Spectrum Brands Holdings, Inc. (SPB) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Kevin and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2015 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, February 4, 2015. Thank you. I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Thank you, operator. Good afternoon and welcome to Spectrum Brands Holdings fiscal 2015 first quarter earnings conference call and webcast. I am Dave Prichard, Vice President of Investor Relations for Spectrum Brands and your moderator for our call today. Now, to help you follow along with our comments, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website spectrumbrands.com. This document will remain there following our call. So, if you go to the slide presentation, I am now on Slide 2, which tells you that our call will be led again today by Dave Lumley, our Chief Executive Officer; Andreas Rouve, Chief Operating Officer; and Doug Martin, our Chief Financial Officer. Dave, Andreas, and Doug will deliver opening remarks and then conduct the Q&A session. So, let’s now turn to Slide 3 and Slide 4, our comments today include forward-looking statements, which includes our outlook for fiscal 2015 and beyond. These statements are based upon management’s current expectations, projections and assumptions and are by nature, uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements that are outlined in our press release dated today, February 4, 2015, and our most recent SEC filings and Spectrum Brands Holdings’ most recent 10-K. We assume no obligation to update any forward-looking statement. Also, please note that we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today’s press release and 8-K filing, which are both available now on our website in the Investor Relations section. With that, I am pleased to turn the call over now to our Chief Executive Officer, Dave Lumley.

Thanks, Dave and thank you all for joining us this afternoon. Let’s turn to Slide 6. We delivered a solid first quarter, especially in view of the large negative impact of foreign exchange, which was mostly the euro, and a significant loss of sales and margin from the well-publicized port slowdowns. Negative FX impacted our sales by $38 million and impacted our adjusted EBITDA by $11 million in the quarter. This was largely in our appliances and battery businesses. Port slowdowns hurt sales primarily in HHI in addition to appliances and pet businesses in the aggregate amount of $20 million with more than half of that in HHI. We will talk more about that later in the call. So the impact to adjusted EBITDA was $10 million more of EBITDA including the air freight and other costs to support our customers because of the port slowdown. So a total of $21 million of adjusted EBITDA when combined with the FX impact. And again we will go through that a lot more as we go on today. First quarter sales increased 0.5% versus last year when you exclude the negative FX impact. After further adjusting for the impact of the port slowdowns, sales grew in our projected low single-digit range or over 2% in the first quarter. Now the Home and Garden business reported another record first quarter. We are also pleased with the solid performance of our small appliances business including top line and adjusted EBITDA growth in North America despite the port slowdown. Europe continued to be a bright spot with solid constant currency growth in batteries, personal care and small appliances. Our products are selling well in Europe and we continue to grow volume. On a constant currency basis the company’s adjusted EBITDA increased 4.5% versus last year. And further excluding the $10 million of negative impact of the port slowdowns adjusted EBITDA increased 10%, actually 10.1%. Importantly our adjusted EBITDA margin as reported increased 30 basis points to 16.5% in the first quarter and also slightly exceeded fiscal 2014’s annual record level of 16.4%. Let’s turn to Slide 7, cost improvement savings were significant in the first quarter allowing us to do or to do more than offset higher product costs and allowed us to continue to invest in new products such as our exciting new Rayovac FUSION alkaline battery which was announced earlier this week. We responded early to the port slowdowns in the quarter, to the currency weaknesses and the North American consumer POS slowdowns in several businesses. We did this with accelerated expense reductions and cost savings resulting in just slightly lower adjusted EBITDA, but an increased adjusted EBITDA margin quarter-over-quarter. During our last call which was on November 20, we announced a new 2-year restructuring initiative with a 1-year payback. We have made excellent progress in the first quarter to move to that more efficient global operating structure, one that better matches retailer needs. You remember we combined our battery and appliances business and our pet and Home and Garden businesses, which streamlined their entire organizations and as we said allowed us to do a lot more faster in new products which will help with the back half of this year. These actions along with strict cost controls did partially offset negative FX and other cost pressures in the quarter. In addition, we recently received approval to resume production and sale of our very high margin fish food into Russia, which negatively impacted our pet results since Q3 of last year. We expect this to help our pet sales and adjusted EBITDA in the second half of the year. Let’s now turn to Slide 8. We continue to plan for a sixth consecutive year of record performance in fiscal 2015 with reported sales growth in the low to – single-digit range compared to the $4.43 billion last year. This includes both recent acquisitions and anticipated continued negative impacts from foreign currency of approximately 5% to 6% for Spectrum Brands. Our growth will come from new product introductions across all businesses, distribution and market share gains, geographic expansion, further growth in e-commerce, cross-selling and select and targeted pricing actions on a global basis. These will be supported by our important tuck-in acquisitions in the first quarter and early in the second quarter. We are really pleased that we have closed on the IAMS and Eukanuba European pet food business on December 31 and completed an exciting acquisition of Salix Animal Health, the world’s largest vertically integrated dog treat company on January 16. Salix has shown strong growth and brings many synergy and distribution opportunities to our existing pet businesses, especially in North America. So, overall, we remain optimistic about measured growth in fiscal 2015. Let’s review Q1. We reduced our expenses quickly. We launched a more efficient organization designed to increase organic growth. We moved as fast as we could to substitute like products for those impacted by the $20 million of port delays. We solved the fish food ban in Russia. So, we will get those sales in the second, third, and fourth quarter. And most importantly, we added three new businesses to our global platform. We feel these actions and the eventual solution to the port delays will provide increased organic sales, more synergies and significant SG&A savings. As we said many times over the past 5 years, our focus remains on growing adjusted EBITDA and maximizing sustainable free cash flow now and over the long-term. Now, I am excited to turn over the review of our operations to Andreas Rouve, our Chief Operating Officer, someone who has held that position now for over a year. Andreas?

