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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): April 24, 2003
Rayovac Corporation
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(Exact Name of Registrant as Specified in its Charter)
Wisconsin 001-13615 22-2423556
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
601 Rayovac Drive Madison, WI 53711
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(Address of Principal Executive Offices) (Zip Code)
(608) 275-3340
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Registrant's telephone number,
including area code
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
99.1 Written transcript of conference call hosted by Rayovac Corporation on
April 24, 2003.
Item 12. Results of Operations and Financial Condition.
On April 24, 2003, Rayovac Corporation hosted a conference call on its website
at www.rayovac.com announcing its financial results for the fiscal quarter
ended March 30, 2003, among other matters. A written transcript of the
conference call is furnished as Exhibit 99.1 to this report. Such information,
including the Exhibit attached hereto, shall not be deemed "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it
be deemed incorporated by reference in any filing under the Securities Act of
1933, as amended, except as shall be expressly set forth by specific reference
in such filing.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RAYOVAC CORPORATION
Date: April 30, 2003 By: /s/ Randall J. Steward
___________________________________
Name: Randall J. Steward
Title: Executive Vice President of
Administration and Chief Financial
Officer
EXHIBIT INDEX
Exhibit Description
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99.1 Written transcript of conference call hosted by Rayovac Corporation
on April 24, 2003.
Exhibit 99.1
RAYOVAC CORPORATION
Second Quarter Earnings
Moderator: Kent Hussey
04-24-03/8:00 am CT
Confirmation #21137845
RAYOVAC CORPORATION
Second Quarter Earnings
Moderator: Kent Hussey
April 24, 2003
8:00 am CT
Operator: Ladies and gentlemen, welcome to the Rayovac Second
Quarter Earnings conference call.
During the presentation, all participants will be in a
listen-mode. As a reminder, this conference is being
recorded Thursday, April 24th, 2003.
I would now like to turn the conference over to (Randy
Steward), Chief Financial Officer. Please go ahead, sir.
(Randy Steward): Thank you and good morning. Welcome to Rayovac's
Second Quarter Financial Results conference call.
I am (Randy Steward), the Company's Chief Financial
Officer. Joining me today is (Dave Jones), Rayovac's CEO,
and Kent Hussey, President and Chief Operating Officer.
As is customary, (Dave) and Kent will present some
prepared remarks and follow with time for questions and
answers.
However, first I'd like to read our "safe harbor"
statement. This broadcast may include forward-looking
statements which are based in part on Management's
estimates, assumptions, and projections as of today.
These statements are subject to certain risks and
uncertainties and other factors that cause results to
differ materially from what we currently expect. Actual
results may differ due to changes in external competitive
market factors, changes in our industry or the economy in
general, our ability to successfully implement
manufacturing and distribution cost efficiencies and
improvement, as well as various other factors including
those we discuss today and those discussed in our
securities filings, including our most recent Form 10-Q,
annual report on Form 10-K, and the prospectus supplement
for the Company's most recent public offering of its
common stock. We assume no obligation to update these
statements.
And now I'd like to turn the call over to (Dave Jones.)
(Dave Jones): Well, good morning. Today, Rayovac announced second
quarter fiscal 2003 financial results.
Diluted earnings per share was $0.01 per share after
taking a $5.2 million charge during the quarter for our
previously announced global restructuring initiatives.
However, pro forma diluted earnings per share was $0.14
as compared to $0.17 for the comparable prior year period
and in line with first call consensus estimates. The
reconciliation of pro forma EPS figures to GAAP EPS can
be found in Table-3 of the financial schedules attached
to our press release issued earlier today, and they are
also available on our Website at www.rayovac.com under
the Investor Resources tab.
Overall sales for the quarter were $202.3 million, up 67%
from the $121.2 million reported last year. The majority
of the second quarter increase was experienced in Europe,
where sales increased to $97.8 million from $13 million
last year, reflecting the significant impact of the VARTA
acquisition, as well as strong overall European
performance for the period.
In Latin America, sales increased 40% versus last year,
reflecting the benefits of the VARTA acquisition,
partially offset by poor economic conditions throughout
the region and continued political turmoil in Venezuela
and Argentina, as well as several smaller countries.
