Spectrum Brands Holdings, Inc. (SPB) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Spectrum Brands Third Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, August 6, 2013. Thank you. I'd now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Good morning, and welcome to Spectrum Brands Holdings Fiscal 2013 Third Quarter and 9 Months Earnings Conference Call and Webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands and moderator for our call today. Now to help you follow along with our comments this morning, as some of you may have seen by now, we've placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at www.spectrumbrands.com. This document will remain there following our call. Now starting with Slide 2 of our presentation, our call will be led today by Dave Lumley, our Chief Executive Officer; and Tony Genito, our Chief Financial Officer, who will both provide opening comments and then conduct the Q&A session. Joining us for the Q&A session are Terry Polistina, President of Global Appliances; Greg Gluchowski, President of Hardware & Home Improvement; and Randy Lewis, Senior Vice President and General Manager of Home and Garden. Now turning to Slide 3 and 4 very quickly, our comments today include forward-looking statements, including our outlook for the fourth quarter fiscal 2013 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 outlined in our press release dated August 6, 2013, 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, we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in this morning's press release and 8-K filing, which are both available on our website in the Investor Relations section. For the third quarter of fiscal 2013, the company reported net income of $36.1 million or $0.69 diluted income per share on average shares and common stock equivalents outstanding of 52.7 million. This compared to net income of $58.7 million or $1.13 diluted income per share in the year ago quarter, which was based upon average shares and common stock equivalents outstanding of 51.8 million. By segment for the third quarter of fiscal '13, the Global Batteries & Appliances segment reported net income as adjusted of $32.2 million versus $40.9 million a year ago. The Global Pet Supplies segment reported net income as adjusted of $24.5 million versus net income as adjusted of $18.8 million in fiscal 2012. The Home and Garden business segment reported net income as adjusted of $42.8 million versus net income of $44.0 million as adjusted last year. And finally, the Hardware & Home Improvement segment reported net income as adjusted of $40.1 million in the third quarter of fiscal 2013. With that background, I am now pleased to turn the call over to our Chief Executive Officer, Dave Lumley.

