completed our major refinancing at the end of the second quarter 2007 resulting in a one-time pre-tax charge of $36.2 million in Q2 of 2007. This included a prepayment penalty of $11.6 million associated with refinancing of our senior credit facility and the write off of debt issuance costs of $24.6 million. We have now anniversaried this event.

For the full year fiscal 2008 we anticipate total interest expense of approximately $230 million and the average rate for the year to be approximately 8.6%. Second quarter depreciation and amortization expense was $35.5 million which included D&A of $7.8 million for global batteries and personal care, $5.6 million for global pet, $3.5 million for home and garden and $1.4 million at corporate.

Also included in total D&A for the quarter was the cumulative pre-tax catch up of $17.1 million related to the reclassification of the H&G segment as a continuing operation. As a reminder, no D&A was recorded for Home and Garden for the five quarters while it was classified as discontinued operations.

Turning now to cash flow, through the end of the second quarter our year-to-date cash flow from operating activities was a use of $136 million. We made capital expenditures of $11 million for the six month period and have received proceeds from the disposition of our Canadian Home and Garden assets of $15 million.

Turning to our balance sheet and liquidity position, at the end of the quarter we had $81 million of cash on hand and our ABL facility was drawn down by $151 million. While we normally hit our peak draw in April, due to the late start of the Home and Garden season we are just now experiencing our peak. During the next two quarters we expect that our cash flow will turn positive allowing us to end the year with no, or a minimal draw on the ABL.

Additionally, we expect our full-year cash flow to be neutral to slightly negative at the cash interest of $225 million, cash restructuring of $33 million, capEx of $30 million and cash taxes of $20 million.

Outstanding net debt at quarter end was approximately $2,562,000,000. Our senior leverage ratio was 5.03 times, well within the 6.25 times maximum ratio allowed under the terms of our credit facility. Total leverage was 8.5 times.

In summary, given the rising distribution and commodity costs coupled with retailer’s tight control over inventory, we are relatively pleased with our second quarter results particularly from a profitability perspective. Our global restructuring initiatives are clearly working. We have consistently delivered increased year-over-year EBITDA for the past four consecutive quarters. As we have said before, profitable growth will continue to be a primary objective for us going forward.

I’ll now turn the call back over to Kent for his concluding remarks.

Kent Hussey

Thanks Tony. I think Spectrum Brands has thoroughly demonstrated in its improved adjusted EBITDA performance that our new focus on profit growth is working. Four straight quarters of double-digit year-over-year increases is a solid trend especially in light of the challenging economy in retail and the marketplace.

We promised to deliver the impact of our $50 million restructuring cost savings to the bottom line and we have albeit with some erosion due to unexpected and unprecedented, at least in the last 20 years, cost inflation. We promised to focus on profitable growth not growth at any cost and we have accomplished that in many segments of our business and are committed to do that in every segment in our product line portfolio.

We are exiting unprofitable or marginally profitable businesses around the world and that is having a dampening effect in top line growth. However, it is paying off in better operating margins in all of our businesses.

We will continue to run our businesses prudently, seeking to recover or mitigate unavoidable cost increases through thoughtful price increases without jeopardizing the important value position we have in most of our businesses. We will continue to work with suppliers, especially our key partners who supply us with finished goods, to improve the cost effectiveness of the entire supply chain from product design to delivery to our customers.

Unfortunately the increases in raw materials and energy costs are beyond our control. However, the efforts to mitigate them will be relentless. Reality tells me that we are in a cycle of cost increases and inflation for at least the near term. With the right organization structure, the right management team, the ability to focus on the key success drivers in the marketplace and in our supply chains, I am confident we can continue the positive energy momentum we have achieved over the past twelve months. Remember, when the going gets tough the tough get going.

On a final note, I am disappointed we have not been able to deliver on our commitment to sell an asset to reduce our debt and de-lever our capital structure. I don’t think anyone saw what was coming at us in early 2007. The good news is there are many indicators that the worst of the credit crunch is behind us. Many global financial institutions have taken their bad medicine; taken steps to shore up their capital structures and hopefully in the near future get back to business. I am more optimistic than I have been in some time that conditions in the credit markets will improve to a point where we can deliver on this strategic imperative in the near future.