In North America sales decreased to $78.7 million from
$89.8 million last year, representing a 12% decrease for
the second quarter in a row. North American sales
continue to be depressed by intense competitive
promotional pricing activity. North American industry
alkaline unit sales in 18 Nielsen-measured accounts were
up a strong 12% for the quarter, partially a result of a
spike in March sales created by terrorism concerns.
However, dollar sales were up only 3% for the quarter,
reflecting the continued magnitude and depth of this
intense promotional pricing activity.
In March, Rayovac announced our response to Duracell's
pricing realignment initiatives, which were announced in
early January. Rayovac's strategy provides consumer 50%
more alkaline AA and AAA batteries at key competitor
price points and package configurations. C, D, and 9-volt
configurations continue to be offered at a significant
value gap to competitive offerings.
This very strong and well thought out, measured value
response has been received very well by North American
retailers and is currently in various stages of
implementation, and should be fully rolled out in the
July timeframe. This strategy should allow Rayovac to
significantly reduce the amount of traditional
promotional and trade incentive dollars spent to support
the alkaline business in North America, and should be a
stabilizing influence on category activity in the future.
However, it will take another couple of quarters for all
of these realignment initiatives from all industry
participants to be fully implemented and play out fully
in the marketplace. Until then, North American dollar
sales will remain depressed.
Rayovac's global sales on major product segments showed a
75% increase in general batteries, largely a result of
the benefits of the VARTA acquisition and strength in
Europe, offset by weakness in North America.
Alkaline sales were up 78%, heavy duty sales were up 55%,
and rechargeable sales were up 105% within this important
general battery segment. Our hearing aid sales were up a
very solid 15% for the quarter, reflecting strong
performance in both North America and Europe. Lighting
product sales increased 45%, the result of the VARTA
acquisition, as well as several new product launches.
Rayovac's lighting business was number one in both unit
terms and dollar terms in U.S. AC Nielsen-measured
accounts for the last 52 weeks for the first time ever.
Overall our top line was weak for the quarter, when
taking into account the benefits of the VARTA
acquisition, reflecting the overall tough economic global
climate that exists in most regions of the world, as well
as a continued tough competitive climate in North
America.
Turning to our recent acquisition of VARTA's consumer
battery business, integration activities continue to
track on our initial aggressive time-table. In October,
we announced a series of restructuring activities
designed to maximize the synergy potential of the
combined companies, streamline our business processes,
and resize our manufacturing capacity to more closely
match our product demand requirements around the world.
These initiatives included closing our Mexico City zinc
carbon facility, now closed; our Dominican Republic zinc
carbon facility, now closed; combining our European
headquarters and relocating it to Frankfurt, Germany, now
completed; consolidating VARTA's Latin America business
into Rayovac's Latin American headquarters in the Miami
area, now completed; and relocating our Madison,
Wisconsin packaging facility and Middleton, Wisconsin
distribution center to a highly automated
package-on-demand national distribution center in Dixon,
Illinois.
The construction of this new facility has been completed
and it will be fully operational in June 2003. The
operational risks of this acquisition and its integration
with the Rayovac business are largely behind us, and we
can now focus on achieving the marketplace synergies that
the combined companies should provide us in the future.
By the end of 2003, approximately 500 positions,
representing 11% of the combined workforce, will have
been eliminated, providing a much leaner, more efficient
global organization. We are extremely pleased with both
the strategic and economic benefits resulting from this
acquisition.
I'll now turn the call over the Kent Hussey for some
brief remarks on Rayovac's financial performance.
Kent Hussey: Thanks, (Dave).
This morning I'll be mentioning both GAAP and pro forma
results, and as (Dave) mentioned earlier, to assist you
in the reconciliation of these figures, we've placed a
financial model on our Website at www.rayovac.com under
the Investor Resources tab. The same information is
included in our earnings release as Table-3,
Reconciliation Of GAAP To Pro Forma Financial Data.
Now turning to some financial metrics. Gross profit
margin was 39.3% for the quarter. Excluding special
charges in the North American retailer markdown programs
of $1.6 million for the quarter, gross margin was 40.6%,
down 70 basis points from last year. Margins continued to
benefit from the favorable impact of our continuous
manufacturing cost improvement program and VARTA
integration activities, but were offset by unfavorable
customer and product line mix, reflecting our alkaline
sales softness in North America.
Selling expense was $42.7 million for the quarter, up
from $24.6 million last year, and represented 21% of net
sales. The dollar increase in selling expenses versus
last year was primarily the result of the VARTA
acquisition.