Thanks, Dave and good afternoon everyone. I will begin with Home and Garden, which is Slide 10. Home and Garden reported record first quarter performance for all key financial metrics, including a threefold increase in adjusted EBITDA. While Q1 is the segment’s smallest quarter of the year, the strong start is a good indicator for what we believe can be another record year for this business. Home and Garden had gained significant market share and continues to outperform underlying category growth by effectively leveraging our Spectrum Value Model. So, every year can be better. Home and Garden is poised to grow again in fiscal ‘15 and have many exciting new products, such as AccuShot, a very effective new delivery system, along with expanded distribution, strong promotional plans and cost improvements that should more than offset inflation. Now to Remington, our personal care business, which is Slide 11. Sales grew 3% on a constant currency basis excluding a large $11 million negative currency impact. Sales increased in Europe and Latin America on a constant currency basis from new product launches, new retail customers and geographic expansion. Lower North American sales were in part due to the timing of holiday shipments. The port delay also impacted sales by an estimated $2 million. Adjusted EDITDA grew nearly 5% in the quarter along with margin expansion, which was helped by improved mix and cost savings that more than offset currency. On a constant currency basis, adjusted EBITDA expanded even a strong 17%. As you will recall, Remington new product launches were significant in the second half of 2014. Remington is also launching a host of new products in fiscal 2015 from a SmartEdge foil shaver, which is the world’s first active hybrid cutting technology to a virtually indestructible hair clipper and beard trimmer. Including expectations for increased cost savings, Remington is pushing for record adjusted EBITDA and improved adjusted EBITDA margin despite currency headwinds led by North America, where we have strong new product placements, especially in our core men’s shaving and grooming category. We also expect e-commerce sales growth to continue. Let’s turn to the small appliance division of global appliances which is Slide 12. This division was a strong performer in Q1, which is its biggest quarter of the year due to the holiday season. Sales grew 3.2% and more than double that 6.7% after excluding negative currency impact of $8 million. This growth was powered by North America and Europe due to new products, customer gains and promotions. Adjusted EBITDA grew at more than 3 times sales growth or 9.9% in the quarter with a nearly 100 basis point margin improvement. Much like Remington in Q1 volume gains and cost savings more than offset negative currency impact and the port delay. On our last call we noted our optimism in fiscal 2015 about small appliances in Europe and especially in our large home market of North America where we have some significant new listings and it is encouraging that both regions have started the year well. As a reminder we have the most new products launching in fiscal ‘15 since the 2010 Russell Hobbs acquisition. And we have seen continued e-commerce growth in this business. We also expect another record year of cost savings for small appliances. Now to global batteries which is Slide 13. The Q1 sales decline of 9.2% was due to $13 million of negative currency, continued competitor discounting in North America which hurt category POS and margins and customer inventory reductions. Sales fell 4% excluding the negative currency impact of $13 million. Europe delivered again strong battery growth on a local currency basis. We also saw modest growth in Latin America. Adjusted EBITDA fell about 5% excluding a negative currency impact of $4 million. Cost savings more than offset product cost increases, but they could not fully offset the combination of negative currency and volume declines. On our last call, we said unusual price discounting, promotions and concessions from premium branded competitors were present in the North American marketplace, we chose not to provide such large discounts as those shrunk the market 3% to 6% in POS dollars during the holidays. Instead as we announced earlier this week, we are investing in and launching in the U.S. an exciting new Rayovac battery called FUSION, which is our highest performance, longest-lasting alkaline battery and addresses the growing consumer audience that demands power at all times. FUSION is an excellent example of how we re-invest battery cost improvement success for enhanced product performance, retailer POS, long-term market share growth and higher retailer gross margins. Looking globally for the rest of the year, our battery business will benefit from other new product introductions, distribution gains, geographic expansion, new retailers, significant cost savings and tight spending controls. All of this is coming as the consumer battery competitive landscape and ownership changes in the months ahead. We believe that these changes will provide more opportunities for Rayovac and VARTA. Now to global pet supplies which is Slide 14. The first quarter was a challenging quarter, but also very exciting time as we completed two accretive acquisitions. The European IAMS and Eukanuba pet food business and the Salix Animal Health dog treat company, which together significantly broadened Pet’s geographic, customer and product line breadth. This along with meaningful synergies transforms our Pet business into a division with more than $900 million of revenues on a pro forma basis. The sales decline in Q1 included a $3 million negative currency impact as about – and as well about $4 million due to the port slowdown. Sales were just slightly lower than last year when adjusted for these items. The North American aquatics category continued to be soft, but our aquatic sales decline has been less than the overall category and our competition. We have grown share and are introducing a stream of innovative aquatics products to bring new consumers to the hobby and keep them engaged. We expect the base Pet business to rebound in fiscal 2015 helped by the recent resolution of the Russian aquatics distribution challenges. Pet also enjoys a strong pipeline of companion animal products launching in 2015 in North America and in Europe. In addition, we will continue our geographic growth of companion animal products in Europe and Latin America. Finally, pet is moving to integrate our two new acquisitions, IAMS and Salix, which allow us to expand over the next several years into much bigger and faster growing segments of the global companion pet market. Both acquisitions offer also good cross-listing opportunities and regional expansion due to the complementary fit between the acquired and our existing product ranges, brands and sales organizations. And finally, Hardware & Home Improvement on Slide 15, HHI sales in the first quarter increased 3.5%, including the Tell acquisition and excluding an unfavorable currency impact of $3 million and a $12 million impact from the port slowdowns. On a reported basis, adjusted EBITDA grew 4.6%, yet the margin expanded a strong 150 basis points to over 19%. The port slowdowns impacted adjusted EBITDA by about $5 million. After adjusting for that impact, HHI grew its adjusted EBITDA in the quarter by 15.7%. We are very pleased with the continuing growth in HHI’s core U.S. market in Q1 and are confident that HHI will deliver another record year. Market fundamentals remain solid for Kwikset, Baldwin, Pfister and National Hardware. And HHI has implemented strong cost controls and expense reductions to offset currency and further port delays. HHI expects top line and bottom line improvements in the base business through growth of its unique and patented SmartKey technology, home automation and electronic locks such as Kevo and other smart locks, as well as increased distribution of our plumbing products. Also our Tell commercial security acquisition on October 1 is off to a solid start. We expect growth in sales and profit from this business as we move to integrated and generate cross-selling synergies. We also continue to monitor the rate of new housing starts in 2015. As a reminder, about 25% of HHI’s business is related to new housing construction. And finally, HHI is making good progress to increase its cost savings level to our annual cost reduction goal of 3% to 5% of cost of goods sold and we are progressing also smoothly on the conversion of HHI on to our SAP platform, which we expect to complete by early fiscal 2016. And this will lead to additional cost savings opportunities. Thank you. And I will now hand it over to Doug for a financial review.

