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Executives

Kent J. Hussey - Chief Executive Officer, Director

Anthony L. Genito - Chief Financial Officer, Executive Vice President, Chief Accounting Officer

Carey Skinner - Division Vice President, Investor Relations

Analysts

William Chappell - SunTrust Robinson Humphrey

Drew Martinson - Deutsche Bank Securities

[Bob Whittenholm - Durol Bank of Canada]

Connie Maneaty - BMO Capital Markets

Reza Vahabzdeh - Lehman Brothers

Joseph Altabello - Oppenheimer & Co.

Jason Gere - Wachovia Capital Markets, LLC

Spectrum Brands, Inc. (SPC) F3Q08 Earnings Call August 7, 2008 5:00 PM ET

Operator

Welcome to the Spectrum Brands third quarter fiscal 2008 earnings conference call. (Operator Instructions) I would now like to introduce Carey Skinner, DVP of Investor Relations.

Carey Skinner

Good afternoon everyone and welcome to the Spectrum Brands third quarter conference call. With me today are Kent Hussey our Chief Executive Officer and Tony Genito our Chief Financial Officer.

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

Additionally, please note that we will discuss certain non-GAAP financial measures during our remarks including adjusted diluted earnings per share, adjusted EBITDA, adjusted gross profit margin, and net sales excluding foreign exchange translations. Spectrum Brands management uses adjusted diluted earnings per share as one means of analyzing the company’s current and financial performance in identifying trends and its financial condition and results of operations. Management believes that adjusted diluted earnings per share is a useful measure for providing further insight into our operating performance because it eliminates the effects of certain items that are not comparable from one period to the next.

Adjusted EBITDA is a metric used by management and frequently used by the financial community which provides insight into an organization’s trends and facilitates comparisons between peer companies since interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company’s ability to service debt and is one of the measures used for determining the company’s debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature and not comparable from period to period.

Adjusted gross profit margin is a measure of gross margin that excludes restructuring and related charges that management uses as a tool to allow it to evaluate the underlying performance of the company in a manner that is comparable over time and which management believes is a useful tool for investors in making those same evaluations.

Net sales excluding foreign exchange translations is a measure that management believes provides useful information to management and investors on the impact of foreign exchange translations on Spectrum Brands overall net sales results. Spectrum Brands provides this information to investors to assist in comparisons of past, present and future operating results and to assist in highlighting the results of ongoing operations.

While Spectrum Brands management feels that adjusted diluted earnings per share, adjusted EBITDA, adjusted gross profit margins and net sales adjusted for foreign exchange translations are useful supplemental information. Such adjusted results are not intended to replace the company’s GAAP financial results and should be read in conjunction with those GAAP results. In Table 3 of our press release we provide reconciliations of diluted earnings per share and a GAAP basis to adjusted diluted earnings per share.

In Table 4 of our press release we provide reconciliations of GAAP income or loss from continuing operations to adjusted EBITDA for the fiscal third quarters of 2008 and 2007. That press release is available on our website. Also posted on our website are historical quarterly reconciliations of GAAP income or loss from continuing operations to adjusted EBITDA on a consolidated basis and for each segment for all four quarters of fiscal 2007 and the first three quarters of fiscal 2008 and on a consolidated basis for the fourth quarter of fiscal 2006 in the Investor Relations section of our website at www.spectrumbrands.com, by which GAAP income or loss from continuing operations to adjusted EBITDA for the latest 12 months ended June 29, 2008 and June 30, 2007 may be reconciled. Within this discussion today we will include reconciliations of gross profit margin to adjusted gross profit margin and net sales excluding foreign exchange translations.

As a final note, during the course of our comments today unless we say otherwise, any reference to prior year results are for the fiscal third quarter 2007.

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

Kent J. Hussey

Hopefully all of you on the call and investors in general will find some of the supplemental information helpful in really understanding the true operating performance of the company. Good afternoon to everybody and welcome to our third quarter conference call.

I’m pleased to report that revenue this quarter increased by 11% with strong top line growth in all of our business units. I believe this reflects the strength of our new product offerings and marketing programs as well as the consumer shift toward value brands. However, adjusted EBITDA declined by 7% as a result of the unprecedented cost increases in the fertilizer operations of our home and garden segment. This decline offsets strong year-over-year adjusted EBITDA growth in our global battery and personal care and global pet supply businesses.

As is the norm, this afternoon I’ll discuss the performance of each of our business units and the company as a whole for the third quarter, Tony will get into more of the financial metrics including a discussion of the impairment charges we booked, and then we’ll open the call to your questions.

Before getting into the details I’d like to echo many of the things you’re hearing from industry in general. First, in spite of government statistics that say our economy continues to grow albeit at a much slower pace the impact of the housing and credit crisis, pervasive inflation and rising unemployment are impacting the consumer. Indications are that foot traffic is down in many retail channels and same store sales growth very significantly from retailer to retailer with some channels experiencing significant declines. As a partial offset consumers are being very selective in their purchasing decisions looking for better values than ever before. We think that our value positioning of providing quality products at a lower price has and will continue to benefit from this trend.

Second, retailers are focused on inventory management more than ever before driving their weeks on hand in many categories to record lows. This has resulted in sell-in well below sell-through in spite of excellent POS results in many categories. The ability of sophisticated suppliers to forecast them in, carry the right inventory of finished goods, and meet the challenging service demands of retailers has enabled this trend. This is one of our core competencies that has and will allow us to compete effectively in these challenging times.

Finally, we like everyone else in the industry are experiencing significant inflation in our raw material input costs, in purchased finished goods from the Far East, and in energy and transportation costs. While we have priced up in all of our businesses and will continue to do so in an effort to protect margins, the lag between input cost increase and pricing actions has impacted all of our businesses. Of particular note is the impact on our home and garden business where input costs for fertilizer spiked unexpectedly this year especially during the third quarter. As I mentioned this was the one segment of our business that underperformed profit expectations this quarter.

Returning to our top line, as I said revenue increased by 11% over 2007 with sales of $730 million. Excluding favorable exchange of $29 million revenue was up a solid 6% with gains in all three business units. Global batteries and personal care was up 12%, global pet supplies was up 10%, and home and garden sales improved by 9%, all in all a very solid performance in a difficult economy not only here but in Europe as well.

And we’ll take a more detailed look at each business unit starting with our global battery and personal care business. With good growth across all product lines sales in our global battery and personal care segment increased by 12% to $344 million. Excluding exchange, revenues were up 5%. Global battery sales were $217 million up 12% over last year primarily due to better performance in North America in both our alkaline and specialty batteries.

Alkaline sales in North America were up over 20% as we have steadily regained the share we lost earlier in the year and have returned to our historical 11% share of dollars. This improvement driven by our new packaging improved in more effective promotional programs and some distribution gains. We think that our value proposition offering the same power and performance as our competition for less is resonating with consumers as well. We also think our distribution in mass where more and more consumers are turning for their staple purchase benefits us.