Research and development increased 18% to $4 million,
consistent with our increased focus on new product
development and technology leadership, and the impacts of
the VARTA acquisition. Major effort continued on I-C3
nickel metal hydride rechargeable battery system, which
will launch this summer, as well as other advanced
battery systems in the development phase.
G&A expense increased $11.4 million compared to last
year, mainly as a result of the VARTA acquisition and
integration expenses associated with that acquisition.
Operating income for the quarter was $8.8 million versus
$12.9 million last year. However, pro forma operating
income for the quarter was $15.6 million, compared to
$12.9 million last year, an increase of 21%. The increase
was due primarily to the favorable impacts of the VARTA
acquisition, partially offset by lower profit in North
America due to the sales shortfall. Pro forma operating
income reflects the exclusion of special charges for our
restructuring initiatives and the North America retail
markdown programs in the current year.
Segment profitability for the quarter was $21.7 million
versus $19.4 million last year, an increase of 12%. We
saw improved segment profitability from both Europe and
Latin America, offset partially by the decline in North
America. Segment profitability for Europe improved
primarily as a result of the VARTA acquisition.
North America's profitability decreased versus last year
due primarily to lower gross profit, reflecting the lower
sales levels and the impact of markdown monies recognized
in the quarter.
Latin America's profitability increased versus last year,
primarily as a result of the VARTA acquisition and strong
sales in Central America, partially offset by weakness in
the Caribbean region. Our business operations in
Venezuela have resumed following cessation of the general
strike, however, at a much lower level of business
activity.
On October 10th of 2002, the Company announced a series
of restructuring initiatives to optimize the global
resources of the combined VARTA and Rayovac companies to
eliminate surplus manufacturing capacity and functional
overhead and to rationalize its main North American
packaging and distribution facilities into a single
modern facility in Dixon, Illinois.
The Company recorded special charges and markdown monies
of $6.8 million in the quarter and $22.1 million
year-to-date for the costs incurred with these
initiatives. We expect total charges to be $43 million,
with the balance to be incurred over the next six months.
Cash costs of the program will be approximately $25
million, with $40 million to $45 million of anticipated
annual savings when fully implemented by fiscal year
2005.
Several of the VARTA integration restructuring
initiatives were completed during the first six months,
as (Dave) mentioned earlier, including closing operations
in Mexico and the total integration of sales and
marketing organizations around the world. The VARTA
integration is proceeding as planned and is on schedule.
Interest expense was $9.5 million for the quarter, $5.4
million higher than last year as a result of the increase
in debit associated with the VARTA acquisition. As
previously discussed, we replaced our previous credit
facility on October 1st in order to finance the VARTA
acquisition and to provide sufficient liquidity to
support our larger organization and future growth
opportunities.
Our tax rate for the quarter was 38%, an increase of 200
basis points versus fiscal 2002. The increase in our tax
rate reflects a larger percentage of our taxable income
being derived from higher tax jurisdictions in Europe
versus last year.
Net income for the quarter was $300,000, a decrease of
$5.1 million from the $5.4 million net income reported in
the same period last year. However, pro forma net income
was $4.5 million for the current quarter. Pro forma
adjustments to the fiscal 2003 quarter include a $3.2
million charge net of tax for the restructuring
initiatives implemented in the quarter and a $1 million
charge net of tax for the North America retailer markdown
programs also implemented during the quarter.
GAAP diluted EPS was $0.01 compared to $0.17 last year.
Pro former diluted EPS for quarter was $0.14, down from
$0.17, but equal to consensus estimates.
Turning to our balance sheet, trade accounts receivable
were $158.1 million, compared to $109 million last year.
Trade receivable balances were reduced in North America
and Latin America with the biggest improvement occurring
in Latin America. This improvement was offset by an
increase in receivables associated with the VARTA
acquisition. Trade receivables decreased in Latin America
by approximately $11.5 million during the quarter. Trade
receivable DSOs at the end of March were 71 days,
compared to 82 days last year, an improvement of 11 days.
Inventory balances were $145.8 million at the end of
March, reflecting an increase associated with the VARTA
acquisition. Inventory turnover decreased to 3.3 turns
from 3.5 turns last year, due primarily to the lower
North American sales turnover.