Thanks, Andreas and good afternoon everyone. Turning to Slide 17, let’s start with net sales. Our first quarter reported net sales declined by 3% versus fiscal 2014. This decline includes negative impacts from foreign currency and port slowdowns, which together were approximately $58 million, or negative 5.3%. We continue to expect fiscal 2015 reported net sales to increase in the low to mid single-digit range, including the positive impact of the acquisitions of Tell, IAMS and Eukanuba, and Salix, partially offset by the anticipated negative impacts from foreign exchange of approximately 5% to 6% based upon current spot rates. About 40% of our annual sales are outside of the U.S. with the euro and the pound being our largest exposures. Reported gross profit and gross profit margin in the first quarter were $370.2 million and 34.7% compared to $381.2 million and 34.6% in the prior year. The gross profit margin percentage increase of 10 basis points was primarily driven by better mix and cost improvements partially offset by input cost increases and pricing. Reported operating expenses of $254.6 million in the first quarter fell slightly versus $256.3 million in the prior year. The decrease was due to strict cost control and FX, which more than offset higher restructuring, acquisition and integration-related charges. Reported net income was $49.8 million or $0.94 per share in the first quarter compared to $54.3 million or $1.03 per share in the prior year. Adjusted EPS in the quarter of $1.07 it was compared to $1.09 last year. Turning now to Slide 18, interest expense for the first quarter was $44 million compared to $57 million in the prior year. The $13 million decrease was primarily due to the non-recurrence of costs related to refinancing of debt in the prior year. Fiscal 2015 interest expense is expected to be in the range of $195 million to $200 million including non-cash items of approximately $15 million. Depreciation and amortization for the first quarter was $45 million and we now expect 2015 full year D&A to be between $200 million and $210 million including the recent acquisitions. Our Q1 effective tax rate of 29% compared to 19% last year primarily due to one-time items in both periods. Our 2015 effective tax rate is expected to be 20% to 25% compared to 21.6% last year. Recall that a 35% tax rate continues to be used to calculate adjusted EPS. Cash restructuring charges decreased to $6 million in the first quarter compared to $8 million in the prior year. The $2 million decrease was primarily due to the winding down of legacy initiatives. Cash payments for acquisition and integration charges increased to $9 million in the first quarter compared to $4 million in the prior year. The increase was primarily due to the expenditures on recent acquisitions. We expect cash restructuring charges of $20 million to $30 million in fiscal 2015 from a combination of new and legacy initiatives. We also expect cash acquisition and integration charges of $15 million to $20 million. Finally to Slide 19, cash interest payments for the first quarter were $56 million compared to $63 million in the prior year. Excluding one-time cash costs in 2014 of $2 million, cash payments decreased by $5 million primarily due to repayments of debt and timing of payments. Cash interest for fiscal 2015 is expected to be between $175 and $180 million. Cash taxes for the first quarter were $11 million compared $8 million in the prior year. The increase was driven by timing of payments. Cash taxes for 2015 are expected to be in the range of $55 million to $60 million. The company entered the year with approximately $800 million of usable net operating loss carryovers and does not anticipate being a U.S. federal cash tax payer for at least the next several years. We will continue to incur foreign and small amounts of state cash taxes. We have ended the first fiscal quarter of 2015 in a very solid liquidity position with no cash draws on the $400 million ABL facility, a cash balance of about $408 million and debt outstanding of $3.4 billion. We continue to expect fiscal 2015 free cash flow to be approximately $400 million or nearly $8 per share. Impacting our estimate on free cash flow is a negative impact of foreign exchange, a modest increase in capital expenditures, acquisition and integration costs and cash costs related to our new restructuring initiatives. Fiscal 2015 capital expenditures are expected to be between $75 million and $85 million compared to $73 million in 2014. These incremental investments which include expenditures supporting the recent acquisitions are expected to drive cost improvement, increased capacity and deliver organic sales growth in the future years. Thank you and now with that I will turn it back over to Dave for Q&A.