European battery sales were up 10% benefiting from foreign exchange and sales increases in both brand and alkaline and specialty batteries. As previously discussed we believe the shift to private label has peaked and is in fact leaning due to significant cost increases in product sources from the Far East as well as increased shipping costs. Private label has actually decreased in Germany by almost three share points in the last year. We continue to exit unprofitable private label business and are seeing growing interest in our value position Varta branded product. In fact we have gained branded market share in Germany over the past 12 months to our highest level in two years. Our brand share of alkaline in Germany now stands at 42%.

Additionally during the quarter as a result of higher transportation costs and new labor and tax legislation in China increasing our cost to do business there as well as the continuing appreciation of the Yuan, we made the strategic decision to shut down our battery manufacturing facility in Ningbo, China. Consistent with our efforts to maximize the efficiencies of our facilities worldwide the bulk of this plant’s annual production of 200 million batteries will be moved to our existing facilities in Germany and Wisconsin. This phased shut down should be complete early in calendar year 2009 and should result in an annual savings of over $2 million as well as improvements in working capital by producing more batteries just in time and carrying less inventory on the water in transport. Tony will cover other accounting impacts of this strategic decision in a minute.

Latin America battery sales were up 5% due mainly to favorable foreign exchange.

Now turning to our personal care business, Remington sales were over $105 million up 16% including about $6 million of foreign exchange benefits. With rapid expansion in our women’s hair care products including nearly 40% sales growth in both Europe and North America, both shaving and grooming as well as women’s hair care contributed equally to this quarter’s total sales at Remington. We now have the fastest growing electrical hair care brand in North America. Our growth in this product category has been driven by a continuous stream of innovative and/or value positioned new products as well as outstanding packaging, point of sale, and marketing programs. We expect our momentum to continue as our category leading wet-to-straight hair straighteners are being relaunched this fall. North American point of sale for Remington hair care and for our straighteners is up 25% and 39% respectively over the last 12 months. Shaving and grooming sales were up slightly for the quarter benefiting from positive exchange impacts as well as double-digit growth in Europe and Latin America partially offset by a single-digit decline in North America.

Our third quarter in the US was impacted by our transition out of our old shaving SKUs into our new Flex360 rotary models which were launched during the quarter. This innovative shaver for which several patents are pending has been designed for the closest and most comfortable Remington shave ever. POS has been up dramatically; in fact over 40% in some accounts since this product was introduced. We believe the Flex360 will appeal to the traditional value conscious Remington consumer and will result in recapture of the market share we lost over the past two years.

In the fast-growing grooming category we have just launched our PG-350, an improved version of our PG250 personal grooming kit which is the number one selling grooming item in America.

Overall Remington sales grew in all geographic regions with North America up 7% and Europe up 28% benefiting from both foreign exchange and continuing strong gains in Eastern Europe.

Turning to our global pet business, despite some enormous distractions during the past several months related to the now-terminated sales process sales grew 10% over the year to $149 million. Favorable exchanged contributed about $6 million. Even after excluding exchange both our companion animal and aquatics products categories were up over last year including double-digit gains in companion animal due to market share growth and expanded distribution as well as benefits from pricing implemented earlier in the year. Sales in North American companion animal were up 9% on the strength of our brands and extensive product offerings. However we saw a 2% decline in North American aquatics. While our aquatic sales in North America were down, this is a significant improvement over the last four quarters where sales were off high single digits. Our decline is a result of category softness and not share loss. Most of the impact is due to lower equipment sales which carried lower than average gross margins. While it’s difficult to measure category performance precisely, we do believe we are outperforming the industry. We have also anniversaried the impact of the removal of live fish from certain stores at one of our key customers.

Total pet sales in Europe and the Pacific Rim were up 29% and 26% respectively driven by the dynamic expansion in Eastern Europe, the companion animal rollout in Europe, and continuing strength in aquatics in both Europe and Asia as well as some favorable foreign exchange. We expect our global pet supply business to continue to expand for the balance of 2008 as a result of category growth in many segments, pricing and new product rollouts in all geographies including a new line of health and beauty aids for dogs and cats under the Pro Pet label endorsed by Dr. Jeff Werber the renowned veterinarian.

Moving on to our home and garden segment. First, on a macroeconomic basis we believe the entire home and garden category has been depressed for the past two years as a result of the dramatic slump in both new home sales and resales of existing homes. Our research indicates the consumers tend to spend more outside as well as inside their homes when they move to a new home. In fact we now believe housing activity may be as important as weather in influencing overall category activity.

Given the severe slump in the housing industry and significantly less foot traffic in same stores sales for major do-it-yourself retailers, we’re actually pleased with our point of sale performance and share gains in many of our home and garden product offerings. Revenue in the home and garden business increased 9% to $237 million in the third quarter compared to last year with growth in both units and dollars. The largest contributors to this growth were fertilizers and growing media which were up 17% as well as low single-digit increases in repellants and pesticides.

POS of Spectrum products was up about 12.5% this quarter with gains in many segments. Fertilizer increased 17% which was driven by two very successful new product launches including StaGreen phosphorous-free loaves. This product provides premium consumer benefits at a value price and we strongly believe that once the consumer tries our products he will not switch back to the premium brand. With the return to more normal weather conditions this year, POS of our Spectracide products are up almost 9% compared to last year. As we enter the height of the mosquito season we’re beginning to see positive POS for our Cutter family of personal insect repellants as well. One of the factors contributing to the point of sale growth was our decision to spend behind our national brands like Spectracide and Cutter. We increased selling, marketing and advertising this year to revitalize these brands and reconnect with the consumer. The good news is that our Ninja TV spots for Spectracide were extremely effective with a 28% point of sale lift in the markets where we ran the media. The bad news is that we were unable to overcome the industry weakness and deliver enough incremental margin to meet our overall profit objectives for the quarter.

While we led the industry with pricing last fall and again early this year, the unanticipated and unprecedented increase in raw material and transportation costs significantly eroded margins in our growing products category which includes fertilizer and rich soil mulch and grass seed. While this segment of our business has grown steadily over the past few years, costs creeped during that time and the skyrocketing costs of Urea, Daft and Potash this year have caused this product category to be a significant drag on home and garden’s profitability.

Given the illiquid nature of the hedging markets for these commodities, at times we were forced into the spot market which as you are aware was extremely volatile and at record highs. Gross margin in this overall product category declined over 300 basis points in spite of two rounds of pricing. Fertilizer margins were the most severely impacted declining by over 800 basis points year-over-year as a result of $24 million of cost increases over 2007. As a result we’re implementing significant changes in our home and garden business to rebuild margins and restore profitability.

First, like our competition we plan on pricing in the 30% range for our fertilizer products for 2009. In addition for fertilizer SKUs which are most impacted by commodity price increases, we’ve implemented a quarterly pricing program to pass on future raw materials cost increases. While one can hope that the speculative bubble in these commodities will deflate as we’re now seeing in oil and corn futures, our planning and pricing for 2009 assumes no moderation in the current record levels of Urea, Daft or Potash.