Thanks, Dave, and thank you, all, for joining us this morning. We've got quite a bit to cover, a lot of exciting news this morning. So before reviewing our third quarter results and our fourth quarter and full year outlook, let me highlight other important news we issued this morning in separate press releases. First, we've announced plans to refinance our $950 million of 9.5% senior secured notes due 2018. We expect to complete the process in early September. This refinancing is expected to lower our cost to capital and reduce our cash interest expense. Second, we announced that our Board of Directors has approved a new $200 million common stock repurchase program effective for 24 months. The board's action reflects its confidence in our future earnings power and strong free cash flow generation. We will use this plan in conjunction with our debt reduction goals. Given our outlook for significant projected free cash flow growth in the coming year and beyond, we believe this repurchase authorization is now an excellent use of our future excess free cash flow and another way to return capital to our shareholders. Lastly, we announced this morning $100 million of term debt reduction to date and reiterated our plan to pay down a total of at least $200 million of term debt in fiscal 2013 ending September 30. Let's now turn to Slide 7. Our third quarter net sales increased 32% and adjusted EBITDA improved 42% on a reported basis. Including HHI, our Hardware & Home Improvement Group, in the last year on a pro forma basis, our net sales in the quarter increased 1% and adjusted EBITDA grew 2%, but 3% on a constant currency basis versus pro forma results last year with a solid 17.3% margin. We are pleased to also report our 11th consecutive quarter of year-over-year adjusted EBITDA growth for legacy Spectrum Brands, a record that dates to the first quarter of fiscal 2011. Well, focus spending, strong control of variable costs, increased savings from continuous improvement programs across all divisions on a global basis and growth in Europe helped us offset negative foreign currency impacts from a number of currencies in a difficult macroeconomic conditions to still post a 2.3% increase in adjusted EBITDA for the quarter or almost 4%, exactly 3.9%, on a constant currency basis. Legacy Spectrum Brands adjusted EBITDA margin for the third quarter grew to an all-time record quarterly level of 16.8%. HHI posted impressive third quarter results with an adjusted EBITDA margin of nearly 19% even with increased investment spending, which I'll talk about later, and another quarter of double-digit net sales growth of 13%. We're especially pleased that this record quarterly EBITDA performance with higher margins was achieved even as we are also making important and major investments in our Remington personal care business. This includes our i-LIGHT hair removal on a global basis, our women's haircare accessories and moving away from Remington, we have put significant investments in our battery performance and production, our launch of global e-commerce and a new product development and marketing for key new HHI products. All of which will help drive future growth but did temper profits in this quarter. Let's turn to Slide 8. Our Q3 results were negatively impacted by macro factors. They include FX, not just euro, but other currencies like the yen, British pound and Brazilian reals. There are other factors, such as slower store traffic, cautious consumer spending, in part impacted by cold and wet weather in April and early May in the U.S. and Europe, heightened and aggressive competitor discounting in several businesses, and a continued tightening of retail reorder rates and tight inventory control. Despite these headwinds, we still posted relatively flat net sales in the quarter for legacy Spectrum Brands, save our planned and continuing exit of $10 million more of low and no margin sales in North American small appliances, which continue though to boost margins, and a $10 million Home and Garden sales shortfall merely from timing as the cold and wet weather shifted the spring season into July. Despite that, Home and Garden actually improved its adjusted EBITDA in the quarter. Now many other Spectrum divisions turned in sales growth, especially in Europe and Latin America. In fact, the Q3 highlight we are proud of is our overall strong sales and adjusted EBITDA performance in Europe with or without negative FX for all our divisions. Spectrum Brands continues to perform well in a region marked by economic challenges and recessionary pressures. All in all, Q3 was a good quarter because we were able to increase adjusted EBITDA and margins to record quarterly levels even as we invested heavily in consumables, batteries, e-commerce and HHI new product development and marketing for future growth. Q3 adjusted EPS of $0.90 did decline from $1.12 last year, which now includes HHI in the prior year, but primarily due to an increase in our noncash stock compensation expense, driven by our commitment to increasing employee stock-based reward programs. And in the Q&A, we'll talk a little bit more about that. Let's turn to Slide 9. Let's look at Q4. We see a record finish, and we see momentum carrying into higher results for fiscal 2014. We expect higher sales and adjusted EBITDA from both legacy Spectrum Brands and the total company, including HHI, in Q4 versus the comparable period year before. Legacy Spectrum Brands net sales should grow as much as 2% with adjusted EBITDA improving up to 3%, giving us our 12th consecutive quarter of year-over-year adjusted EBITDA growth. HHI sales growth could reach 10%, along with adjusted EBITDA growth. Almost every division is expected to have Q4 top line growth versus last year. This stepped-up performance should be driven by our end retailer optimism about value-branded sales in the back-to-school season timeframe. We expect higher store traffic following a lackluster June quarter, coupled with earlier retail promotions and holiday sets. We have new product launches, expanded retail distribution and continued geographic growth. And, stressing what I said about the third quarter, this growth is coming even as we invest heavily in new products. Many of these new products are launching now. They include our 2-hour and 7-Hour Power for Rayovac and Varta globally, U.S.-made chicken jerky and pet, the Kwikset Kevo Bluetooth lock in HHI, new dynamic George Foreman Grills, new Black & Decker toaster ovens, new Remington men shavers, and so on and so forth, which we'll talk about it when we get to the division section. Now this is all happening in addition to commodity costs that are relatively flat and strong expense and variable cost controls, along with increased global operation savings across divisions. This should all help offset current negative FX impacts that we are encountering. Let's turn to Slide 10. We expect 2013 to be a fourth consecutive record year of results for legacy Spectrum Brands. This includes adjusted EBITDA and adjusted EBITDA margin. We project total company fiscal 2013 adjusted EBITDA with HHI and at current FX rates of $640 million to $650 million. This growth will be even higher -- would be even higher except for our major strategic growth investments in Remington consumables, which I've talked about; e-commerce; batteries; and HHI. We do project total company net sales to be between $4.060 billion and $4.1 billion, an increase of more than 1% versus the comparable prior year despite FX challenges. The Spectrum Brands model is working. It's even more relevant now as retailers need more store traffic and POS with value-branded products. Now, we continue to expect free cash flow, including HHI, to reach at least $240 million for the year. We reiterate our plan to reduce total leverage and pay down at least $200 million of term debt this fiscal year with an even higher level of debt reduction next year from increasing free cash flow. We announced $100 million term debt pay-down this morning, so we're already halfway towards our $200 million target. Long term, our objective is to maintain a total leverage ratio of 2.5x to 3.5x. Now, we manage Spectrum Brands to maximize sustainable free cash flow. This is our strategy and has been. In 2012, we delivered free cash flow of about $4 per share. In fiscal 2013 with HHI, we have higher free cash flow target of about $240 million or nearly $5 per share. When you consider our planned refinancing of our $950 million of 9.5% senior secured notes, a significant decrease in our acquisition integration restructuring costs of approximately $45 million over 2 years, and include the free cash flow impact of HHI in fiscal 2014, there's an opportunity for Spectrum Brands to drive free cash flow per share on an annualized run rate basis to at least $7 and perhaps more. Again, compared to $4 per share in fiscal 2012. Now let's turn to our individual businesses. Beginning with Global Pet Supplies, which is Slide 11. Pet is sprinting towards a record year for net sales, adjusted EBITDA and adjusted EBITDA margin. Adjusted EBITDA will have grown every quarter this year. Through the 9 months, adjusted EBITDA is up 9%. Driving Global Pet's strong performance are continuing growth in the high margin FURminator product line globally; geographic growth in companion animals in Europe and North America, such as our Dingo and Nature's Miracle brands; resumption of growth in North American aquatics, which we have seen for a number of quarters now; and e-commerce sales improvement. We're excited about the many new products launching across the world, which will provide momentum in the next year. For example, Pet is currently entering the large U.S. chicken jerky market, which we believe approaches $200 million annually at the retail level with a U.S. manufactured product, also helping our shelf space increases at some retailers and new retailer customers here and abroad. Finally, we are especially pleased by the fact that Pet's continuous improvement savings this year will be more than twice the level achieved in fiscal 2012. Now let's talk about our newest acquisition, Hardware & Home Improvement, your Slide 12. HHI delivered strong third quarter results following a solid second quarter. Sales were up 13% on the strength of residential security and Pfister faucet growth with a solid adjusted EBITDA margin approaching 19%. HHI is on track for an even stronger second half for the calendar year, primarily the December-end quarter. HHI is winning in the marketplace, driving solid organic growth, gaining market