Our positive cash flow from operations in the quarter
allowed us to decrease our debt during the quarter by
$5.2 million to $477.8 million.
Capital spending for the quarter was $8.3 million, an
increase of approximately $4.5 million from last year,
again reflecting the VARTA acquisition and completion of
our Dixon packaging facility. For the six months, we have
reduced our debt by $23.9 million and capital spending to
date was $11.6 million.
That concludes my financial remarks, and we'll now open
the call to questions. I'm sorry, turn it back to (Dave).
I'm sorry.
(Dave Jones): Prior to questions - thank you, (Kent) - prior to
questions, I'd like to make a few comments regarding
future guidance and we'd offer you the following
comments.
We have no change to our fiscal year '03 for your pro
forma earnings guidance. The first call consensus
estimate is $1.31 and we believe that that is still a
good estimate at this time. Again, reconciliation of pro
forma and the GAAP EPS can be found on our Website at
www.rayovac.com.
We would project pro forma earnings of $0.31 to $0.32 in
Q-3, recognizing the transitional nature of this quarter,
as inventories of current alkaline product are reduced in
advance of the new alkaline AA and AAA packaging
configurations, due to start shipping in the June
timeframe.
Q-4 guidance is in the range of $0.52 to $0.53,
reflecting full rollout of the new alkaline lineup and
significant favorable results of restructuring
initiatives as they begin to kick in. However, sales
softness will continue to persist in North America until
the promotional pricing environment begins to stabilize
later this year.
We anticipate continued solid performance in Europe as a
result of distribution gains and continued positive
effects of the new alkaline product line introduced last
fall.
Latin America will continue to exhibit sluggishness until
this economic-sensitive region begins to recover.
Overall we're optimistic about our business prospects
over the long-term and believe the combination of the
Rayovac and VARTA businesses will be a significant growth
catalyst over the next several years. However, we remain
cautious over the short-term and need to see improving
global economic conditions and a more stabilized
promotional pricing environment in North America to fully
maximize the efficiencies of this newly formed global
enterprise.
And now we'll take a few questions. Operator?
Operator: Thank you. Ladies and gentlemen, if you would like to
register for a question, please press the one followed by
the four on your telephone. You will hear a three-tone
prompt to acknowledge your request. If your question has
been answered, and you would like to withdraw your
registration, please press the one followed by the three.
If you are using a speaker phone, please lift up your
handset before entering your request. We do ask that you
please limit to one question and one follow-up question.
If you do have any additional questions, you will need to
go to the end of the queue by pressing the one four on
your telephone. One moment, please, for your first
question.
Your first question will come from the line of (Alice
Longley) with Credit Suisse First Boston. Please proceed
with your question.
(Alice Longley): Hi. Good morning.
(Dave Jones): Morning, (Alice).
(Randy Steward): Good morning.
(Alice Longley): I must say I'm surprised that the North
American business was down as much as it was, given as
you said yourself how strongly marketed South was, and I
know the Nielsen data we get down to the brand level at
this point is extremely limited, but what we get showed
that you were actually instituting very sharp price cuts
yourself in the quarter and you gained share in these
kind of non-Wal-Mart, you know, retailers, and I know
it's a very small part of the market for you, but can you
tell us what your share was in your view, you know,
putting all the numbers together for you? And how much
were your alkalines, themselves, in North America down in
dollars, and what was their performance in units here?
(Dave Jones): I can't give you share numbers, per say, because
we have the same confusion that you do relative to share,
now that not only Wal-Mart, but Home Depot and Lowe's and
others are not reporting in (INAUDIBLE) at all.
However, I'd just make a couple comments about your
question. While units were up 12% and dollars were up 3%
for the quarter, most of that increase occurred in the
month of March, and I think March unit sales were up
somewhere in the 20s, and so, you know, that was sort of
late in the quarter, and I don't think there's much
effect from a standpoint of ship-in by anybody during the
quarter as a result of that late in the quarter spike.
Secondly, the markdowns that we took, which are programs
designed to move inventory so that we can get to our new
packaging that we'll be shipping in the June/July
timeframe, were largely put in place - not largely,
totally - put in place during the month of March and much
of it in the last part of March, and so there's little
effect if you look at the whole quarter, a marginal
effect, on programs that we put in place in March.