Second, we’re evaluating changes to our product formulations and offerings to reduce input costs without sacrificing quality or performance.

Third, we’re fixing our mix by reducing our low margin product offerings and emphasizing our evaluative products such as phosphorous free fertilizers which deliver excellent performance while protecting the environment. In fact in many areas of the country there have been or they’re considering regulations concerning the application of fertilizers containing phosphorous, so we currently expect continued strong growth from these value-added products.

Fourth, we’re re-planning the service area for our soils and mulch products from our manufacturing facilities and in some cases adding co-packer locations to reduce our freight expenses. The dramatic increase in the cost to transport has eroded the margin on these heavy low-dollar value products when we ship them over excessive distances.

Finally, we’re reviewing our organization and infrastructure to make the necessary changes to reduce our operating costs and SG&A as a percentage of sales. With the changes already implemented or in the process, we currently expect to return to profitability in our growing products segment in 2009.

With that let me turn the call over to Tony to discuss some of the details of our financial results. When he’s finished I’ll come back and provide my concluding remarks.

Anthony L. Genito

Good afternoon everyone. I’d like to start off with a review of a number of unusual items we recorded this quarter which have been excluded in our calculation of adjusted earnings per share. Table 3 in our press release provides a full reconciliation of our GAAP loss per share to our adjusted diluted earnings per share. First, as you can see from a review of our press release we recorded a charge of $253.7 million net of tax reflecting the impairment of goodwill and certain of our investment lives and tangible assets. This impairment charge which is a non-cash charge relates to three separate items. $82.6 million of this charge relates to our home and garden segment representing the impairment of goodwill and certain of the trade name intangibles associated with this business. This impairment was triggered by a reduction in future forecasted operating profitability of this business as a result of the significant current and projected cost increases of the raw material inputs from fertilizer and growing products.

The second piece of this charge was a $154.9 million impairment of the goodwill related to our global pet supplies business. GAAP requires that long-lived assets be tested for recoverability whenever events or circumstances indicate that the carrying value of an asset may not be recoverable, or put another way when an asset carrying value is in excess of its fair market value. Once such event or circumstance is defined by GAAP, it is “the current expe3ctations that it is more likely than not that a long-lived asset will be sold or disposed.” Accordingly in connection with the terminated sale of our pet business, we estimated the fair market value of this business to be the sales price that had been negotiated. I should also note that this determination of fair value assumed the market value of the Spectrum subordinated debt that would have been tendered by the buyer as opposed to its par value thereby increasing the amount of the impairment charge.

And finally, $16.2 million of this charge relates to the impairment of goodwill associated with our strategy to exit Ningbo, our Chinese battery manufacturing facility. As Kent mentioned earlier, due to higher transportation costs and new labor and tax legislation in China increasing the cost to do business there coupled with the continuing appreciation of the Chinese Yuan, we made the strategic decision to shut down our battery manufacturing operations in Ningbo.

The second item relates to net tax adjustments of $19.1 million to exclude the effect of certain adjustments made to our valuation allowance against deferred taxes and other tax-related items.

Third, we recorded $19.9 million of restructuring and related charges during the quarter primarily related to our decision to exit our Ningbo manufacturing facility in China and other company-wide cost reduction initiatives.

Fourth, our general and administrative expenses this quarter included $2.9 million net of tax representing professional fees incurred in connection with the terminated sale of the company’s global pet supplies business.

Finally, during the third quarter we had a benefit associated with expiring taxes and penalties in our Brazilian subsidiary of $2.8 million. This benefit has been excluded for purposes of calculating adjusted fully diluted earnings per share.

Also, before we move on I would like to discuss the average number of shares outstanding used to calculate adjusted diluted earnings per share. For GAAP earnings per share, the basic share count of 50.9 million shares was used for both basic and fully diluted earnings per share as we incurred a GAAP loss. However once adjusted for the items I just discussed, our GAAP loss turns into income and therefore we used our fully diluted share count of 53.3 million shares to calculate our adjusted fully diluted earnings per share.

Now with those items out of the way, let’s move on to our income statement. Our third quarter adjusted diluted earnings per share, which again exclude the amounts I just covered, was $0.06 per share compared to $0.12 per share last year. Gross profit for the quarter was $261.4 million up 3% from last year’s level of $253.9 million. Gross profit margin for the quarter was 35.8% compared to 38.5% last year.

Within cost of sales we incurred restructuring and related charges of approximately $13.9 million which negatively impacted this quarter’s margin by 190 basis points and was primarily related to our strategy to exit the Ningbo manufacturing facility. During the third quarter of fiscal 2007 cost of sales included $4.1 million of restructuring and related charges. Excluding restructuring and related charges from both periods our adjusted gross profit margin was 37.7% this year compared to 39.1% last year. Reduction in adjusted gross profit margin was driven by significant inflation in our raw material input costs which was primarily in our home and garden business as well as increases in freight-in costs.

Operating expenses for the third quarter were $521.2 million which included the non-cash goodwill and impairment charge of $303.3 million and restructuring and related charges of $6 million. Last year operating expenses for the third quarter were $200 million to $208.3 million which included restructuring related charges of $26.8 million. So if you do the math after considering those items, operating expenses increased $30 million year-over-year. However I think it’s important to spend a little time to better understand what drove this increase in operating expenses.

$10 million of this increase was due to the impact of foreign exchange translation. Remember, as the dollar weakens exchange increases the dollar value of foreign sales but also increases the dollar value of foreign expenses. $5 million of this increase represented costs incurred in the quarter in connection with the business unit sales efforts which were terminated. $4 million relates to depreciation and amortization expense related to our home and garden business which was not included in last year’s expense as that business was reflected as a discontinued operation and hence, per GAAP, we stopped reporting D&A for that business. The remaining $11 million reflects higher marketing, selling and advertising expense of $5 million and that’s principally related to our home and garden business, $3 million of higher distribution expense in our pet and home and garden businesses which of course is driven by higher fuel costs, and $3 million of increased infrastructure costs incurred by home and garden to make it a stand-alone business. As Kent mentioned previously we are reviewing that organization to determine the changes necessary to lower our operating costs there.

Turning now to profitability, as Kent mentioned raw material input and transportation costs as well as the costs of sourced goods have been on the rise which resulted in mixed profitability results for us this quarter. We saw year-over-year adjusted EBITDA growth in all but one of our major business lines including double-digit gains in our global battery and personal care and pet businesses which we consider remarkable in this current economic environment.