On that note I’ll open the call to your questions.

Question-And-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Bill Chappell.

Bill Chappell – SunTrust Robinson Humphrey

On the divestiture program you said there are no longer active discussions for the Garden business. Can you tell us if there are any active discussions for any of the businesses at this point?

Kent Hussey

I think you saw a press release that was put out by a major hedge fund that they wanted to take a look at one of our businesses. Clearly they did not look at Home and Garden business. Let me just finish on that point that there is some activity still underway and discussions that are ongoing but at this stage in the game there is nothing that I can tell you on that. Nothing to report. If and when anything should materialize clearly we would make a public disclosure, but for right now that is the only activity underway.

Bill Chappell – SunTrust Robinson Humphrey

My follow-up…on the fertilizer side, we heard last night that Scotts said they might be losing share. Are you seeing significant market share gains in that category? Can you give us any idea of what urea is in terms of your commodity costs as far as costs of goods sold?

Kent Hussey

If you take urea, pot ash and dapth¸ those three together are the major raw material inputs that go into fertilizer and I can’t tell you but I’m sure it is the majority of the cost of sales. I just want to remind you that fertilizer while it is an important product line to us is only about 25% of our revenue. I believe it is a much bigger percentage of revenue for Scotts so it is a potentially bigger issue for them.

In terms of market share gains, there are lies, damn lies and market share. Our management says that we are…I’ll just use the term “outpacing the category” with our key customers so that tells me that things are going fairly well for our fertilizer business this year. We think that may be somewhat due to the fact consumers may be trading down from the expensive premium brands to value brands and we think that is a good thing. We think they’ll discover when they do that our product is as good as that premium brand and they may not necessarily need to go back to paying those higher prices in the future.

Operator

The next question comes from the line of Connie Maneaty.

Connie Maneaty – BMO Capital

My first question is when do you envision an end to all the charges and we can start looking at the company as a company as opposed to an accounting puzzle?

Kent Hussey

I wish I could answer that question. We’re trying Connie. But GAAP is very prescriptive in terms of its requirements and because of the dynamic nature of the company for a number of years of acquisitions and integration with purchase accounting and then moving businesses in and out of continuing operations the reality is at some point here we are going to sell an asset and we’ll have to deal with that. It does make it very difficult to understand our business and I’m as frustrated as you are that it is difficult for us to sometimes to present factual information to make it helpful to understand what is going on. I think we’ve tried to do some of that with the schedules we’ve attached to the press release and some of the material that is on our website now.

Connie Maneaty – BMO Capital

I was just hoping with this reclassification you may be seeing the worst or the most of the charges and things would just be minor going forward.

Kent Hussey

I would think so. You know what I’ve said is a lot of the…certainly we’re not going to be doing any acquisitions in the near term and all that purchase accounting. Also, we’ve done a major restructuring in this business. We feel we are in the right structure now and the right place and we feel that we’ve got that behind us. We may have some small projects that come up in the future but I think as the quarters go by you’ll have much purer numbers to see how the business is really performing. We’ve tried to give you an indication of what we call adjusted EBITDA which we think is at this stage of the life of this company the most meaningful statistic relative to how the ongoing operations are performing and hopefully you will find that useful.

Connie Maneaty – BMO Capital

One follow-up question, as you think about strategic alternatives I guess we are all assuming that the one that makes the most sense is the divestiture, but are there other strategic alternatives that you are considering? Structural changes or anything like that?

Kent Hussey

Yes. We have. Obviously with the difficulties in credit markets, the inability of acquirers to obtain the kind of leverage that they have historically had multiples of contracted it just makes it a much bigger challenge to sell an asset for what I continue to say needs to be a full and fair value and a significantly de-leveraging transaction. So we haven’t been able to get there yet. We are still committed to trying to do that. Obviously we don’t want to continue [ad in situm] with the amount of leverage that we have. So we have been actively talking to our advisors and evaluating various other steps to potentially reduce the leverage of the company and improve the capital structure. So we’re thinking about it. There have been no decisions taken to date but certainly they are on the table and under active consideration.