As you may recall, Duracell took their pricing down, or
realigned their pricing in early January. We didn't
respond until the last part of this quarter, and so, you
know, much of our depressed sales and softness in North
America is a result of us evaluating the realignment
initiatives and then putting our things in place late in
the quarter.
So in North America we did lose share for the quarter,
and you know, in Europe we did gain share for the
quarter, and that's probably the only way I can answer
that question, (Alice).
(Alice Longley): Well, if you put all those promotions out there
in March to clear the inventory out, wouldn't that be
generating strong sales and some share gains for a while
that would boost your results in your June quarter then?
(Dave Jones): You know, possibly on a share basis that's true,
but you know, the June quarter is an extremely
transitional quarter for us, as I have mentioned, because
we're moving out of old inventory and not shipping in new
inventory until the latter part of the quarter, and
really the principle pipeline of that new product lineup
would be occurring in the fiscal fourth quarter, you
know, in the July timeframe.
So as retailers naturally begin to reduce the level of
the current AA and AAA, you know, Rayovac alkaline
lineup, to make room for the new stuff, there's going to
be a softness that occurs in Q-3 and probably, you know,
a strength that occurs in Q-4 just as a result of timing.
(Alice Longley): How much were alkaline shipments down in North America
alone - alkaline alone - in the March quarter?
(Dave Jones): Let's see if we can get that. You know, most of the
shortfall that occurred in North America was the alkaline
business.
(Alice Longley): Yeah, I'm assuming alkalines were down more than North
America was down because some of the other...
{Crosstalk}
(Dave Jones): It was down like 15%/16% from last year in alkaline.
(Alice Longley): And how much were units up or down for alkalines?
{Crosstalk}
(Alice Longley): You don't have that?
(Dave Jones): Don't have it.
(Alice Longley): Okay, and one final question if I could.
(Dave Jones): That's more than two, (Alice).
(Alice Longley): I know, but it's a follow-up. What are you counting on
for Duracell's response to your new pricing?
(Dave Jones): You know, you'd have to talk to them. We believe
that our new initiatives that we did are very thought
out. They have been extremely well perceived, and that
they will help to create further stability in the
marketplace, and we think they're very well and prudent,
and you know, frankly, you know, I think Duracell
announced theirs and we announced ours, and you know, we
understand that Energizer is in the process of announcing
theirs, and you know, I think all of those will lead to a
much more stable environment.
(Alice Longley): Well, Duracell has said they will not lose share.
(Dave Jones): Okay, again you're going to have to talk to Duracell
about anything that they need to tell you.
(Alice Longley): Okay, thank you.
Operator: The next question will come from the line of (Andrew
McQuilling) with UBS Warburg. Please proceed with your
question.
(Krista Zuber): Good morning. (Krista Zuber) for (Andrew McQuilling). Can
you just give us a sense of what kind of shape you think
inventories will be at the end of the June quarter? Will
they be down or is it because you're shipping the new
packaging it will be pretty much a wash? Thank you.
(Dave Jones): I think we would anticipate versus this quarter
that Rayovac's inventories at retail will be down in the
June quarter simply because all retailers will be and are
at the moment trying to reduce the alkaline inventories
in AA and AAA package configurations to make room for
planogram changes and the new package configurations that
we'll ship. So in the alkaline segment, our inventories
should be down in the June quarter and then rebuilding in
the fourth quarter of the year.
(Krista Zuber): Okay, thank you.
(Dave Jones): You're welcome.
Operator: The next question will come from the line of (Catherine
Imm) with Salomon Smith Barney. Please proceed with your
question.
(Catherine Imm): Hi. In light of your new pricing strategy being
implemented, can you give us your updated outlook for
what you think the categories price mix should be as well
as lines in the U.S. for '03?
(Dave Jones): You know, it's sort of a crystal ball guess, but
if you were to try to model out the effects of everyone's
pricing realignment initiatives and then try to model out
less promotional activity, which is certainly going to
occur here, there's going to be price depression in the
category, we estimate, over the next two quarters of
roughly 5% per quarter, so dollar sales in the category
we would estimate - and again we could be off by some
magnitude here - is going to be down approximately 5% in
our Q-3 and down approximately 5% in our Q-4, and then in
the most important quarter, which is the Christmas
quarter, which will be our fiscal Q-1 of '04, if our
modeling is correct, dollar sales should be positive as a
results of all the initiatives that have taken place.