Consistent with what you’ve heard from our competitors, the one area where we saw a decline in EBITDA was in our home and garden segment while the cost structure of the industry has taken a tremendous hit in recent quarters due to the rapid unprecedented increase in commodity costs. So despite widespread gains in market share as consumers in this tough economy opted for our value brand and the pricing actions we took earlier in the year unfortunately with the spike in input costs coupled with the selling and marketing investments we made in this segment and the increases in infrastructure that we made to make it a stand-alone business, the adjusted EBITDA of our home and garden business declined compared to the same period last year.

Consolidated adjusted EBITDA for the quarter was $81.2 million versus $87.7 million last year. However as I said, when we look across our segments both global batteries and personal care and our pet supplies segment had strong year-over-year growth. Also, I’d like to make a point here that our LPM adjusted EBITDA as of the third quarter 2008 was $290 million versus $242 million as of the third quarter 2007 representing a 20% increase. Our global batteries and personal care segment contributed EBITDA of $37.9 million as compared with $30.2 million of segment level adjusted EBITDA contribution during the third quarter of last year. This represents the sixth straight quarter of year-over-year adjusted EBITDA improvements in this segment. GBPC generated segment profits of $33.2 million during the quarter. That’s an impressive 21% increase over last year’s results primarily resulting from the cost-savings we achieved as part of our global realignment initiative and improvements in the operations at our manufacturing plants.

Before moving on to our other segments I should note that we currently have 78% hedged of our zinc need for all of fiscal 2008 at an average price of $3,245 per metric ton. The current spot price for zinc is now at about $1,800 per metric ton, thankfully lower than it has been for most of the past couple years. We have also hedged about 61% of our 2009 needs for zinc and about 24% of our 2010 needs. Our ongoing hedging program will allow us to continue to average down as zinc prices remain at current levels. Obviously the lower zinc prices will have a greater impact in 2009 and 2010 than we saw this year.

Another point I’d like to make is that despite the relatively lower zinc prices in recent months, there’s another input in our battery category that’s manganese ore which is on the rise. As a result and in order to maintain margins we are following the lead of our competitors and are in the process of implementing pricing in North America which should benefit us in 2009.

Our global pet supplies segment generated adjusted EBITDA for the quarter of $22.4 million which was helped by pricing taken earlier in the year and was up 11.4% from last year’s adjusted EBITDA level of $20.1 million. We anticipate taking further pricing in fiscal 2009 in an effort to maintain our margins. The global pet supplies segment generated segment profits of $16.8 million as compared with $14.4 million last year which represents an increase of 17%.

Home and garden as discussed before faced extreme input cost increases which resulted in a decline in segment level adjusted EBITDA year-over-year. For Q308 home and garden adjusted EBITDA was $29.4 million versus $41.9 million last year. The home and garden segment generated profits of $25.9 million for the quarter compared with $42.3 million last year. Keep in mind that the $42.3 million in segment profits generated last year did not include approximately $4 million of D&A as the home and garden business was reflected as discontinued operations at that time.

Moving on, third quarter corporate expenses were $12.4 million which included $4.5 million in professional fees associated with the sales process. Last year corporate expenses were $7.6 million.

Interest expense for the quarter was $57.1 million compared to $59.4 million last year. For the full year fiscal 2008 we anticipate total interest expense of approximately $236 million and the average interest rate for the year to be approximately 8.6%.

Third quarter depreciation and amortization expense was $17.4 million which included D&A of $7.8 million for global batteries and personal care, $5.8 million for global pet, $3.5 million for home and garden, and about $300,000 at corporate.

Turning now to cash flow, through the end of this third quarter our year-to-date cash flow from operating activities was a use of $130.1 million which is normal as the working capital investment in our home and garden business is just coming off its peak. We made capital expenditures of $15.3 million for the nine-month period and have received proceeds from the sale of our Canadian home and garden business of $15 million.

Turning to our balance sheet and liquidity position, at the end of the quarter we had $72.2 million of cash on hand and our ADL facility was drawn down by $144 million. As you have probably noticed over the past several quarters, we’ve been carrying higher operating cash balances than our historical level which is approximated about $30 million. This increase in cash is primarily related to higher cash balances at our four subsidiaries which represents a substitution for various overdraft and other credit lines that we previously hadn’t placed prior to our refinancing last year. In addition there are delays in the Venezuela Central Bank exchange processing which continue to cause us to carry more cash in that profitable subsidiary. We expect this trend of higher cash balances to continue into the foreseeable future.

Let’s talk about cash flow. Full year cash flow is now expected to be a use of approximately $50 million to $60 million. While our businesses are delivering on our previously internal expectations which gave rise to a neutral to slightly negative cash flow projection for the year, this use of cash is being driven by what I would refer to as extraneous factors. These factors include cash settlements and margin deposits we have made on our fx and zinc hedges. These cash settlements and deposits which are projected to total between $20 million and $25 million for the year are the result of the US dollar weakening against currencies we have hedged and the falling market price of zinc during fiscal 2008. While we previously expected the cash impact of these fx hedge settlements and zinc margin deposits to reverse themselves during fiscal 2008, we now expect that reversal to occur in 2009. Also contributing to this use of cash during fiscal 2008 are approximately $10 million of costs related to the terminated business unit sale efforts we took during the year, approximately $10 million reflecting the delay of some planned miscellaneous asset sales, and a $5 million anticipated cash payment pursuant to the earn-out provisions associated with our acquisition of [inaudible].

Let me reiterate that we are still anticipating cash interest of approximately $226 million, cash taxes of $20 million, cash restructuring will be slightly higher than previously planned as it is now projected at $39 million which will be somewhat offset by lower than previously estimated capital expenditures of $26 million.

As a result of our cash flow being less than previously expected coupled with the higher projected operating cash balances that we’ll be carrying, year-end utilization of our ADL facility is expected to be higher than previously planned. For fiscal 2009 we expect to generate $40 million to $50 million of free cash flow including cash from continuing operations of $75 million to $85 million less $35 million of capital expenditures as we anticipate significantly reduced cash restructuring costs and improvements in our working capital management.

Outstanding debt at quarter end was approximately $2.562 billion; foreign exchange has increased the dollar value of our euro denominated debt by approximately $41 million at quarter end. Our senior leverage ratio which represents our only significant financial covenant was 5.1 times, well within the 6.25 times maximum ratio allowed under the terms of our senior credit facility. As an aside, the maximum ratio allowed under our senior credit facility will continue at 6.25 times for the remainder of this fiscal year and it then drops to 5.7 times for fiscal 2009 before dropping to 5 times for fiscal 2010 and thereafter. We currently do not foresee any issues with maintaining compliance with this covenant. Total leverage at the end of our third quarter was 8.5 times.

So in summary, despite the continuous pressures we’ve seen in the previous quarters including tight inventory controls at retailers, low levels of foot traffic, the rising input costs, and a weak economy except for our shortfall in select parts of our home and garden segment, which I hope you picked up from the comments that Kent made that we are actively addressing, we’re pleased with our results of the third quarter. Across the board consumers are realizing the value of buying Spectrum Brands products particularly in these harsh economic times. Both our global batteries and personal care and global pet supplies segments saw improved levels of the adjusted EBITDA and are gaining market share as well as expanding distribution. We feel good about where these businesses are headed.