Okay. Thanks Dave, Andreas and Doug. Operator you can now begin the Q&A period. Thank you.

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

Hi, guys, good afternoon. When does the HHI orders you lost from the port strike, do those come back in and kind of how did the trade deal with it when stuff was out of stock, I know you said you had to airfreight a bunch of stuff. So I mean is there an inventory catch up and maybe…?

Yes. Bill, this is Dave Lumley. Absolutely a lot of those ironic – ironically a lot of those products were containers on the dock. They just haven’t been processed or they are on boats waiting to come in. So our HHI leader Greg Gluchowski just took us all through this and has been doing it for three months. And it’s all very real. It’s – we just need it to come in. I think though that we should count on most of that in the third and fourth quarter based on what’s going on out there. So, you think about it as it we are just about depending on the product, 5 to 8 weeks behind. So, we have been subbing, but the subbing isn’t as good as all the stuff we have and so, yes.

Okay. And is it – there are still some issues with the ports though, right, I mean they are still working slow…

Yes.

When do you think that gets resolved?

Well, that’s what I said. In our model, we have a third and fourth quarter.

Okay.

And when I talk about, we were hit with FX and ports now, but we have got so many good things coming in the back half. This port thing should be resolved. We have the mergers and acquisitions and the organic growth that comes off those. We have the new products coming in March and April. We have the pet food coming. We have our reorg savings. So, we are really pretty bullish about the back half, which is why we feel so good about the year despite the FX.

Great, thanks, Dave. And then on the battery side, I know Energizer did like a price rollback at Wal-Mart for the holidays. I mean is stuff getting back to normal and is inventory in the right place now? I know they have a big new launch, because they have a new big launch. Is that going to be okay? Is there going to be some more de-stocking to make room for some of the new stuff coming in?

The battery – we grew batteries over, but one or two accounts in North America. To answer your question, I think you will see that flush out finally by the spring. Our new FUSION product will go in there. Some of our competition has higher performing batteries or new environmental batteries. And I think that those pricing will help. All of that happened in batteries, you guys may all remember, for a year and a half, we exited over $50 million or $60 million of low margin appliances. It just – we drive our company on free cash flow and we lost quite a bit of shipments in that pricing decision, almost $20 million, but I never thought it was a good idea to get $20 million of sales that cost more than that. So, I think that is going to be behind us. And I think as we go forward, because the retailers lost on that strategy, significant POS downturn. And so I think that we are finally almost there, I guess finally and almost there don’t go together, Bill, but we are almost there.

Okay. And then just one quick one for Doug, I mean, with the acquisitions, it looks like the free cash flow guidance it actually came down a little bit, right? So, it was $400 million before and I guess the new $400 million, I am not sure if IAMS is in there or not, but the Salix acquisition certainly wasn’t in there. So, is that mostly currency or is there something else going on there?

No, no, it’s almost all currency, Bill.

Okay. Am I right that IAMS and Eukanuba were not in the guidance before or were they, I can’t remember?

Well, they were not.

Okay.

We have Tell in there in the guidance, but not Salix or IAMS and Eukanuba.

Okay. And what do you think the cash flows for those, do you have a guess?

We are not disclosing those at this point.

Okay, alright. Thanks guys.

You are welcome.

Your next question comes from the line of Michael Steib with Credit Suisse. Your line is open.

Yes, good evening. A couple of questions please. Starting with cost savings, you highlighted the benefits of those a few times in your prepared remarks, how should we look at this going forward? Do you expect a similar level of savings in the following quarters as we go through the year or should they ramp up as we go through this fiscal year?

Yes, this is Doug. I would put those into two buckets. One was just tight management of spend in the quarter in our core business and we will let some of that out if we feel it’s appropriate and helpful to the business as we go on. And then the second piece is the restructuring that we did in the first quarter and that benefit will be pretty steady throughout the rest of this year and then we will have a nice annualization of that benefit into next year.

Okay, thanks. And then what if any benefit do you expect or factoring into your outlook for this year from the lower oil price?