share, especially in residential locks, is benefiting from the U.S. housing recovery but is launching innovative products, such as the unique Kwikset Kevo Bluetooth door lock. Investments in new products, such as that Kwikset Kevo lock, and increased spending on hero products like SmartKey are modestly tempering short-term adjusted EBITDA results even as sales continue to grow. These investments will provide profit and sales growth into fiscal 2014 and beyond. Improvements in the U.S. housing starts are also helping HHI as new construction channel sales correlate to U.S. new housing starts with a 3-month lag, and HHI retail sales correlate to existing home sales with a 6- to 12-month lag. The HHI integration continues to progress smoothly and ahead of schedule. We expect to have exited predominantly all of our TSA agreements with Stanley Black & Decker by calendar year end. We are confident of achieving the projected $10 million of synergies in the first 2 calendar years and maybe more. In summary, we're very pleased with HHI's performance today, excited about its many future growth prospects and pleased with the pace of its integration to Spectrum Brands. We think it was the right acquisition at the right time. Now let's move to Remington, our personal care business, which is your Slide 13. Remington's third quarter global net sales were essentially unchanged. We're pleased with significantly higher revenues in Europe, which nearly offset lower net sales in Latin America and North America, where we have been impacted in North America by the shaving and grooming category shelf space reduction at a major retailer, which began in the first quarter. Without this retailer move, our sales would have increased. We did, however achieve gains in personal care at another major retailer. It's important to note that in North America, we are gaining market share in 4 of the 6 categories in which we compete with Remington. New shipments from women's and men's shelf space gains at several key North American retailers should help drive new Remington volume higher in this quarter and higher than last year, especially if the month of July was an indicator. Even with the impact of the major retailer shelf space reduction all year, which may in part be reversed next year, Remington global net sales in fiscal 2013 still may be up slightly. Let's stay with Remington, talk a little bit about i-LIGHT, our unique and patented hair removal product. It has just enjoyed a very strong Brazilian launch in the third quarter. In fact, we believe Brazil may become the largest market for us in this product category. We also just received clearance for i-LIGHT in Mexico and expect approval in Columbia soon. For many quarters, we've said to you that Remington is the key platform for our planned increased spending this year in global e-commerce and consumables, which we see as future growth categories. This has not come without expected cost to our EBITDA performance this year, but this strategic spend has yielded valuable insights for fine-tuning our products development and marketplace strategy to drive growth in e-commerce. We also are driving consumables growth for next year and beyond. We have strong confirmation that the Remington brand is highly recognized, innovative global brand that consumers trust. The Remington name also has been working well in wet shave at retail in our tests. So we have strengthened that strategy for entering this large and growing market with a global licensing agreement and partner. In the small appliance categories of Global Appliances, which is Slide 14, we're pleased with continuing growth in Europe and Latin America, which we've seen all year. We overcame a major unfavorable foreign currency impact from several currencies. Half of legacy Spectrum Brands sales decline in the quarter was simply due to the planned exit of another $10 million of low or no margin North American sales. This is on top of the $30 million sales exit in the first half of the year. We began this program last year. It's clear this strategy is improving our gross margin percentages for the segment and total company. Consider that North America small appliance gross margin as a percentage improved nearly 350 basis points in the quarter. This is following increases of 300 basis points and 450 basis points in the first 2 quarters. Since North America is the largest geographic segment of the Remington business -- I'm sorry, of the kitchen appliance business, this turnaround has particularly significant impact. We expect this sales exit process to continue this quarter. New product launches, however, with select pricing incentives and retailer shelf expansions should contribute to higher fourth quarter sales for appliances. We have the most new products launching this year since we acquired the business in 2010. These include new George Foreman Grills, new Black & Decker toaster ovens and irons. We also have major new products introductions coming in fiscal 2014. Global cost improvement is also a major success for small appliances. Savings this year are tracking twice the rate of fiscal 2012 as the business moves more fully into Spectrum Brands' continuous improvement in the new product development process. With higher cost savings, new products, select pricing, distribution gains and strong expense control, this business is more than offsetting, continuing but moderating Asian supply cost increases this year and is well-positioned for fiscal 2014. Now let's move to the Home and Garden division, which is your Slide 15. Weather across the U.S. was very challenging for our product categories in April and early May. It was the coldest spring in U.S. weather history after the second warmest on record last year. Despite net sales gains and share gains against competition and continued gains for our new Black Flag line, sales were down $10 million or 6%, but that is compared to a near record third quarter level of sales in 2012. Now, aggressive expense management and strong cost improvements, however, drove better-than-expected profitability despite the weather. Third quarter adjusted EBITDA declined only slightly compared to a record $47.5 million last year. Even more impressive is that adjusted EBITDA margin for the quarter increased to 29.4% versus 28.5% last year. Home and Garden is finishing strong in the fourth quarter. July sales, largely higher margin repellents, were up double digit versus last year. A strong bug and mosquito season with many reports of West Nile virus and Lyme disease are favorable for repellent sales. Retailers are responding to our Spectrum value model. They continue to support the season and are pushing repellent products. Remember, the bulk of our goods sales come now, not earlier in the season. So we still are very optimistic about the year. Home and Garden has also delivered excellent continuous improvement programs and operating expense management this year. Despite the tough hand dealt by Mother Nature, we believe Home and Garden will still deliver another record year of adjusted EBITDA, a remarkable performance given the weather and timing. And we are optimistic about distribution gains and increasing promotional support for fiscal 2014 at our highest margin division. Finally, to our Global Battery business, your Slide 16. Batteries is delivering adjusted EBITDA growth in a highly aggressive environment. It's a strong EBITDA producing cash flow generator with steady performance over many years. We have good momentum with new smartphone power products and distribution expansion with more opportunities ahead for new retailer business and shelf space gains. Our brands, Rayovac and Varta, are winning in hypercompetitive categories. In fact, over the last 12 months, market shares have increased. For example, continuing growth in our European Varta Battery business in the third quarter following first half gains was driven by new customer listings and expansion into new channels. Our Latin American business, the alkaline and zinc carbon unit market leader in that category, was impacted primarily only by decreased exports into Venezuela. But we did see growth in alkaline batteries and lights in the quarter. In North America, Rayovac market share increased versus prior year overall with double-digit unit growth in a large and important non-Nielsen scan channel. North American sales results were impacted almost totally by just 1 large private label retailer. Key retailers further tightened inventory levels and trimmed reorders and competitor activities were focused on significant discounting. Still, we are convinced, and shares and POS confirm, that our long-term strategy of same or better performance for less price works. Our presence with prominent retailers worldwide has considerably grown in recent years. The data over many quarters show that value is winning for retail customers and consumers. New Rayovac and Varta products are creating global excitement and will help drive sales in Q4 and into fiscal 2014 important holiday season especially our new 2-hour and 7-Hour Power for smartphones, emergency lighting products, rechargeable lights, the world's longest lasting hearing aid batteries and others to just name a few. Our business is succeeding by focusing capital on battery performance enhancements, thus same performance, less price as premium brand. We also focus capital on cost improvement to offset cost increases and inflation to maintain a flat cost of goods sold. We work hard at securing new distribution and expanded shelf space at existing customers. And we work very hard at minimizing and continuing to reduce our expenses. Our goal remains, which has been for 7 years, help the retailer grow the category, increase market share, specially shelf space, and provide the best value to consumers. In closing, we delivered a record EBITDA on the third quarter with higher margins and made important long-term investments in Remington consumables, e-commerce and our new division, HHI, which is a wonderful platform for growth long term, to fuel additional growth in fiscal 2014 and beyond. We are on track for higher sales and adjusted EBITDA on the fourth quarter for legacy Spectrum Brands and total company, including HHI, and we see a record year of fiscal 2013 for adjusted EBITDA as well. Our free cash flow will be growing, and we see significant free cash flow per share improvement over the next 14 months and beyond. I want to thank you for staying with us on that long introduction, but we have Tony Genito, our CFO, now to add some additional comments.