With that I’ll now turn it back over to Kent for his concluding remarks.

Kent J. Hussey

While there’s no question that all of our business units are facing challenges related to the weak economic environment and pervasive inflationary pressures, we’re taking action on a number of fronts to mitigate the impact wherever possible.

First, in order to combat rising costs we have and will continue to implement pricing where possible to protect and/or restore margins. As you’ve heard in recent weeks most all consumer product companies have no choice but to price up to pass through rising input, energy and transportation costs. Each of our businesses operates in a different competitive set so there’s no one size fits all approach to this difficult and necessary action. We will continue to be sensitive to our price positioning vis-à-vis our competitors and the needs of our customers and the ultimate consumer. We believe our value proposition in many of our businesses will work in our favor in the quarters to come and intend to maintain or enhance that positioning. Pricing has been announced up to as much as 25% to 30% by major consumer product companies. We expect to implement pricing ranging from low single digits to well in excess of 30% with the biggest increases in our growing products business where input costs have skyrocketed.

Second, we’ll continue to focus on cost improvements, productivity enhancements, organization simplification, and capital expenditures with immediate impact on operating costs. While we do not have a single massive homerun program that can deliver the $50 million we saved when we reorganized the company in early 2007, we do believe we have lots of singles and doubles that are underway and in total can match that figure over the next 24 months. These initiatives are underway in every business unit in every geographic area and in every functional area. An example of cost improvement is at Remington where our focus on designed cost targets for new product development has the goal to expand gross margin on every new product with full awareness of the tactical price points we must hit. Our new Flex360 rotary shaver is a prime example where margins will be up several points over the older models.

Third, we’ll continue to focus on growing our business profitably. That means continuing to exit unprofitable business including products or product lines that don’t deliver satisfactory margins or returns on invested capital. SKU production has been and will continue to be a primary focus. During the past year we’ve reduced a world-wide SKU count of Remington products by over 30% with more planned going forward and all the while delivering outstanding growth. In Europe we’ve exited over $30 million of unprofitable private label business parting ways with some long-time customers. And in home and garden we reduced our price position of fertilizer product offerings from 22 to five and will continue to prune the product offerings as required. Our goal is to maximize profit, not sales.

Fourth and most importantly, it’s ultimately about driving sell-through of our products by connecting with the consumer. We believe the reorganization of our business into three product-focused units; the elimination of the integration, de-integration and sales processes distractions; and the revitalization of our marketing programs positions us to do well going forward. Our goal is to win the consumer at the shelf. Great packaging and POS materials, clear communication of features and benefits, alignment with our retail partners, and the right price have been the keys to our success in the past and all these competencies have been revitalized this year. If recent trends continue, we should continue to grow through the holiday season.

I’ll now open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from William Chappell - SunTrust Robinson Humphrey.

William Chappell - SunTrust Robinson Humphrey

First, can you give us any indications that you’ve had from retailers going into the holiday season in terms of battery orders with inventory levels they’re comfortable with?

Kent J. Hussey

Battery inventories at some of our key customers are truly at record lows. We are optimistic with a number of promotional programs that we have planned for the holidays that we are optimistic that we’ll have a relatively good sales performance during the holiday season.

William Chappell - SunTrust Robinson Humphrey

Do you feel like Europe remains pretty stable in the whole battery category or have you seen any real changes or maybe a swing back over the pendulum?

Kent J. Hussey

As I said earlier I think we’re beginning to see in a number of our key customers a shift towards our value proposition or value positioned batteries.

William Chappell - SunTrust Robinson Humphrey

On the lawn and garden side, what are you forecasting or what are you expecting in terms of volumes with the price increases that are going through? Do you think you’ll see greater trade down or do you think you’re going to end up pricing consumers out of the category altogether?

Kent J. Hussey

I think you’re going to see two things. Clearly with prices going up pretty significantly from all the suppliers, there will be some unit volume decline in the industry. I think that’s clear. What we’re hoping for is an offset to that for us as consumers begin trading down to again our value proposition products.

William Chappell - SunTrust Robinson Humphrey

Have you had any pushback from the retailers in terms of the quarterly commodity pricing structure?

Kent J. Hussey

I think they understand that the volatility of the raw materials here puts the manufacturer, the supplier, in a squeeze in the middle and we can’t continue to absorb the significant price of our commodity price increases without being able to pass those through. So I think they understand the situation that we’re in as a key supplier.

Operator

Our next question comes from Drew Martinson - Deutsche Bank Securities.

Drew Martinson - Deutsche Bank Securities

I just wanted to start with your liquidity profile with a peak to trough capital need of like $150 cash burn here. How do you feel about your liquidity profile going into 2009 as you start to build for the long garden season?

Kent J. Hussey

We’ve got a whole series of initiatives built into our call it planning for the year and we’ve laid those out in our business planning and we believe we have sufficient liquidity to operate all of our businesses.

Drew Martinson - Deutsche Bank Securities

I couldn’t help but hear that there were some minor assets that you were looking at selling as well. Could you provide a little color on that, kind of the magnitude there?

Anthony L. Genito

That was about $10 million in magnitude and what it represents is really, when we built our expectations for this year we anticipated that we would have these small assets sold by the end of the year. It looks like that’s probably going to be delayed. You’ve got a company that’s $2.8 billion. It’s just assets that are excess assets that are idle with very low book value and basically we’re just looking to add those inside our cash flow forecast and they’re being delayed beyond 2008, probably into 2009. So it’s $10 million and it really doesn’t move the needle that much but it’s partly when it starts to accumulated to the what we said before, neutral to slightly negative cash flow for the year and now $50 million to $60 million. I’d say it’s just another one of those components added to it, but it’s a time issue.

Drew Martinson - Deutsche Bank Securities

In terms of the big picture with the pet asset sale falling through, what are the next steps and management’s commitment to deleveraging the company?

Kent J. Hussey

We’re kind of stepping back. Management and the board are having active dialogue about a variety of different options. The reality is that the current state of the credit markets on the one hand and our relatively low equity price on the other hand make a number of what I would call options very unattractive right now so we’re somewhat hopeful over time that we’ll see improvements in one or both of those things that would make some of the refinancing activities more attractive. We’re not actively trying to sell the pet business now. We thought it was a good transaction. Unfortunately, with the demands of some of the senior lenders it would have increased our borrowing costs significantly over the remainder of our credit facility and when we ran the numbers it really had a significant negative impact on economics of the pet deal. We think it’s a great business; the buyer thought it was a great business; and we think it will just continue to grow in value over time so we’re basically patiently waiting for the right opportunity and we’ll see what happens in the future.

Drew Martinson - Deutsche Bank Securities

Could you go over the fx cash hedges that you were referencing in terms of the deposits that you’re making? When will those flow through your numbers?