Connie Maneaty – BMO Capital

What do those alternatives include if not a divestiture?

Kent Hussey

Well one of the things we talked about and there is a laundry list of things that advisors throw up as things that company’s do and I’m not saying we would do any one of these, but raising new equity for the business in a pure equity offering or some kind of a rights offering, perhaps equity for debt swap of some kind, those are a couple of things that have been talked about. Obviously with the very pressed level of our equity right now that is not a most attractive way to fix the balance sheet but they are things we do have to think about. At some point in time one of those things might bubble to the surface. Again, what we’re trying to do is to rebuilt confidence in the underlying businesses here by demonstrating improving performance. Hopefully at some point in time we’ll get some benefit from that in terms of the equity value of our company and we’ll make it more feasible to consider some of these other activities in terms of fixing our balance sheet.

Operator

The next question comes from the line of Joe Altobello.

Joe Altobello – Oppenheimer & Co.

My first question I just want to go back to Home and Garden. You guys said you took two price increases this year, one pre-season and one mid-season. Did you see any pick up or pre-buying on the part of retail ahead of that mid-season price increase this quarter?

Kent Hussey

No, not really. The retailers are very, very disciplined about only placing orders when they see consumer demand and take away. So they are not, in fact, our numbers say that Home and Garden inventory at retail was down 10% at the end of Q2 versus where it was a year ago. So, they are truly controlling inventory down to historically low levels.

Joe Altobello – Oppenheimer & Co.

So the number we saw in the second quarter was pretty much a clean number in terms of the top lien?

Kent Hussey

Absolutely.

Joe Altobello – Oppenheimer & Co.

In terms of pricing for next year, Scotts mentioned last night they were going to look to take pricing but it is an interesting dynamic where the industry leader is kind of waiting for the private label competitor to see what they’re going to do. So I was curious if you are planning on additional price increases for next year as well?

Kent Hussey

In 2007 we led the industry with both rounds of price increases. We will be aggressive. We think it is a mandate for us that if costs have increased dramatically we are not in the business of not creating value for our shareholders and like in so many other parts of the consumer economy whether it is milk or bread or fuel or whatever it is the consumer is going to end up having to pay for the true ongoing cost of the various specific purchases. So, we will be very aggressive about pricing up our products to recover our cost increases.

Joe Altobello – Oppenheimer & Co.

Lastly, on zinc and batteries. Zinc cost pulling back pretty aggressively the last few weeks and months here. What happens to those costs? Do they get spent by competitors in some type of promotion? Does it drop to the bottom line? How do the pull backs in the zinc costs been experiencing impact there?

Kent Hussey

I can’t speak for my competitors. I can tell you that while we’ve got good news relative to zinc the reality is there are other areas of costs that are increasing that are eroding those benefits. Most recently we saw, and I think you have seen one of our competitors talk about the run up in the cost of nickel, which goes into rechargeable and other types of batteries. More recently we’ve seen manganese ore go up dramatically in terms costs in the commodity markets and that is another key metal that goes into the manufacturing of batteries. So, I don’t see at least for my company that all of that lower zinc cost is going to float to the bottom line. I think some of it is clearly going to be eroded by other inflationary cost increases in the input costs of batteries.

Operator

The next question comes from the line of Bill Schmitz.

Bill Schmitz – Deutsche Bank

Can we spend a little bit of time on North American batteries? Can you separate the sort of retailer inventory de-stocking and then just the weakening consumer demand based on the economic situation in the U.S.? Then also the number of weeks of inventory if you know right now on the trade right now relative to what it has been historically?

Kent Hussey

It is very hard to separate what is consumer take away. I think the statistic from Nielsen’s said that the total category was down about 3%. We saw our business actually down a lot more than that in North America. We actually lost some share during the quarter. So the combination of weak consumer take away, we had some share erosion and then retailer pull back on inventory were all contributors to our lower sales and that was strictly in our alkaline segment. Reported earlier fortunately some of our other kinds of batteries are doing fairly well and offsetting some of that weakness in the alkaline battery business.