(Catherine Imm): And in your modeling, are you assuming that you're
going to gain any market shares, or are your market
shares going to remain flat?
(Dave Jones): I think we would assume that we would gain
marginally. You know, our initiatives are not designed
to, and do not anticipate, significantly gaining market
share. They do anticipate that our market share will
shore up, and that we will recover moderately from the
market share that we lost over the last year.
(Catherine Imm): Okay, and in terms of volumes then for the category?
(Dave Jones): We're anticipating volume up 7% or 8% over the
next couple of quarters. I think that's been real
consistent with what's occurred here over the last five
or six quarters, as volume has returned to historic
levels, and I think what occurred in the one-month period
of March, as everybody began to stock up terrorists kits
in their homes, you know, is an aberration that's not
likely to repeat itself.
(Catherine Imm): So then in terms of the dramatic swing in earnings
from the June quarter to the September quarter, is it
based on primarily beginning to see early signs of
recovery of dollar of sales in the category, or is it
primarily because of the VARTA synergies that you're
beginning to realize? Can you give me a little bit more
details in terms of what gives you confidence about the
pretty huge double-digit growth that we should expect for
the...
{Crosstalk}
(Dave Jones): I think the number one driver will be the
synergies that occur as a result of the VARTA acquisition
and all the things that we've done that both (Kent) and I
have talked about again today that are largely completed,
not totally, but largely completed, and so we feel very
confident, and we have, you know, very precise tracking
mechanisms to assure that, you know, all the synergy
things that we've done and the savings that we've
anticipated are, you know, flowing and will come in.
That's the biggest driver behind the increase that's
going to occur in EPS in Q-4.
Secondarily, we do think that in Q-4 with our new product
lineup that we'll be shipping that we will have
incremental sales velocity and that will generate, you
know, incremental earnings, so you know that's sort of a
very brief way of looking at what we think will occur
from a modeling standpoint.
(Catherine Imm): Okay, thank you.
(Dave Jones): Thanks, (Cathy).
Operator: Our next question will come from the line of (Jim Hoeg)
with Goldman Sachs. Please proceed with your question.
(Jim Hoeg): Good morning.
(Dave Jones): Hey, (Jim).
Kent Hussey: Hi, (Jim).
(Jim Hoeg): Just really quickly a couple things. First, you guys have
historically said that you try to manage the price gap
between yourself and Duracell and Energizer at, I
believe, 10% to 15%, but if I look at what the price
that, at least in the mass channel, where Duracell and
Energizer are currently selling their products, if you
offer 50% more, on a per battery basis that breaks down
to, I guess, a discount of about 35% roughly, and of
course it varies by package size, but I think typically
it's over 30%. Can you tell me is that consistent with
how you're thinking about it, and I mean why have we
doubled now the target for how you're going to manage the
price gap?
(Dave Jones): Okay, well, I think your numbers are a little
off, and let me just reconstruct your numbers. We said
that we try to maintain a 15% to 20% - not 10% to 15%.
We've never been as low as 10% - a 15% to 20% price gap,
although when we say that that doesn't take into effect
off product sold on promotion and everyday pricing, okay?
If you were to look historically at the price gap, let's
say over the last two years, between ourselves and our
competitors, the average price gap in our alkaline
segment is approximately 30%.
You're right in that our new 50% more configuration on AA
and AAA creates a price gap of 33%, not 35%, and on C, D,
and 9-volt batteries, it creates a price gap of roughly
18%, and so if you add all of those numbers up, our price
gap will be somewhere in the high 20s to 30% by our
estimate, which is almost exactly on top of the average
selling price gap over the last two years.
(Jim Hoeg): Okay, so the goal is really just to get it back to what
it always was, not to...
(Dave Jones): Right, and in fact over the last year, (Jim), as you
know, our competition has closed the price gap.
(Jim Hoeg): Absolutely.
(Dave Jones): And in fact in the last six months, our competition has
closed the price gap right on top of us.
(Jim Hoeg): Absolutely.
(Dave Jones): And that's the principle reason why that you're seeing
Rayovac sales softness in North America, and what we're
trying to do is in a very value-oriented way, go back
and create the price gap, albeit in a different way, and
in a way that we believe creates a real value message to
our consumers.