Anthony L. Genito

We would expect those to flow through in 2009.

Drew Martinson - Deutsche Bank Securities

So that is included in your $40 million to $50 million positive free cash flow?

Anthony L. Genito

Indirectly, yes.

Operator

Our next question comes from [Bob Whittenholm - Durol Bank of Canada].

[Bob Whittenholm - Durol Bank of Canada]

Tony, I was just looking for a little clarification. The earnout is a one-time use of cash. That’s $5 million. Your efforts to sell the pet business, that’s a $10 million cash charge?

Anthony L. Genito

It’s not just the pet business. We had as you recall a strategy back at the beginning of the year where we were looking at other, all assets were on the table effectively, and we incurred some professional fees, legal fees and accounting fees. For instance we embarked upon getting carve-out financial statements.

Kent J. Hussey

For several of the businesses.

Anthony L. Genito

For several of the business units. So it’s a combination but that $10 million number includes the costs that we incurred this quarter. Keep in mind we had a $3 million payment that went out in the fourth quarter as a termination fee that we paid to [Sultan]. And like I said it’s just a combination of these other professional fees that we had.

[Bob Whittenholm - Durol Bank of Canada]

And the cash restructuring charges, the $39 million includes the closure of the battery business in China, correct?

Anthony L. Genito

Correct. And it also includes we made some minor tweaks on the European management structure back in the beginning of the year and we included it in that. As you’ll recall I believe the number I had thrown out earlier was a $33 million number or $30 million to $33 million and it’s picked up for those items, basically those are the big drivers.

[Bob Whittenholm - Durol Bank of Canada]

So a lot of cash it sounds like that’s getting eaten up like the margin call on your fx. This is one time and you’re kind of front-loading it and taking a hit now?

Anthony L. Genito

Yes, exactly. When you look at that basically you’ve got $20 million to $25 million of costs associated with the margin deposits and the fx hedge payments, we’ve got the $10 million of fees for the various asset sales that we’re no longer pursuing at this point in time because of the credit market, so those are obviously big numbers that are one-time type items.

[Bob Whittenholm - Durol Bank of Canada]

Excluding your fx, is net working capital, receivables and inventory less payables going to be a source or a use for the full year?

Anthony L. Genito

It’s going to be a slight source net of fx.

[Bob Whittenholm - Durol Bank of Canada]

And your fx does flow into working capital?

Anthony L. Genito

Yes, it does.

Operator

Our next question comes from Connie Maneaty - BMO Capital Markets.

Connie Maneaty - BMO Capital Markets

Have you started hedging Urea yet for next year?

Anthony L. Genito

No, we have not. With the recent call it backing down on some of the commodities, particularly corn and wheat, as we kind of end the growing season, we are anticipating that you’re going to see some softening in those markets. So rather than rushing in, we’re going to just watch for a little while. We’re at the low point in production of that product. We don’t really begin ramping up until about November so we’re taking a wait and see attitude right now.

Connie Maneaty - BMO Capital Markets

Normally how hedged would you be at this point?

Anthony L. Genito

Not much. Hardly any.

Kent J. Hussey

There are not really robust markets for some of these commodities. The only one that’s fairly reasonable is Urea and that’s even a fairly short window that you can hedge in. You typically have to wait into the fall to start hedging.

Anthony L. Genito

Typically the Urea market, we were hedging about six months forward and that’s because that’s kind of what the market allowed us to do. That was about as liquid as it was. And I believe at this point in time last year we had if not zero, darn close to zero. It was a very, very low number if any hedge.

Connie Maneaty - BMO Capital Markets

Do you use mainly pill or granular Urea?

Kent. J. Hussey

We don’t know.

Connie Maneaty - BMO Capital Markets

Because the price of Urea has doubled since the end of March. I guess my question is, how did your margin go down 800 basis points in this business? If fertilizer is only 25% -

Kent J. Hussey

I’m only talking about fertilizer margin, not the entire business. If you take our home and garden business and break it into two pieces, half of it are what we call control products and personal repellants, household insecticides; the other half if what we call growing products and that’s a combination fertilizer, rich soils, grass seed, and mulches. Fertilizer is about $150 million.

Anthony L. Genito

When you say how much Urea do we use?

Kent J. Hussey

[Inaudible]. As you just mentioned Urea spiked but not only Urea, Daft and Potash I think tripled in value in the last six months.

Anthony L. Genito

If I could just cite some numbers as to where, I can’t say where they were in the last six months, but I can tell you that for instance Potash or Daft, $276 a ton in 2007. It’s now at over $400. The price of Potash, for some reason I don’t have the 07 number for Potash, but that has gone up significantly as well. I think that was over a $1,000 at one time, but the point is this. They’ve more than doubled. They’ve tripled.

Kent J. Hussey

The reality is, is that significant of the purchases we made during the height of the season, we’re at spot prices so fertilizer itself, while we did price up twice during the year, that huge increase in the input costs drove the margin down from 29% to about 20% on fertilizer, or 28% to 20%, something like that. It still generates gross margin but it took a heck of a hit. So the 800 basis points is strictly the fertilizer product line.

Anthony L. Genito

Connie, I apologize. I misspoke before. The $387 was the 08 price for Daft. Daft was $276 in 2007 a ton; it’s now at $1,100 a ton. I don’t believe Potash can be hedged so there’s no spot.

Connie Maneaty - BMO Capital Markets

Even with the price increases you’re taking, how can the profitability of this business be better in 09 than it was in 08 given what’s gone on with commodities?

Kent J. Hussey

Well, the pricing will be well in excess. We took the big hit in terms of the increase in the input costs this year. We’re forecasting next year to be call it flat with where the input costs are currently running and we are in fact taking very significant pricing that will be in excess of the cost increase. So we are expanding margins again next year.

Connie Maneaty - BMO Capital Markets

So you’re expecting next year’s home and garden EBITDA to be flat with this year, is that what you just said?

Kent J. Hussey

No, I’m saying in the fertilizer portion of our business, we do expect to expand the gross profit margins.

Connie Maneaty - BMO Capital Markets

In batteries, with the price increase you’re taking and the decline in zinc do they offset the increase in manganese ore?

Kent J. Hussey

Yes. Manganese is actually up slightly more than the decrease in zinc and that’s really what’s driving the need for the industry to price up.

Connie Maneaty - BMO Capital Markets

On Ningbo, how are you getting out of this? Are you just closing it down or are you selling it?

Kent J. Hussey

We are actually phasing down; we’re finishing up production to use up the raw materials, so gradually phasing down. Some of the equipment is being actually returned to our other facilities and then we are selling the facility and the remaining equipment. So we’re not selling an ongoing business.

Connie Maneaty - BMO Capital Markets

A question on the sale of the pet business. I have to ask this, I’m sorry. How is it that your lender didn’t buy into it before the press release was put out about the sale?