In terms of an exact weeks figure I can tell you it is in the single digits. I don’t know the exact number. But we do know that they went out of the holiday season with higher battery inventories than they liked and that really caused the pressure on sell in during Q2. We believe at the end of Q2 the inventory weeks on hand of battery inventory in the retail community is back to a level that is where they’d like it to be so hopefully going forward for the rest of the year we’ll be in more of a true consumption model, that they’ll be replenishing as consumers take the product off the shelf.

Bill Schmitz – Deutsche Bank

I know it is a big volume game in batteries in terms of manufacturing variances. Are you guys back to kind of the production schedule you were at prior to the inventory de-stocking in the quarter?

Kent Hussey

Yes we are. Actually the plant in Europe and the plant in North America are running full shifts now and I think we hinted at this we have actually been able to increase operating efficiencies in those plants. Part of that has come because we have also reduced production in China. We’ve chosen really to load up our Western plants here to optimize our manufacturing costs there. So our plants are running very efficiently right now.

Bill Schmitz – Deutsche Bank

Did you lose any private label contracts in the quarter?

Kent Hussey

In Europe there is an ongoing desire to walk away from or to fade out of these unprofitable or marginally profitable contracts and I think over the course of this year we will ultimately exit somewhere between $25-30 million worth of that business. So that is an ongoing process.

Operator

The next question comes from the line of Carla Casella.

Carla Casella – JP Morgan

Are you seeing any impact on the lawn and garden side of the Scotts recalls in terms of better bargaining power with clients or any additional shelf space in other product areas?

Kent Hussey

No. I think this is a relatively new phenomenon. My understanding is that the particular SKU’s that are effected here are not huge volumes. Obviously wherever their product is off shelf we will benefit because we don’t have a competitor sitting there next to us. I can’t give you any specific figure but I don’t think it will have a dramatic impact on our business. I think it is more of a reputational issue for Scotts than it is a loss of revenue in the short-term.

Carla Casella – JP Morgan

On the China side of the business is there any plans to change? Are there other places you can source some products? Can you tell us what percentage right now you are getting from China of your products?

Tony Genito

We purchase finished goods from China primarily for our Remington product line. Virtually all of Remington shaving, grooming and personal care products are sourced in China. The other makeup product line that comes from that part of the world is all of our flashlights that are sold around the world. Yes, what we are doing is looking potentially for other suppliers in country in China since we already have an infrastructure there. We have a Far Eastern office based in China of sourcing people, purchasing people, quality people, logistics people, etc. So we have knowledge of how to do business there. We are working with our suppliers. I think one of the things I alluded to is also in terms of product development trying to find ways to engineer cost out of the products in a collaborative fashion is another activity and then in some cases we are beginning to scout other countries in the region but that is a longer term process and in many cases you are just changing one problem in one country for a different problem in another country. So it is not the easiest thing to do.

Then finally what we found is particularly in batteries we are actually able to produce batteries in Germany and Wisconsin today at about the same total cost as it costs to produce batteries in China so we have actually instead of ramping up production in China we have ramped it back down and moved a lot of that production back into our western facilities. So it is a war that you fight on all fronts and we’ll continue to do that.

Operator

The next question comes from the line of Jason Gere.

Jason Gere - Wachovia

Can you just try and talk in the framework about the cost saving initiatives out there between the restructuring and maybe any other things that are kind of in the pipeline? Then also what percentage of pricing is going to cover cost inflation for the next say three quarters, if possible?

Kent Hussey

In terms of restructuring, you know the big impact we are benefiting from now was the complete corporate reorganization that took place in January of 2007. I think we’re getting virtually all of the benefit of that flowing into our business as we speak. So there is not a big increment yet to be realized there. In terms of future cost savings activities we are looking at investing some capital and potentially realigning some of our manufacturing activities so there are opportunities there that can be identified in the range of $5-10 million in potential cost savings that could flow our way in our global battery business over the next two years.