Thanks, Dave, and good morning, everyone. Turning to Slide 18, let me first comment on our gross profit and margins in the third quarter. Our gross profit and gross profit margin of $383 million and 35.1%, which includes HHI, compared to $292 million and 35.4% a year ago for legacy Spectrum Brands only. The slight decrease was due to unfavorable product mix and increased product costs. Gross profit margin in the third quarter of fiscal 2013 for legacy Spectrum Brands only was 35.0%. Third quarter selling, general and administrative expense, excluding HHI, was $178 million, down slightly versus last year's $181 million. Legacy Spectrum Brands' SG&A expenses also decreased in the 9-month period. Interest expense in the third quarter was $62 million compared to $40 million last year. The $22 million increase is primarily related to an increase of approximately $21 million in interest expense related to additional debt financing for the HHI acquisition. Our effective tax rate was 29% in the third quarter versus a $5 million tax benefit last year. We now expect our fiscal 2013 effective tax rate to be between 25% and 35% for all of fiscal '13. Let me highlight a few more items in our financial statements. Restructuring, acquisition and integration-related charges increased to $21 million in fiscal 2013 versus $9 million in 2012, primarily driven by the implementation of a series of initiatives across the company to reduce operating costs. Cash interest for the third quarter of fiscal 2013 was $94 million compared to $58 million in 2012, driven by the financing of the HHI acquisition. Cash interest for all of fiscal 2013, excluding onetime items of $23 million related to the HHI financing, is expected to be approximately $185 million to $190 million. Turning to Slide 19, cash taxes for 2013 were $9 million compared to $6 million in 2012. The increase was primarily due to the HHI acquisition. Based on the level of NOLs we expect to be able to utilize, we do not anticipate being a U.S. federal taxpayer for the next 5 to 10 years. However, we will continue to incur foreign and a very small amount of state cash taxes. We've said that our normal annual run rate of cash taxes, including HHI for a full year, is expected to be $60 million to $70 million. In fiscal 2013, although HHI is reflected in our results for approximately only 3 quarters, we expect our cash taxes to be in a similar range of $60 million to $70 million, primarily due to the timing of payments between fiscal 2012 versus fiscal 2013 in Germany. We ended the third fiscal quarter of 2013 with a solid liquidity position with about $70 million drawn on our $400 million ABL working capital facility and with a cash balance of about $99 million. As of the end of the quarter, total debt at par was $3,230,000,000. Regarding our cash flow projections, given the strong cash flow potential of our businesses, including HHI, our goal in fiscal 2013 is to generate approximately $240 million of free cash flow, net of HHI acquisition costs, or nearly $5 per share. Our normal annual capital expenditures, including HHI for a full year, should be approximately $65 million to $70 million. However, in fiscal 2013, and as we have indicated on our last 2 quarters' calls, fiscal 2013 capital expenditures will be slightly higher, approximating $70 million to $80 million. More than 2/3 of the spending represents investments in new production capacity, lockset production infrastructure related to the integration of Tong Lung, technology infrastructure, new product development and cost reduction projects. We believe the investments we are making in fiscal 2013 will accelerate research and development, new product enhancements and new product introductions in 2014 and beyond. Thank you, and now back to Dave for our Q&A.