Anthony L. Genito

You enter into a purchase agreement first. You have to have the deal in hand before you go to the lenders to ask for their consent. So we had to get the deal done first and once you ink a contract, we are obligated to make a public disclosure. I would just tell you that at the time we signed the contract we certainly didn’t anticipate that we would have the issue that we did. So we were not call it aware of how challenging the market for consents has been in the recent several months. And as I’ve learned along the way, we’re not the only ones that were faced with some extremely onerous demands by the holders of the senior secured debt. They’re not banks; they’re hedge funds.

Operator

Our next question comes from Reza Vahabzdeh - Lehman Brothers.

Reza Vahabzdeh - Lehman Brothers

Just a couple of housekeeping items. In terms of POS or consumption at retail, how did you fare during the quarter in the battery business in North America?

Kent J. Hussey

POS was up 20%.

Reza Vahabzdeh - Lehman Brothers

So POS was up basically in line with your sales?

Kent J. Hussey

Yes. We had some good promotional programs going during the season and POS was up about 20%.

Reza Vahabzdeh - Lehman Brothers

And would you expect this kind of promotional support and therefore POS to continue in the second half of this calendar year?

Kent J. Hussey

I think you have to look at it on a retailer by retailer basis. Every retailer has its own schedule of promotional activities that they plan to run during the holiday season. We’ve already entered into agreements with our key retailers and we feel relatively optimistic that with our knowledge of what is going to happen that we should maintain or perhaps even slightly expand our share during the holiday season.

Reza Vahabzdeh - Lehman Brothers

But is the category healthy still as far as overall consumption?

Kent J. Hussey

Unit consumption’s been relatively flat. I think the category has grown strictly because of the pricing that’s taken place.

Reza Vahabzdeh - Lehman Brothers

As far as the costs for the home and garden that rose, I would have thought that a lot of the costs that you would have tremendous visibility for a lot of these costs in home and garden preceding the June quarter because I would have thought you would have purchased a lot of these input costs and even manufacturer’s a good bit of them. So I’m just surprised that the costs became a bit of a surprise given the nature of how you manufacture it and then ship this product.

Kent J. Hussey

There actually is not a huge lag time between when you take delivery of the material and you end up, you call it manufacturing but it’s really more of a blending packaging activity in that it’s shipped directly out to the retailers. So if you look at how rapidly during the last three to six months some of these commodities have skyrocketed and the fact that we only had less than half, I’m not sure exactly how much of each of these commodities were actually hedged where we knew what we were going to pay. We were stung with some very significant increases that were not anticipated.

Reza Vahabzdeh - Lehman Brothers

So you had visibility on about half of your input costs give or take and it was the rest that -

Kent J. Hussey

It was basically at spot.

Reza Vahabzdeh - Lehman Brothers

As far as working capital use or source in this quarter, how did you fare Tony?

Anthony L. Genito

It was definitely a use because of the peak requirements of the home and garden season. This is the quarter, but I don’t really focus on quarterly cash flow because we work on either a year-to-date or a full-year basis for our projections. Just to confirm that, yes, working capital overall was a slight use but not as bad as I would have anticipated.

Reza Vahabzdeh - Lehman Brothers

So how do we expect to fare in working capital for the year?

Anthony L. Genito

As I mentioned, for the full year we’ll be slightly positive and that will include exchange, net of the exchange impact, because keep in mind that as the exchange impact is going to have a negative impact on working capital but net net we will be slightly favorable.

Reza Vahabzdeh - Lehman Brothers

And your companion pet business is doing well in the US. Aquatics is still soft. What is the total pet business in the US doing? Is it still up slightly or is it down?

Kent J. Hussey

It’s positive. I think it’s up 9% in the US.

Anthony L. Genito

Companion animal is up 9% and North American aquatics is down a little less than 2.5%.

Reza Vahabzdeh - Lehman Brothers

So on a combined basis what’s the number?

Anthony L. Genito

I don’t look at it that way but I would guess it to be, based on the relative proportions I’d say it’s probably about 6% to 7%. Keep in mind that aquatics is two-thirds of our business and one-third is companion animal but on the other hand when you look at North America, North America is where right now about 99% of our companion animal is, so it’s probably closer to 7% or 8%.

Reza Vahabzdeh - Lehman Brothers

And do you think the strength of the companion animal is due to new products, distribution gains, pricing, what’s the driving power?

Kent J. Hussey

All of the above.

Operator

Our next question comes from Joseph Altabello - Oppenheimer & Co.

Joseph Altabello - Oppenheimer & Co.

Just staying on home and garden for a second, the working capital on that business was a source in the quarter, correct?

Anthony L. Genito

I don’t really look at that by business so I don’t have that at my fingertips right now.

Kent J. Hussey

It normally is a use.

Anthony L. Genito

Well in the third quarter though we were starting to -

Kent J. Hussey

Staring to collect. But the season was late this year.

Anthony L. Genito

The season was late. I’d guess that to be probably a use and I can get back to you on that just for the home and garden business. Again I have it but I just don’t have it in front of me.

Kent J. Hussey

One of the things that we saw, and I think you’ve heard this from other people, the season did break a little later than usual; we’ve also seen retailers now be very cautious about when they place orders and so they wait until the last minute; and we actually saw as the weather improved as we went through the quarter the third month of the quarter was relatively strong so we had significant receivables at the end of the quarter.

Joseph Altabello - Oppenheimer & Co.

In terms of the input cost pressures in the quarter, how much of that was actually Urea and other input and how much of that was transportation and diesel?

Kent J. Hussey

The overwhelming majority was the raw material input. It’s maybe a couple million dollars worth of transportation because we do spend a lot of money both on inbound freight and on store-door delivery particular at the fertilizer and growing media. Our actual transportation costs in that segment are run depending upon the SKU we’re shipping, and they were from 8% to 15%. So the run-up in diesel costs over $5.00 a gallon really did have a big impact in that business.

Joseph Altabello - Oppenheimer & Co.

Moving on to the closing of the Ningbo facility, this is kind of interesting because you’re actually one of the first comers I think to start to move operations out of China to Germany and Wisconsin for example and it seems like you just actually moved some capacity from Germany to there. So if you could just give us some insight into what’s going on and how the labor cost advantages in China are slowly getting overwhelmed by transportation and other issues?

Kent J. Hussey

We actually got into that business four years ago and we did move a line from Germany there. At the time that we got involved in that facility the actual landed cost of a battery out of China into the US or into Europe was roughly 30% below our western manufacturing costs. You’ve seen cost increases across multiple fronts there including a significant increase in labor costs; there were actually increases in raw material input costs; we’re seeing increases in energy costs; and you’re seeing a significant reduction in the [Vactech] refunds that the government is allowing the manufacturers who export products to enjoy. That’s been pretty significant. And then you couple all that with the strengthening of the Chinese currency, it’s actually gone from close to 8 and is now about 6.

Anthony L. Genito

6.7 and the Smart Money is talking about it going further down to 6.2.