There are some consolidation rationalization projects, none of them huge, but a number of small what I call blocking and tackling projects we have identified and will be implementing in our global pet supply business that has a $5-8 million of potential benefit that again we would realize over the next 18-24 months.

Then, as I mentioned earlier all the efforts we are going through in the Far East to find a way to either control cost growth of our sourced products or trying to lower cost ways of acquiring those products. So we are back to what I call traditional value engineering, cost improvement, cost reduction kinds of activities across all of our businesses. Tony can probably add those up but there are probably $20 million between all the activities we have identified across all our businesses that we could be going after here in the next two years.

In terms of pricing, we priced up in our pet business over the last 4-6 months. We’re starting to see the benefit of that which is typically a lag between when you announce a price increase and it actually installing into your margin and we’re beginning to see that. We should see somewhere in the order of about $6 million of that price increase flowing in the back half of this year. We’re studying and projecting cost increases in each one of our businesses and we will be aggressive in stepping up and implementing price increases to try and get even or ahead of the cost increases that we are experiencing. So there is more pricing in store for us probably before the end of the calendar year in the pet business. Clearly as we get into line reviews on our Home and Garden business that will start later this month and go through the summer. We’ll be discussing price increases there for next year. In our global batteries and personal care business that is a business where typically we have not been the price leader other than Latin America where we are the market share leader. Fortunately there I think overall the favorable zinc impacts will offset a lot of the other cost pressures that we have but I think the industry may need to take up pricing there as well and certainly we would want to participate in that if that comes to pass.

Jason Gere - Wachovia

So it sounds like maybe over the next four quarters or so that 75% of your cost inflation may be captured by pricing? Is that a fair assumption?

Kent Hussey

That is very hard to quote that precise a statistic.

Jason Gere - Wachovia

On Remington in North America, obviously that is more of a non-staple type product or discretionary versus the other categories. Can you talk about certainly with Father’s Day coming up is one of your big periods here and can you just talk about what you are seeing out there on the North America side in terms of consumers in terms of shying away from maybe more of those discretionary type products right now?

Kent Hussey

Well one of the good things about the Remington business or the battery business or virtually every one of our businesses is that we are selling products at what I call modest price points. If you look at our women’s personal care product line which are a whole variety of products, I would say the majority of the products we sell are priced under $40. Many of them are $15, $20 or $30 price points. So you’re not talking about huge purchases here. Even in the men’s shaving and grooming product line you have to remember that Remington has always been positioned as the value alternative to the very expensive Braun product and to Philips which has products that cover the mid-tier as well as the upper-tier. So again, I think the majority of our shaving and grooming products are priced under at least in shaving under $70 and in grooming under $30. Being the value position player in most of the businesses we compete in and selling products that are at what I think are modest or reasonable price points, should protect us from some of the economic slow down that is having a big impact in other categories.

Jason Gere - Wachovia

Are consumers buying those types of products? I agree with you that you guys are priced at the right level. With that maybe what your competitors are doing right now, Braun and Norelco.

Kent Hussey

If you look at the Remington business, our personal care business in North America was up 18% I think was the number. It is off the charts. That is a category that is driven by the right product and the right distribution. We’re seeing continuing strong growth around the world in our personal care business and our men’s shaving and grooming is growing in Europe. We had a modest decline in men’s shaving in North America this quarter but it is not a big quarter for the sale of those products anyway. So, now we are not seeing a negative impact on our Remington product line.

Tony Genito

For the quarter our personal care sales grew 47%. Personal care is primarily the women’s hair care area, 47% in dollars and even if you exclude the impact of the exchange which is favorable we grew 37% for the quarter in personal care.

Shaving and grooming, keep in mind that included in that is the grooming piece, obviously if you look at Remington business today versus where it was three years ago it is probably more focused on personal care and grooming than shaving right now and that is where our strong growth is coming from. Lastly just as to the discretionary products and you raise a very valid point but living in a household with a wife and three daughters I don’t know if they would consider those discretionary purchases.

Operator

The next question comes from the line of Mike [Shredgast].