(Jim Hoeg): Okay, and then as a follow-up, you had mentioned that the
synergies are going to be big driver of the acceleration
of earnings growth in Q-4, and it sounds like that's when
you really start to see, you know, a lot of the cost
savings kick in. Is it fair then to say and to assume, as
we move into Q-1, Q-2, Q-3 until that anniversary next
year, that you could actually see some relatively
accelerated earnings growth, just as you continue to
realize the synergies?
(Dave Jones): Right, directionally we - we have not modeled out
and we have given no guidance to '04, and this is not a
guidance statement - but directionally we do think
earnings are going to accelerate, and that over the next,
you know, few quarters, four to six quarters, we're going
to see significant momentum as a result of synergies, but
you know, we've still got to do our modeling on '04.
We're too early for that.
(Jim Hoeg): Okay, fair enough. And (Kent), when you talked
about the synergies and what you completed, you still
talk about '05 when you fully realize it, but it sounds
like - I mean I don't want to put a number on it, but
maybe 80%/90% of the work is really done here. I mean is
it fair to say that it's going to be, you know, end of
this year/next year when you really realize everything as
opposed to now '05?
(Dave Jones): I think probably 80% to 90% of the effort is
done, but 80% to 90% of the synergies won't flow in '04,
because you know they have a lagging effect. There is a
lot of purchasing synergies, as an example, and
manufacturing efficiency synergies that will come in
future quarters. So I think you have to look at it that,
you know, we've got a lot of the work done. However,
depending on the type of synergy, there is a six to 12
month lag between, you know, when we do the work and when
it begins to show up meaningfully. That's why we are,
when we talk about the full synergies, I think to get it
all, fiscal '05 should get it all, and you know, fiscal
'04 is going to get a big piece of it.
(Jim Hoeg): Okay, and that's just as evidenced by the fact in the
fourth quarter, you're already seeing the ramp up.
(Dave Jones): Yeah, and you know, the fourth quarter ramp up is what we
did last October.
(Jim Hoeg): Okay, thank you.
(Dave Jones): Yep, you're welcome.
Operator: The next question will come from the line of Christopher
Ferrara of Merrill Lynch. Please proceed with your
question.
(Christopher Ferrara):Hi. Not to ask you to comment on what your
competitors might do once again, but considering
Gillette's perspective that there was a 36% price - they
were at 36% price premium to you - and now that will
change to 50%. Just along those lines, they're thinking
that this is going to go up, so if in the event that they
do end up responding to what you do, how should we be
looking at this category going forward? I mean is it
possible...
(Dave Jones): Your 36% and 50% are not correct. You know, we
are offering 50% more batteries on AA and AAA
configurations. Fifty percent more batteries creates a
33% unit price gap between us and the competition. That
33% compares to a recent historical price gap of 30%.
(Christopher Ferrara):But they're talking about their price premium.
Their premium relative to you, not your discount relative
to them.
(Dave Jones): We're at the same price point. You know, the
other piece of this is we took our price points up, so we
matched their price points exactly. For their 4-battery
configuration packages, we've matched their price points,
with the 6-pack, and taken our package price up. Their
8-pack, we've matched it with a 12-pack, and taken our
prices up. Their 12-pak, we've matched with an 18-pack,
and taken our prices up. So you have to take all that
into effect, and so you know, certainly no one is looking
at this where you talked about earlier 36 and 50. Those
numbers don't jive.
(Christopher Ferrara):I mean even aside from that, I mean just Duracell's
perspective that their price premium to you is going up
as a result of your initiative.
(Dave Jones): It is not going up, (Christopher). The price premium
is not going up.
{Crosstalk}
(Dave Jones): All packages sold in America over the last two years,
okay, of all configurations in alkaline batteries, the
price gap is approximately 30%, and if you take our
lineup, the way we've configured it, AA, AAA, C, D, and
9-volt, the price gap is 30%. Now I'm not quite sure
where you're differing here.
(Christopher Ferrara):Okay, do you know what? Then just moving on, can you talk
about what the FX impact was in Europe in the quarter?
(Randy Steward): Yeah, I mean, from a sales perspective, it was about $2
million on a year-over-year basis.
(Christopher Ferrara): Okay.
(Randy Steward): That was really offset by kind of FX negative impact in
Latin America.
(Christopher Ferrara):Got it, and is it fair to say that the
reduction in sales in North America from KMart is sort of
filtered through, since I notice you didn't mention it in
the press release?