This is Dave Lumley. We think it’s pretty significant at the moment. If it holds, we have a big appliance business in personal care that all comes from Asia. As you can see here, HHI brings in a lot from Asia and so does pet. So, those things should help us offset currency. If you think about our situation with currency, the port slowdowns is timing. So, that’s the good news, but the currency I think is probably around where it’s going to be and we will give you a forecast for that, but when you put in our mergers and acquisitions, our cost savings, our restructuring and then some of these commodities, I think those two should offset and our organic growth plan should then go to right what we told you we thought we would do. And frankly, our e-commerce business is growing better as of course it’s doing that for a lot of people who know how to do it. So, I feel very confident about the year.

And the benefit from lower oil and raw material prices obviously wasn’t the driver in this quarter, but when do you expect that to….

It wasn’t a driver in this quarter and for us it’s mostly deferral of price increases in our sourced supply chain and to the extent that, right – and hopefully that will offset FX and then D&T in the U.S., we should expect to see some declines, but that depends on capacity constraints in different parts of the country. So, we will see how that shakes out.

But it’s good.

Yes.

It’s a good thing.

Absolutely, okay. Thank you so much.

You are welcome.

Your next question comes from the line of Connie Maneaty with BMO Capital. Your line is open.

Hi. I have a couple of questions. One relates to the last one. I am not sure I understood your answer about the benefit of lower oil prices. What did you mean by it relates to a deferral of price increases in your sourced….

Well, Connie to the extent that our suppliers are getting the benefit of lower input cost, then we are able to defer what we would have expected to be and we are right, we are in continuous negotiations with suppliers, but we are able to defer or push-out price increases, because their costs are impacted in a good way, in a favorable way.

Okay. It used to be that the quality of all the branded batteries was the same. ANSI used to do all that testing. Is that still the case with all the upgrades that the branded competitors have done?

No. The ANSI still does the testing and currently they will be testing for high drain devices like a digital camera versus a low drain device like a flash, but there have been movements though, let’s take that the bar 100 was everyone was the same, let’s just take alkaline batteries and let’s just take the top three brands. And then by using chemicals and using things you put in the can, you can make it higher, you can’t make it 150, but it might be 105, 110 and in a high drain device that could be a big difference. It could be a lot more pictures and things like that. So, the higher performing batteries like our FUSION and the other one out there, they are higher, but they are only 5%, 10% higher, but depending on the device, they could be 20% or 30% higher, right. Others have reduced the materials it takes to have a higher performing battery and they maybe at 90% or 92% and then some private labels could be at 80%, right. So, that is moving around and you are getting good segmentation. If you could jump in, Andres for one minute and say what that has led to in Europe, which is actually way ahead in the segmentation area versus North America.

Yes. As Dave just explained, there is a very clear segmentation between the applications. So, you have the typical low drain devices, where you can work with a much, let me say, lower performing batteries versus than the high power and high drain devices where you do need such superior alkaline or lithium products.

So, what does that mean, Connie? That means that the most expensive material that goes in a battery is not zinc, it’s called EMV and you have to put more of that in to have a higher performing battery.

Okay, fine. And just two quick follow-ups, what was the local currency sales growth of batteries in Europe and Latin America? And given that sales – battery sales declined in Q1 in the easiest comparison of the year, do you expect them to grow for the full year?

Why don’t you answer the European and Latin America ones?

So, the currency on batteries was in total $13 million on net sales in the first quarter. And of course that impacted mainly Europe and Latin America. We have a very strong underlying business trend and we believe we will continue to grow that, yes and we grew in Europe, for instance, over 8% in local currency, so a very strong performance and that will continue. I think the one big exception was really in North America, where we have explained already where we had that, let me say, little plausible promotional spend of one of our competitors, which did distort the market in the first quarter.

And Connie, actually sell-through of batteries at Christmas time is the highest time of the year for battery sell-through. But with 9 months to ago, I would expect batteries to have slight growth when we are all done this year despite the currency.

Okay, thank you very much.

Because our FUSION battery outperforms some of the other alkaline batteries and will be priced higher than our base Rayovac Ready Power battery, so that will also take revenues up.

Right, thank you.

Your next question comes from the line of Zach Fadem with Wells Fargo. Your line is open.

Hi, good afternoon.

H, Zach.

Hi, how are you? Can you talk a little bit about the pet deals with IAMS and Salix now closed, can you talk a little bit more about the synergy and distribution opportunities? And have you set any specific targets for what those might be for this year and potentially next year?

Andreas will take you through the two deals and why we are so excited about them and then Doug will talk a little bit about the targets to the point that we have disclosed them.