Mike [Shredgast] – No Company Listed

I was wondering I think you had said in previous calls that WalMart was already fairly lean on inventory of batteries. Can you talk about X WalMart what you saw in inventory de-stocking there and how that has changed? You said that the retailers are really at unprecedented levels of inventory I guess on the shelves and the time they need to order what they want for you. Is that sustainable do you think? I can imagine what the costs must be of many deliveries in very short time frames and the cost of gas and how that is impacting things?

Tony Genito

Companies such as ours, major consumer product companies, have built the capability in terms of our business model to respond very quickly to the needs of our key customers. We build inventory to forecast. We don’t build it to order. We build it to forecast and have it sitting in our distribution center. We hope we have built the right mix of products. They place orders and we typically ship within 24-48 hours and they get the product at an average delivery time of 2-4 days. So the sophisticated retailer now understands that their key suppliers have that capability. They demand that level of customer service from it. We have built a business model and an infrastructure that enables us to do that consistently. That has enabled the retailer to reduce the level of inventory he has in his system because he knows that when he gets down to a certain level he can rely on Spectrum Brands to get the product there and to get it into his stores and on the shelf. That is really one of the enablers of the retail community being able to do a better job of managing inventories within their system.

Mike [Shredgast] – No Company Listed

With regard to the cost of zinc and the cost of urea, how are those two balancing themselves out? Is zinc coming down but urea isn’t up how much of a decline in zinc will offset this increase in what seems to be a significant increase in urea?

Kent Hussey

I think you shouldn’t think about it in terms of balancing. We like to think about we have three distinctly different businesses and I think with balancing as I alluded to while zinc is coming down in terms of an input cost on our battery business we have other cost pressures that are mitigating some of those benefits. So there may be a balancing within the battery business. Totally and separately our Home and Garden business, again I said about 25% of our revenue comes from fertilizer; we are seeing dramatic cost increases in the raw material inputs to the fertilizer business. The way in that business we are dealing with that is very aggressively pricing up our product to make sure we recover those cost increases. So I think it is better to think about them separately and each business is dealing with their cost input issues appropriately for their business model, their customer set, and their competitive set.

Mike [Shredgast] – No Company Listed

Would you say the gross margins are lower in lawn and garden than in batteries?

Kent Hussey

Yes they are on average but I will tell you that our gross margins in our fertilizer and growing media business have actually increased in spite of the dramatic cost increases we have experienced because we got out ahead of it in terms of the size of the price increases we were able to secure this year.

Operator

The next question comes from the line of [Resa Bahad Vaday].

[Resa Bahad Vaday] – No Company Listed

Tony what do you expect working capital to be for the year in terms of use or sort of free cash flow? How did the European battery business do on a local currency basis in the quarter?

Tony Genito

With respect to working capital basically as I said in my prepared remarks we are expecting our total cash flow to be either neutral to slightly negative. Cash flow at this point in time I think overall will be a net use of cash but I think again, as I said on the last call I believe, I think we will see some opportunity to improve that in the second half of the year. All in all in a phrase would probably be a use but I would say a slight use.

[Resa Bahad Vaday] – No Company Listed

For working capital?

Tony Genito

Yes sir.

[Resa Bahad Vaday] – No Company Listed

And in European batteries?

Kent Hussey

Euros was down…in Euros batteries in Europe for the quarter were down about 2 million Euros. So a slight decline in local currency.

[Resa Bahad Vaday] – No Company Listed

In the U.S. battery business have you seen any change in competitive or promotional intensity in recent months versus prior year? How do you see consumption trends pan out for the rest of the year?

Kent Hussey

We did see one of the major competitors had a very aggressive promotion during the holidays and that affected us clearly. The good news in the current quarter is that promotion came to an end so it was a relatively normal period. January through March is not a big quarter for the sale of batteries. There is not a huge amount of promotional activity that goes on this quarter.