Kent J. Hussey

Down to 6.2 within the next year. And then you couple that with a doubling of container costs out of the Far East and then suddenly the current cost of delivering product out of China is equal to or greater than our costs in our Western plants. Then you couple that with the fact that you have significant working capital investment in the inventory in that plant and on the ocean and we have enough capacity here that we can actually produce batteries almost just in time for our customers both in North America and in Europe. So it is a significant cost savings for us to make that decision and we decided to just go ahead and do it instead of waiting.

Joseph Altabello - Oppenheimer & Co.

So that is not unique to batteries. It sounds like those issues will also impact pet supplies for example?

Kent J. Hussey

To a much lesser extent. It varies by the product that you’re manufacturing. We are seeing some of those actually increases in our Remington products which are all sourced from the Far East. Now we haven’t seen as much of an increase in costs there as we did in the battery business, but we are beginning to see cost pressures from the suppliers of the small electrical appliances.

Operator

Our next question comes from Jason Gere - Wachovia Capital Markets, LLC.

Jason Gere - Wachovia Capital Markets, LLC

I guess life would be really good if home and garden was treated as a discontinued operation again. Just a couple of questions. One, if you look at and clearly you guys are starting to see some of the trade down there and some of your HPC peers haven’t quite seen the value play come in. I was wondering if you could talk a little bit more about Europe, which we’ve been hearing through the earning season is a bit tougher right now, in particular with the Varta brand which is a higher end priced battery than obviously what you have in the US. I was wondering if you could talk about that and maybe Remington. And then I’ll have a question on the North American battery.

Kent J. Hussey

Europe has definitely slowed. Germany in particular is seeing a slowing in their economy. Their consumers have always been a little bit more conservative than somewhat free-spending American consumers. But the Varta private label is something that we have exited. We have spent a lot of time explaining to some of the key retailers there that actually working with a branded product while it may not rotate as quickly actually generates more profits for them. So because we sell across a large number of channels of distribution, we tend to put the premium batteries in select channels and we have actually launched what we call a value positioned Varta brand that doesn’t perform as well as our premium products as an alternative to private label, and it’s actually beginning to do quite well. So as I said on the call a little bit earlier, we have actually seen the beginnings of a decline in private label and an increase in branded batteries. Obviously most of the increase is coming at the value end of our product offerings but that’s a significant improvement over where we were even a year ago.

Jason Gere - Wachovia Capital Markets, LLC

As we turn to North America, you were talking about some distribution gains that you got in the quarter. I assume that would be the mass channel or can you just provide a little bit more color on which channels you might have seen a big more of those gains?

Kent J. Hussey

Actually it wasn’t in mass; it was in some of the other channels where we have relatively small distribution. There’s nothing earth shattering; just some wins here and there with various different retailers.

Jason Gere - Wachovia Capital Markets, LLC

Clearly you’re trends were much better than some of the higher-priced competitors and I appreciate the color you gave us on I think Bill Chappell’s question about the holiday season. But I guess I was just wondering, how do you think your competitors are going to respond to some of the share gains that you’ve been getting? I mean, over the last couple years as you know you guys have kind of been the sources of share gains by the other two other players out there. So I’m just wondering from more of an in-store merchandising activity or how do you think the competition’s going to react and how are you going to counter-act so you can maintain that double-digit share that you’re back to?

Kent J. Hussey

If you look over a long period of time, we have averaged around 11%. As I’ve told a lot of people the reason that our US share is so low is that we have such narrow distribution compared to our two premium brands that basically are sold everywhere. So you don’t find much of our product in grocery or drug or the clubs or places like that, so we have much narrower distribution. The good news is where we are in distribution and we have call it reasonable shelf placement, reasonable share of the shelf, our product sells at much, much higher percentages of the overall battery category. And we talked about the fact that we got away from our value positioning. We weren’t offering the retailer significant or let’s put it this way, better penny profits. And over the last year and a half or so we’ve kind of over time changed our pricing, changed our positioning; we believe we’re continuing to offer compelling value to the consumer; and we’re back in the mode of trying to provide our retail customers with equal to or better than profits by selling our batteries. So they are more incented; they’re more motivated to give us better space in the store because we’re actually helping them grow their category right now, as you can see because we’re outperforming the category, and then growing their profitability. Batteries have historically been one of the three top categories in terms of revenue and profitability for major retailers and they have suffered a little bit in the last year or two. So maybe we think our time has finally come here in terms of being in the right place at the right time with a good value proposition.

Jason Gere - Wachovia Capital Markets, LLC

What would be the adjusted EPS number for the fourth quarter? Clearly with your press releases there are a lot of recalculations to go through, so I’m just wondering what’s the true number to compare to for last year and do you think now that obviously lawn and garden’s in a lower profitable quarter, in the fourth quarter we should be seeing acceleration from that?

Kent J. Hussey

I’d just make a comment. If you go to the website, we have endeavored here because we know we have confused a lot of people with things being in discontinued ops and out of discontinued ops and restructuring charges and we have provided I think unprecedented granularity and visibility into the performance of each of our business units over the last two years. So let me suggest you go take a look at what’s out there. I think you’ll find it to be very helpful and then if you still need some more information, just give Tony or Carey a call.

Thanks everybody. Carey, Tony and I all kind of rambled on quite a bit today but our objective was to give you some real insight into what’s really happening in the business. And again, very good top line performance. That is very encouraging to me that our products are selling well everywhere in the world in all of our businesses.

We had one issue in our growing products segment of our home and garden business where we like everybody else in the industry were tremendously impacted this quarter. The rest of our businesses performed exceptionally well. And we have action plans in place to address the issues that we experienced this year, which are unprecedented. It was like what happened in the battery industry three years ago when zinc skyrocketed from $1,000 a ton to over $4,500 a ton and we all scrambled to price to catch up and now zinc is back down to $1,800 a ton.

Hopefully we’ll see that same curve over time although for right now we’re not assuming we’re going to see any reduction in the cost of the raw material inputs to our fertilizer business and we’re pricing them appropriately assuming that that’s going to be the case. But we do know that it’s a cyclical industry and we do believe that the call it the speculative bubble will burst like you’ve seen in oil, like you’re seeing in wheat, like you’re seeing in corn and a lot of other commodities, so we hopefully will have call it an opportunity going forward there for some moderation in those input costs.

Anyway, the business is healthy; it’s doing very well; we’re optimistic about the holiday season as we go through the next quarter leading up to the holiday season. Again if you look at the performance of batteries, Remington, pet and even the balance of our home and garden business, I think we’re doing very well especially when you take into consideration the challenging times that we’re operating in. So we thank you all for your time. I know we went kind of long today. Go to the website and I think you’ll find a lot of interesting useful information there. And we look forward to talking to you at the end of the fiscal year. Thanks a lot.

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Source: Spectrum Brands, Inc. F3Q08 (Qtr End 06/29/08) Earnings Call Transcript
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