Yes, let me start with the IAMS/Eukanuba acquisition in Europe. I think there we have really a fantastic geographic fit, because traditionally IAMS was very strong in the UK, where historically again Spectrum Brands has been weaker. Whereas Spectrum Brands is very strong in Continental Europe, especially the German-speaking markets, where historically again IAMS/Eukanuba was weaker. So, in the first step, we have a very nice regional complementary fit, where taking the two sales organizations are going to bring us a lot forward. The second point is also that we have a very nice complementary fit of the product ranges. We have a very strong position with the snacks and treats, but we were lacking the dog and cat dry food. So, therefore again having now a kind of more complete portfolio is a fantastic opportunity, where we are going to have a lot of cross-selling opportunities. And then I think the third element which we should also not completely forget that we obviously are going to fully integrate the business into our existing legacy Spectrum business and are going to have a significant cost savings versus the previous set up as part of P&G. Now, moving to the second acquisition, which is the Salix acquisition. Here again, we are broadening our footprint significantly by having additional supply base coming from Latin America, which is a nice complementary fit and also having here several different brands will allow us to do a very nice channel play, different price points. So again, it will allow us significant cross-selling opportunities. In addition, Salix was very strong or is a very successful company in North America, so far more or less not present in Latin America and very weak in Europe. So, therefore, again taking our existing legacy infrastructure, we will be able to grow in those regions the sales significantly.

Very good, Andreas. Doug, you want to?

Yes. Zach, we have 3 deals this year. Tell was in it in the guidance already and when we bought that on the first day of the year, so that’s about $40 million for the year and it’s already in there and it’s tracking really, really nicely to plan. IAMS/Eukanuba, we expect given spot rates today, because it’s a European business to be between $115 million and $120 million at top line and Salix in the $60 million to $65 million on the year.

Great, that’s really helpful. But given all the recent deals and the potential for added distribution and potentially cross-selling over time, have you thought about what a reasonable long-term organic growth range for the business could be?

This is Dave Lumley. Yes, we have, but I got to tell you these are – we are still in the honeymoon suite here. So, we need to take a look at it. We have a model. We have typically modeled conservatively. I will tell you this, the Salix acquisition should not be underestimated, because of its North and South American supply chain in an era where the only other supply chain is Asia, with the exception of our Cambodia plant, which has experienced significant challenges to quality and safety in dog treats. So, I think this is going to be a very, very good thing for the company and it’s kind of like what we preach about tuck-in acquisitions, but not only can you grow them, but you have a supply chain that complements and builds factories and you have the duality of the sales force in the marketing and then putting it in to different customers. And I can only point to Black Flag and HotShot. When we bought Black Flag, this is exact story I am talking about now to some extent. And not only has Black Flag exceeded our expectations, but HotShot grew as well, because we could go into two different retailers and sandwich the leading competition. Regarding IAMS and Eukanuba, I think you could see disproportionate growth there because of what Andreas has explained. So I think it will grow at better rates than Spectrum Brands normally does. But we can come back on that in another call or two and have a lot better, but I would tell you that and I am not one that usually push up the sales number too high, but these two can really go. They really can go for us.

Great. Thank you. And Dave one last thing, congrats on the retirement, the upcoming retirement, I saw that your transition services contract set and adjusted EBITDA incentive target about $760 million for the year, would you mind commenting on whether you think that’s a stretch goal or something that can be more easily attained this year if things go according to plan?

Well, that is an agreement, that is not a guidance number. I am looking at our General Counsel right now. But I would say that is an attainable goal. It depends you could call a stretch of currency went worse and you can call it more attainable on another way. But I think if we execute and we do the things we are telling you on this that the Lumley family would certainly appreciate it if that was attainable and achieved, right.

Great. Thank you. I appreciate the time.

Okay.

Your next question comes from the line of Kevin Grundy with Jefferies. Your line is open.

Hi, good evening guys.

Hi, Kevin.

Real quick clarification on the top line guidance, is it basically that the FX and port hurt that you guys are taking is basically offset by the M&A, is there anything you would call out that you now view differently than you did a few months ago on an underlying organic basis for the top line?

That’s a good way to think about it. Port we don’t think will be permanent on the year. We think it’s a quarterly phasing issue, but otherwise yes.

And don’t forget – Dave Lumley here, our reorganization that is providing with the M&A a good offset to the FX. And then like I said earlier to Bill Schmitz, I believe we also feel good about the pet food ban coming off and so we really, really need new products coming out. So that’s why I am sitting here telling you I think exactly what we have told you despite the challenges. And I feel like I am in a repeat of three years ago. We have about quite a bit of our income coming from overseas overall that’s a good thing. We still make and sell all those products. They still have market share. They still drive economy of scale. They still grow our brands. And once again when things come around the other way it’s important. So they are not lost sales. It just happens to be that we are an American company, right. But I think it’s a good thing how well we are diversified, our seasonality and all our products that we have, our model is working. We have a strong management team, good succession planning. So I think that’s good that we are able to react this past week. We came within days of covering it. So I am looking at my CFO on how our year ends, but it – I am pretty confident about where we are going.

Okay. And then a follow-up for me, Doug on the FX piece sticking with that, so you had 3.5 point drag on the top line, it was a little worse than 6 point drag on EBITDA I believe, should we be extrapolating that for the full year so like the 1.8 multiplier impact presumably due to how you guys, the mismatch between how you are realizing revenue and sourcing your cost of goods because that will be pretty dire if that were the case if we were making that sort of assumption, if you can comment on that?

And I won’t comment directly on the translation to EBITDA because our business and business seasonality is different across the businesses and across the geographies. I would say though that we are taking – we began action early to offset the impact of FX. We are continuing with strict cost control. We are continuing with restructuring plans. And I think we are going to continue to see favorable mix across our businesses this year as well.