Going forward we saw about a 3% decline in dollar sales in the last quarter according to Nielsen. I want to caution people that Nielsen is now only covering less than half of the outlets where batteries are sold. People tend to forget that. We do have panel data for WalMart which sometimes is suspect in the short term. I think our projection for the consumption of batteries in North America, call it mid to long term, and is basically a flat category. As you have seen over the last year it has been in terms of unit volume a relatively flat and the dollar growth we saw in 2007 was all driven by pricing. So keep our fingers crossed maybe we’ll have that kind of experience going forward into 2009.

Operator

The next question comes from the line of Bob [Wetinghoff].

Bob [Wetinghoff] – No Company Listed

Are you guys expecting a substantial sales increase in the second half in your Home and Garden just due to the absence of the drought?

Kent Hussey

Well normally the quarter we are in now, Q3, is the biggest quarter of the year. April/May/June is where you make the majority of sales and the overwhelming majority of the profit for the year. Basically weather conditions are a heck of a lot better this year. We have had a lot of rain so the drought seems to have subsided in the southeast. Although here in metropolitan Atlanta we still have watering restrictions but many communities outside of Atlanta have lifted those watering restrictions which is good news. We have actually seen in the southeast pretty good growth this past quarter and we’re expecting that to continue as we go through Q3. So we are pretty optimistic that we should have a good Q3.

Bob [Wetinghoff] – No Company Listed

I remember last year you had some manufacturing variances which led to higher cost to goods sold because your inventory was not normal. Just from a production standpoint and putting aside higher [inaudible] your costs, how big is that delta if you put aside pricing and inflation and your raw materials….year-over-year what is the size of that variance that we can expect?

Kent Hussey

That is a level of granularity I don’t think I’m prepared to comment on today.

Bob [Wetinghoff] – No Company Listed

Sizeable?

Kent Hussey

No.

Bob [Wetinghoff] – No Company Listed

Your 225 cash interest capEx of 30-33 of cash restructuring? Just to clarify you said cash flow neutral to slightly negative. Does that include the $15 million of new grow asset sales proceeds?

Tony Genito

Yes.

Operator

The next question comes from the line of William Chappell.

Bill Chappell – SunTrust Robinson Humphrey

To follow-up on the battery sector, can you talk about as we moved into April do you see any benefit from the Disney licenses and from trade down? Do you expect market share to be stable in the U.S. as we move through the rest of the year?

Kent Hussey

We actually lost a little bit of share this quarter. Disney is now in the parks but all of the other promotional activities surrounding our license are just kind of getting cranked up so we view that as a positive influence on the business going forward. It is a 3-year frame so we are really into it only one quarter now or two quarters in earnest. We certainly hope that will help contribute to help recapture some of the share we lost this quarter.

Bill Chappell – SunTrust Robinson Humphrey

In terms of pricing on the battery side do you really need to wait, I know you are having a price discount right now, do you need to wait for competitors to raise prices or can you close the price gap and still have season volumes?

Kent Hussey

We think that the price gap we have in the market now is where we need to be. I think we have talked in the past about it. The value brand is we want the consumer to believe that we are as good as those two premium guys. The 15-20% price gap is believable. If the price gap gets too big like 25-30% they tend to view us as a price brand and it has a negative impact on our business. So we like the positioning we are in right now. In North America with approximately a 10 share in the industry we certainly are not the group really that can lead a price increase. So I think we’d have to wait for some industry activity and if there was pricing up we would certainly want to follow that to maintain the price gaps that we have.

Europe is an economy where private label is still an issue. It sells at a huge discount to the branded product so we don’t view pricing as being a near-term option there. It is more us finding ways to reduce our manufacturing costs and operate more efficiently.

In Latin America as the industry leader in many of the markets down there we have historically been the price leader and have priced aggressively. In many cases multiple times during the year. We did a lot of pricing last year. Margins have actually expanded in Latin America in our battery business. We are kind of at a pause right now and don’t really see a need to do pricing in Latin America in the short term but certainly if costs continue to grow we will revisit that decision.

Operator

There are no further questions. I’d like to thank everyone for joining today’s conference call. Have a great morning.

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Source: Spectrum Brands, Inc. F2Q08 (Qtr End 3/30/08) Earnings Call Transcript
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