Thanks very much, Dave and Tony. And operator, with that, you may now begin our question-and-answer period, please.

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

Ton of questions, so I'll try to keep it brief. But on the debt refi, there's an article on Bloomberg that you're going to do it with floating rate debt. Can you sort of talk about kind of the debt you're taking out and what you kind of want to replace it with and some of the interest rates and maybe the interest savings?

Well, we're not going to get into a lot of the details at this point. We just launched the 9.5% refi today, Bill, but what I can tell you is that, obviously, our 9.5% senior notes, the apparent pursuit to our -- for our term debt, so we are looking at, obviously, the market as to where rates are. And as a result of this transaction, we believe that we will materially lower the company's cost of capital and, as a result, meaningfully increase our free cash flow as a result of the lower cash interest that we have.

Okay. That is -- so you want to maybe give us like -- maybe like, directionally, what the interest might be in the new debt?

Well, it's going to be lower than 9.5%. So as to your point about a fixed rate versus a floating rate, we're going to assess the marketplace and see what fits best for us and, again, resulting in a significant and material reduction in our cost of capital and with a -- hopefully, a very meaningful increase in our free cash flow.

Okay, great. And then just in terms of batteries, this happened when you got all that shelf space at Walmart. But like you have this huge uptick in Nielsen market share when the Walmart stuff came in. And now with the Nielsen data its obviously turning massively negative, but your sales kind of don't reflect that. And I know you said there's a couple of on-track customers, but can you just like talk a little bit more about kind of what's going on in batteries and why there's like -- there's almost like schizophrenia across like the retail environment? I've never seen just like this kind of like choiceful changes and the brand assortment in the trade.

Okay. The lowest period of time for batteries is really the second and third quarter. There's no back-to-school, there's no holiday. So it's kind of uncommon for shares to flip flop quite a bit in that period of time, especially over the last -- as you would say, Bill, the last 3 or 4 years. I think an easier way to think about it is if you look at our overall share, and Nielsen is -- lessens -- just barely over half, 60% of the market, it doesn't include the important do-it-yourself channel, the two-step channel, all kinds of other retailers and industrial marketplace. So our overall share is very healthy and growing. What you're seeing in Nielsen right now is what I just said, some flip flops in timing in the second and third period due to some promotions and unusual market-share attempts. I think you'll see that all even out as we go through the holidays. For instance, more batteries are sold through on the day after Christmas and the day after that than sometimes the whole month -- a whole month in the summer, right? So I think you'll see -- I keep saying this, but I still think you're going to see sanity return. If you look at battery sales over the last 1 year, 3 years, 5 years, 10 years, they're still decent. There's no big change. They're still profitable for everybody. And remember, batteries is one of the most profitable items in retail. Now I will maybe give you this -- I'm sorry for the long answer, but for 7 years, 59% of all questions have been -- at this company had been on batteries, so I enjoy this part of the conversation. Batteries, think of it this way, the difference of the 2 strategies, we have 2 premium competitors who make a good product and price at a premium level. We have mostly Rayovac and Varta that are value-brand pricing with no advertising, per se. There, the premium strategy tends to focus on dollar sales, higher dollar sales, which correlates to higher dollar market share. That's their strategy. It also tends to correlate to less margin for the retailer and higher price for the consumer tends to. Our strategy is that we have a prior class just this long. We tend to go after unit sales and market share from the standpoint of shelf space, okay, because we believe over the long term, through a comparison and through trial, they will convert to that. You've seen it to some extent in private label goods, although private label goods tend not to last as long as the premium products. If those are the 2 strategies, and you get unusual discounting by -- on a dollar basis, both by the premium ones forcing us to do the same thing, you're going to see a category decline. You're going to see, however, certain shares flip flop during small periods of time. We believe that what today's retailers need and we think it's being concerned is, is that consumers have less money to spend. So if you're discounting a premium product, whether it's batteries, home and garden, whatever it may be, but the acquisition price is still higher than the everyday price of a value-branded product, that promotion is not going to look too well, but it's going to depress the industry sales, right? So I think as we go through these cycles of attempts for market share in a flat environment, especially where price -- acquisition price is so critical -- for instance, we've had a competitor at home and garden had a very high price product discount, and significantly, it was a really good deal, but it was still twice the cost of our comparable product, so it pumps you up. That kind of happen in batteries. I'm very optimistic that we've cycled through all this. We have strategic changes in the marketplace where everyone wants to make a healthy profit on batteries. So I think you're going to see that balancing out between dollar discounting of a premium and unit share, and I think it would be fine. Again, at the end of the day, if the product lasts as long as the higher-priced one and, in fact, for less money, it's going to correlate, regardless of how long a premium product continues to discount. So I think that's our strategy. There's room for both, and I think there you're going to see okay. Again, look at the 10-year, 7-year, 5-year, 3-year, 1-year batteries, and it's pretty solid, and we were talking 20% EBITDA margins that have not changed for the competitors. A lot of other businesses would love to have that. I don't know if that answered your question.