If I could just clarify, do you guys care to guide what you think the at – based on your top line guidance of down 5% to 6%, can you comment on what is embedded in your guidance for the impact on profit? I guess if so, is there any hedging to offset it or you just feel comfortable that you can pull forward some of these restructuring savings to offset it to hit the guide for the year?

It’s really a combination of those last two things. We really don’t guide on that line. So, we won’t do that. But commodities, we expect to be a little better than we had originally planned in the year. And we do have a very robust hedging program transaction, hedging program and we are about 75% hedged, 70% to 75% depending upon the exposure across the business. So, we feel fairly confident about the input cost benefits or lack of hit that we will see as these hedges are matched against the buying activity.

Okay, very good. I appreciate the color and Dave, congratulations.

Thank you. Julie Lumley is very happy.

I am sure, she is.

Your next question comes from the line of Bob Labick with CJS Securities. Your line is open.

Hi, most of my questions have already been asked, but could you just take a bigger picture look at – these are some pretty big acquisitions in pet after a period of time where there hasn’t been that much in terms of acquisitions there. Was that a strategic decision or was it just coincidental that these came up now and fit well and are there more to come, acquisitions in pet?

They are not a coincidence. We have a very robust M&A program and we come through our businesses into the office and our Chairman, David Maura plays significant roles, has made great contributions in that for us as well. And we do that at strategic planning together. And pet and home and garden are unlike most businesses and I don’t know how much exposure you would have what I would call the hobbyist business, but lot of smaller to medium companies are entrepreneurs, family-owned. So, now you are going to say well, that was in IAMS and I will get to that in a minute. But we have spent every quarter for every year going through every possible one that would fit us. So, someone like Black Flag took years. Someone like Salix, years because it’s private ownership – well, two guys owned it and we are talking to them. There is many other companies we continue to talk to, we get close, we come out, it’s got to be right for both sides. IAMS came up as just an opportunity. We knew that high-end dog food was significant for us to keep growing our pet business, but frankly, you just don’t show up and get into that. And the fact that the factory, actually I will ask Andreas to say some about the factory we achieved in this. And when we saw we can get it further priced to fit our model and that factory with those brands. So, that was opportunistic. Andreas, you may want to comment about that?

Yes. Actually, as I mentioned earlier, that strategic fit was so perfect that we really wanted to take that opportunity which came up by coincidence. And yes – and it is going very well. The integration is on a very smooth track. So, we have already started the integration at most countries. So, we are seeing also the first pickup already.

But the factory is outstanding, isn’t that the best factory?

The factory is fantastic. We have a fully integrated factory in Holland, which has its integrated European warehouse. So, that means we are also going to ship all products directly from the factory to all customers in Europe.

And if you know anything about what I would call the big bag business, that’s very important. You don’t ship that twice. I don’t know, has that answered your question?

Yes, absolutely. And so does that mean you are obviously still looking for additional opportunities and bolt-ons in pet?

Yes. And we have said before, pet is a high margin business. We are the leader in non-pet food. Home and garden, same thing that’s our highest EBITDA margin business. We were also very excited about what’s going to happen in HHI and that platform. As we continue to finish the SAP project, Tell would be a great example. In fact, Patrick Tell was here at our big sales meeting this week and that factory is full already. So, I really like that guy more than before.

Okay, that’s fantastic. Thank you.

Alright.

Your next question comes from the line of Lee Giordano with CRT Capital. Your line is open.

Thank you. Good afternoon, everybody.

How you are doing, Lee?

Doing well, Dave. Thanks. I am hoping you could talk a little more about the HHI business if you take out the Tell acquisition and the FX impact and the port slowdowns, what’s happening organically there?

Yes, okay. I am sorry, I interrupted you, go on.

Go ahead, that’s what I was asking for.

Well, this is tale of two cities, right. He has got $12 million to $20 million, he can’t wait to ship. He had his own currency issues, but that business fundamentally is a strong 5% to 8% business growth. You saw his sell-through at our top two customers on a double-digit, single – highest single double-digit and that’s without the products we need. So, I think they are in very good shape when the support thing comes down. They have been doing other things around the world to streamline their businesses in Canada and Mexico. They have got some great projects coming up on cost improvement besides new products. I think the Tell acquisition pushes us into commercial much higher margin, because there is a lot more credibility. I think you will see a really good second half from HHI and a really good 2016 as SAP is in. And that’s where we would be looking to add another thing to that platform. They are market leader. They have got a very exciting new Pfister launch. You don’t have to touch the faucet. It’s called REACT and it really does react. So I have been dying to say that. So, a lot of times you forget that they have done very, very well in plumbing as well. So, I think you should feel real good about where they are going.

That’s great. Thanks a lot.

Thank you.

Your next question comes from the line of Connie Maneaty with BMO Capital. Your line is open.

Hi. I just have one or two follow-ups. With the acquisitions in pet, how big are aquatic sales now as a percentage of total?

That’s a very good question. It is now no longer the dominant part of sale. It’s about 42% I would say. Don’t quote me on that exactly.

Pro forma is over $900 million, aquatics is over $300 million.

Yes, so.

But in this year, it will be closer to…

It will be closer to $900 million this year. 40 some – it will go from well over 50% to 42% down into 33%. And that’s good. It’s still very profitable. It still got some good products in there. And I think the aquatics will be okay, will stabilize. Many of our – I think I have told you all this story before, aquatics goes, the way that the main retailers go by putting live fish in their stores. They went through a period of time that they were not doing that. And I think I have also told you that when a major retailer takes fish tanks out of their pet department, they can see the entire department POS fall as much as 3% to 5%. If you put them back in, it goes up. And those meetings have happened that data has come across, now that will take a year to get the fish tanks back in and we are leader in commercial fish tanks, we don’t sell live fish. And that’s happening. So, I think by 2016 you will see the business rebound again, but you can’t buy any fish food unless there is a fish in the house. So, that’s what we are trying to do.

And just the last one is where does….

Sorry, we lost you on that one.

Sorry, where did small appliances get new lifting?

Well, we have had significant growth online, significant growth at the top two retailers, especially the number one and in specialty. So, this is the best appliance lineup we have had in a decade and the most new placements since they have been part of our business. Very exciting products, a mill and brew coffee maker, a 5-minute pizza oven, a hot air fryer, which means you are frying it, but there is no oil, the oversized toaster oven, the Juiceman that Consumers Digest has said was the best. It just keeps going and going down. What’s exciting about that is for 3 or 4 years, we have been working on that. And some of you we had here to our new – here, but to our new headquarters in Madison have seen those labs in all the testing and all that. So, it’s paying off. We are definitely back in small appliances, Black & Decker and George Foreman.

Okay, that’s it from me. Thank you.

Alright, operator we have one more question, then we are going to close down the call since it’s the bottom of the hour, if there is one question left.

Your next question comes from the line of Ian Gordon with Bernstein. Your line is open.

Hi, thanks for taking the question. I am wondering if you can give us anymore detail on the North American – in the battery business, the North American increased promotional environment, who do you think started it and whether you think that Duracell going into Berkshire’s hands will improve the industry dynamics going forward and why. And then I have a second question on M&A. I know you probably wouldn’t comment specifically but maybe theoretically any thoughts that you had on the pros versus the cons of potentially acquiring the Energizer battery business as that spins off? Thanks.

This is Dave Lumley. I have had a little experience answering this question for the last five years, both those questions. Let me deal with the promotional environment, every holiday in the last 3 or 4 years – in the old days we never did this, we just did price increases and everything went along. But we have very unusual situation. So no one is pristine in this, everyone promotes. It’s just that one of the premium players those who promoted more and that was their strategy. And then we have done it and other people do it. And certain retailers try to be more aggressive. And you have these examples in a lot of businesses it’s going to start in the Home and Garden business any time and it will start in the appliance business. So when it doesn’t work then these don’t do anyway. And I think to answer your question both of those changes of ownership for the two premium branded players happened I think in like June and July. And then they will develop their strategies and do all their things. But at the end of the day batteries is still a very profitable business for a manufacturer even more so for the retailer. And despite the fact that everyone likes to write that it’s not doing too well, we still sell more cells every year than we did the year before, so it’s a function of pricing and bonus packing. The encouraging thing is that there are going to be a different line up of things of ownership by the end of the year. There is new batteries that actually do last longer and they are being segmented. There are a tremendous need for batteries, the toy business drives batteries, okay. And after that all the things in your house drive batteries. And most of you don’t realize this, but you use – if there is four people in your family and you have a decent nice house and you have seven TVs, you are driving 100 cells a year. So I think the battery business from a free cash flow standpoint is fine, that’s going to be fine. And yes, there will be ups and downs, but it will be fine. This you could say, that’s terrible. We are competing, people are trying to. Regarding companies being put together, boy of course any like business that that makes the same products, sells the same type products to the same retailers, to the same consumers we will have boatload of synergies. And there is no denying that the question is what happens in the marketplace if there is two players instead of three. And does it actually after the synergies increased the value of the company and the trade, I have made a joke I think last time that I was the last man in America who thought battery business was good and everyone thought I was nuts including certain shareholder of ours. But nevertheless when Warren Buffet said they worth 7 to 9 times all of a sudden they became good. So I just need him to say that’s some more and things will be good. But I think the battery business will steadily increase the units a little bit because most devices are more power-hungry, okay. Voltage goes up, they suck through them faster. Every time you hit your remote on your universal remote TV those four batteries you are pounding them as if you shot them in the head, that’s why they only last three or four weeks and we love universal remotes. So it’s a long-winded answer, but solid business, good free cash flow. Yes, great synergies if two brands went together. Would it be worth of our money, will the retailers embrace it, right or would they go to private label. So if those all things get worked out. The good news is we can’t even talk about this until after the summer.

Yes. I appreciate that.

Alright. Well, thank you very much. And with that we have reached a little bit past the bottom of the hour, so we will now conclude our conference call. I certainly want to thank Dave, Andreas and Doug. And on behalf of all of us here at Spectrum Brands we thank you for participating in our fiscal 2015 first quarter earnings call. Have a good day and a good evening. Thank you.