No, it does. And then just 2 really quick ones. Is there like a sort of follow-up to Spectrum 500 in terms of like any set of compensation program? And then my last question is on like the store traffic. There's been some comments here in the press release about you think that store traffic is going to increase. I know you've been fairly downbeat on the U.S. macro. I mean, is that like an indication that you guys are getting a little bit more optimistic about things?

Yes, I'll answer the store traffic, and I'll let Tony answer the follow-up to Spectrum 500 because we do have one. Yes, when I say we're optimistic about back to school and holiday, I think we're talking in terms of what I would call products like value-branded, meaning like what we sell. That the consumer is coming back into the marketplace a bit, but they're coming in on promotional goods or goods that they perceive to be of value. And based on the promotions we've won, which are much better than last year, and based on what that big store I just told you about does the retailer take a premium product at a discount instead of high acquisition price, or do they go with our product and a good promotion, that's what I mean. So I don't think that we will define the U.S. macro market make it better. I do think we're going to do better than we did last year because of these reasons I just explained.

Yes. And, Bill, this is Tony. Just as a follow-up to your question on a follow-up program for 500, yes, we actually had it disclosed in our products [ph] statement last year, we've got a program called Spectrum 750, which basically, the parameters of the plan are it's a program where an aspirational goal to reach $750 million of adjusted EBITDA in fiscal 2014, cumulative free cash flow of $550 million -- and when I say cumulative, that would be cash flow in 2013 and 2014, so that cumulative number of $550 million would be the target -- and then adjusted EPS of $5 per share. Now the weighting of that would be 40% for the free cash flow and the EBITDA and 20% for the adjusted EPS to achieve 100% of the target of $750 million. Keep in mind that similar to Spectrum 500, the Spectrum 750 plan is not guidance. This is an aspirational goal. If you look at our Spectrum 500, we actually came in with EBITDA last year of $485 million versus the $500 million now. That was reported. Obviously, if you were to adjust for a change, which the program did not allow for, we would actually have been slightly over $500 million, about $502 million, $503 million. So basically, that's the program in a nutshell, and I believe we went to disclose back in February -- early February, February 4 to be exact, in an 8-K filing, if you want to get more detail on it.

Yes, no, I understand. I was going to ask you guys, if you have accrued for it all?

Yes, in fact, the increase -- part of the increase that we saw, which had an impact on our adjusted EPS, was the fact that we had a large accrual for employee stock compensation, that that's the amortization associated with the stock. So basically, it was a $13 million hit in the quarter versus last year, the same quarter, which translated to about $0.16 in EPS. So that was a big factor in driving the EPS downward from last year.

Your next question comes from the line of Dan Oppenheim from Crédit Suisse. Michael Dahl - Crédit Suisse AG, Research Division: This is actually Mike Dahl for Dan. My first question, just a follow-up on the battery side. Maybe if you could give a little more clarification, should we then assume that your guidance for 4Q reflects a stable, like a flattish total battery market? How should we think about -- if Nielsen data doesn't capture it all...

Yes. Michael Dahl - Crédit Suisse AG, Research Division: What is your view on the market?

Yes. To answer your question directly, yes, I think you should see a relatively stable quarter in batteries. And remember, Nielsen is capturing a portion of the U.S. market. We have $1 billion global battery business, and so the other 2 competitors, much larger, right? The batteries are sold all around the world, so most of the markets are relatively stable. Most of these promotions and discounts are, again, flushed through the holiday season. It's pretty well set. Most people know where it is. There'll be some Black Friday promotions in North America. But for the most part, we foresee a relatively stable flat environment. Now some companies have lost some customers, some have gained some, but we all kind of know what that is. So of course, you never know, but I really don't foresee any volatile swings there. I think it would be a pretty solid season. Michael Dahl - Crédit Suisse AG, Research Division: Okay. And then on the Home and Garden side, given the strength in the POS, do you think you will actually recapture all of the lost sales by the end of the fiscal year? Or is there still going to be some kind of leftover where you won't fully recapture?

Well, we have Randy Lewis here, who runs our business. He's been here for years, so I'm going to ask Randy to directly address that.

Sure. Mike, we think we're going to be close. So if you look at where we were through the third quarter on POS, we were down 5 for the year relative to last year. Within the first month of the quarter, July was very good. We clawed back on a POS basis back to negative 2 for the year. So the run rate and trajectory is very good, and revenue is keeping up with that. So as we look at it, by the time we get to the end, I think we're going to be within a point or 2 of last year, somewhere in that range. Michael Dahl - Crédit Suisse AG, Research Division: Okay. And that's really helpful.

And of course, as Dave said earlier, we're expecting that we're getting great leverage to the P&L, so that will translate to -- as we said in the prepared statement, it will be higher year-over-year EBITDA. Michael Dahl - Crédit Suisse AG, Research Division: Sure, sure, helpful. And then if I could just squeeze one last one in. Just priorities on free cash flow, I guess, just if we think about the timing here with the debt tender and the pay-down on the term, should we think that in the near term, priority will be more focused on this new share buyback versus additional debt pay-down? How should we think about that?

No, Mike. This is Tony. No, the focus -- our primary focus is de-leveraging. We will continue to generate good free cash flow. And with that cash flow, we'll do primarily debt de-leveraging and service to dividend. And if an opportunity presents itself, keep in mind that, that share buyback program is over 24 months. So if an opportunity presents itself over that period of time, where we believe that it's of -- appropriate for us to buy back shares because we think that there's a value to do that, it's basically in that order. But our #1 priority is de-leveraging.

Your next question comes from the line of Lee Giordano from Imperial Capital.

Can you talk a little more about the business in Europe? It sounds like you're bucking the trend despite the tough macro environment over there. What's driving that really good performance in such a tough environment?

Well, it's a combination of a lot of things. We have a strong battery platform in Western Europe, and we've invested over the last 5 years in Eastern Europe. And that battery platform provides a unique opportunity with retailers, distribution, tax, all types of things that you need to do business in these areas. And we've seen that through the growth of Remington over the years. And now Russell Hobbs has followed that system in there and has done a very good job on that. Russell Hobbs is small kitchen appliances, that's our brand in Europe versus Black & Decker here. And now Pet is in that system. So what happens is you reduce your costs in the shared services space. You reduce your costs to better distribution and transportation. You have an opportunity to introduce these products in a way where you can better leverage your total offering, especially in Eastern Europe, where you're seeing a lot of the growth, right? And when you can do that, you can invest some of those savings from our shared services model to get into the stores and promote them and sell them through. So I mean, I think the fact that, that the new segments built on this model that we have and this platform we have, and this is some good new products, right, that I've -- we've talked about, has enabled us to get into these segments, and it will continue to let us grow through those segments. Now we're just preparing for our new Hardware & Home Improvement Group, which has very small sales over there to follow this in next, right? The same will be true in Latin America, what's going on. But your question was about Europe, so I would tell you it's that type of leverage and that type of approach. Now the other thing I would tell you that's helping that is the dedication to the expenses we put in for category management. A lot of Western and Eastern Europe is sophisticated there in some ways. This is kind of new to them. And when you do good category management in those stores as well. So also, it's a high-cost region for the consumer, and good products, brands like ours, value-branded, also works well because they don't cost as much. So those are all the things I think is why we're growing there.

That's helpful. And then just secondly, on the acquisition front, what are your thoughts going into 20 -- fiscal 2014 on acquisitions? And how do you see the environment today as far as new opportunities?

Well, our strategy has always been to pursue synergistic bolt-on acquisitions, especially for our Home and Garden division and our Pet division. We continue to meet with several of these entrepreneurs, who tend to own all these, or large companies own small divisions, and we continue to meet with them and talk to them. Obviously, when you look at Black Flag and you look at FURminator and how we are able to make the product, we are able to take out a lot of the SG&A and use our sales platforms to grow -- great success story. But there's nothing on the direct horizon right now, but we're continuing to look at that. I think a more exciting one to talk -- not more exciting but just as exciting -- is the platform that HHI provides us in the 3 areas, right, you have the locksets, you have the hardware, you have plumbing. So you have a lot of opportunities long-term there. But right now, we are focused on de-leveraging. We are focused on using our free cash flow in the best possible way to get our debt down. And then we will look at all the other opportunities as they come along.

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

I wanted to stick with HHI, as you just mentioned there. It seems like the integration is on track, and you certainly have a lot of growth opportunities ahead. Maybe you could talk a little about the new product, Kevo, particular market size and opportunity, and then also talk a little bit about the new channel opportunity, both, I guess, U.S. mass and using your international distribution, how you see that enabling growth at HHI over the next few years?

Well, we happen to have Greg Gluchowski, our President on that. I think of no better person to tell you about that. His enthusiasm could probably keep you on here for a while. So go ahead, Greg.

So I'll just -- I'll respond on the new products relative to Kwikset Kevo. What I will tell you is what's unique about Kwikset Kevo from a growth perspective is we are seeing -- or we are gaining access into the consumer electronics channels with residential locksets, which is something we've never done before. So in terms of giving you an absolute number from a market size perspective, I wouldn't want to put one out there. I would just tell you that the Kevo product is slated -- we're taking pre-orders now. It's going to be shipping in September and October, and it's functional with all iPhone 4S and 5 smartphones. In addition, we're working on a generation that would be working with Android products. So if you do the math on a small percentage of folks that have those phones purchasing this lockset, you can get roughly right what that opportunity might be worth. Your second question about the U.S. mass market, obviously, our mass merchant market, obviously, Spectrum has a tremendous presence in the U.S. mass market, and we are already working with the Spectrum teams to assess our opportunities to grow in that space. And we see -- we've already had some -- a little bit of growth related to that in Canada, and we would expect that we'll continue to see growth in the U.S. And then internationally, we have product platforms and technology that are transferable into the 4 major regions for us, which we define as Mexico, Latin America, Eastern Hemisphere and Northeast Asia, and also in Europe. We've got a base in the first 4. With Spectrum in Europe, we now have the opportunity to take those product platforms and grow into Europe. So we see tremendous opportunities from a new product standpoint with the technologies that we're launching, and that is further amplified on a goal basis by the presence Spectrum, the legacy Spectrum team has had.

Okay, great. And then just one housekeeping question probably for Tony on -- you touched on the stock comp related to Spectrum 750 and the increase in the quarter. What's the right run rate for that? I know I guess some legacy 500 will roll off. How should we be looking at the stock comp on a go-forward basis?

Yes, for the full year, Bob, it's probably going to be in that 45 -- say, $40 million to $45 million range in total expense for this year. Now it's hard to project what next year will be since rewards haven't been issued, and it's continuing to [indiscernible] with the grant -- with the price in the stock is at the grant date, so on and so much that the shared services [ph] has been granted. But I think right now, for the full year, we're looking at total comp related to stock-based compensation of about $45 million. That includes the normal what we call our EIP plan, executive incentive plan, which covers about -- I believe about 100 in the -- 125 folks in that neighborhood and then about 150 people covered by the Spectrum 750 plan. And then we got the -- as you probably point out, an impact from Spectrum 500 as a carryover from last year.

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

I want to touch on the product exits. I know you've been working on this for the past year or 2 now. Do you feel like that is constraining your retail relationships that you're getting out of products that you might not have enough competition for and just the costs were too high to sustain?

We have Terry Polistina on the line, who's been intimately involved in this and has been in this business for a very long time. And I think I'll be glad to add on, but Terry, you want to jump in on that?

Yes, I think what you're seeing us doing, we talked about it going back several quarters now, is just to be very, very disciplined about the innovations and new products with reasons to buy that we put out there and not spend a lot of time in chasing the lower-priced promotional activities. So it's something that the bulk of it is behind us, but we are going to be very disciplined in weeding and feeding promotional activities. So -- as an example, you're going to see very good promotional wins in the fourth and first quarter for the Home business, but they're more profitable promotions than you would've seen in the past. So we're choosing to stay away from the lower margin stuff and participate where we can make a little bit of money versus losing money just to participate in promotions.

Terry, maybe you can address the retail relationships. I actually think that, that's worked out pretty well. Maybe you want to address that.

Yes, I think our relationships are actually better today than they've been in a number of years. We've been very, very transparent with the retailers on what we're doing. The supply chain, our operations teams have worked not only at the buyer level but all the way through the different channels in the organization. And I will tell you, it's coming from outside of Spectrum Brands and then now being a part of Spectrum Brands the last 3 years, that the hand and glove connection that Spectrum has with the infrastructure and the teams from operations all the way through sales and marketing has really actually improved our relationships with the -- with our customers around the globe.

Okay. And my last question is, where are you guys on the HHI expansion to Europe? And what kind of costs are you expecting in the fiscal '14 from it?

This is Dave Lumley. We're really -- I think that, that is a good opportunity, but right now, we're focusing on exiting the TSAs, integrating the Spectrum Brands. I think you'd see that more as a late 2014, 2015. I mean, Greg, you can jump in if you want here.

Yes, I just would like to add, I mean, I think the key thing to think about relative to growth opportunities with the HHI platform is that a big part of the organic growth that we're driving is really coming from initiatives that don't include Europe. So things that we're doing today to expand SmartKey, to expand our sister business in the non-retail areas, to expand in home automation and to expand in existing international platforms, that's what's driving the growth in the business. The European comment that we just talked about is an opportunity that we're beginning to work on and look at for 2014 and beyond, but it's not a core part of the way we think about business growth going forward. And I did mention the other underpinning that helps us with the growth in the business is really the performance of the U.S. housing market, both new construction and existing home sales. All of that is what's driving the growth, and that's much more than what we think about in terms of European opportunity. That's more opportunistic probably for '14 and '15.

And with that, we've reached the -- just past the top of the hour, and we'll end our conference call, but I do sincerely want to thank, of course, Dave, Tony, Terry, Greg and Randy for participating on the call today. We want to thank each and every one of you for taking part, and have a good day, and we'll talk to you again on our fiscal year-end conference call in November. Thanks, again.

This concludes today's conference call. You may now disconnect.