(Dave Jones): Yeah, in terms of going forward, you know, KMart,
what occurred in their bankruptcy won't be a negative
drag on the Company, but KMart is still closing stores,
as you know.
(Christopher Ferrara): Thank you.
(Dave Jones): You're welcome.
Operator: The next question will come from the line of (William
Steele) with Bank of America Securities. Please proceed
with your question.
(William Steele): Can you tell me what cash flow from operations was in the
quarter?
(Randy Steward): Yeah, it was about $5 million.
(William Steele): Five million, great, and then secondly, can you
explain a little bit about the retailer inventory
markdown program, and why that should be considered kind
of a pro forma adjustment?
(Randy Steward): Well, we're looking at that, (Bill), as kind of
a - it's a one-time arrangement that we're doing in order
to roll out our new packaging configuration, so it's
something that we look at, as I mentioned, just a
one-time event with the new configuration.
(William Steele): But...
(Randy Steward): It's not an ongoing program that we do on a historical
basis.
(William Steele): But isn't that arguably a reversal of some prior
sales that fell through, so in some respects, you've over
- I mean I don't want to say overstated - but there
should be sales adjustments in more than just one
quarter. Is that right?
(Randy Steward): No, it coincides with a totally new marketing
strategy, new packaging configuration, so we look at it
as basically a one-time event.
(William Steele): And you would consider that this is done then. You're all
aligned at retail?
(Randy Steward): No, you're going to see some fallout in Q-3 also.
(William Steele): Okay, in Q-3. Okay, and could you just...
(Dave Jones): In a very simplification strategy. I mean we're probably
simplifying what we talk about when we say a new lineup.
The other thing that we're doing, (Bill), that's as a
result of both this new packaging configuration, as well
as moving our distribution centers, you know, to this new
automated facility in Dixon, Illinois is we're
dramatically reducing the number of SKUs in North America
by over 1,500 SKUs, and so all of those are having an
effect, so we're reducing our SKUs by as much as 50%
going forward, as well. So you know, it's a major
initiative and a brand new marketing initiative and one
that is truly, you know, sort of not a normal
reproducible thing.
(William Steele): Okay, and last question. Would you venture an
estimate as to what VARTA did contribute to earnings in
the quarter?
Kent Hussey: I'd just look at our segment profitability for
Europe, and you know, all of that improvement is from
VARTA.
(William Steele): Okay, great. Thanks, Kent.
Operator: The next question will come from the line of (Constance
Maneaty) with Prudential Securities. Please go ahead with
your question.
(Darryl): Hi, it's actually (Darryl) on here for (Connie). I just
had a quick question regarding your sales to Wal-Mart.
Are they in line with the performance in North America?
(Dave Jones): Yeah...
{Crosstalk}
(Darryl): (INAUDIBLE) growth rate, is that indicative of what's
happening at Wal-Mart, as well?
(Dave Jones): Yeah.
(Darryl): Okay, and do you expect a similar trend at Wal-Mart for
the rest of the year?
(Dave Jones): We expect a similar trend from Wal-Mart, albeit
probably slightly improving in the current quarter. You
know, we would expect - you know, we actually would
expect, you know, favorable results in Q-4.
(Darryl): Okay, thank you. Oh, and just a point of clarification on
the category share number you said was like 15% up for
hearing aids, and etc. That is worldwide, correct?
(Dave Jones): Yeah, that's worldwide, and you know, our 15%,
which we had - I guess the last quarter was a
double-digit increase. I don't know exactly the number,
but you know, the hearing aid business worldwide is
probably up 3% or 4% of the industry, so we continue to
gain share in that. You know, for us it's an important
category.
(Darryl): Okay, thank you very much.
{Crosstalk}
Kent Hussey: That's all generic growth, because we did not acquire any
hearing aid battery business with the VARTA acquisition,
so there is no VARTA bounce on that.
(Dave Jones): Right.
(Darryl): Thank you.
Operator: The next question will come from the line of (Andrew
Shore) with Deutsche Bank Securities. Please proceed with
your question.
(Andrew Shore): (Dave), good morning.
(Dave Jones): Hey, (Andrew).
(Andrew Shore): I'm just wondering, could you clarify all the
EDLP moves one time, but this is a different question
than what's been asked. Is there a tendency that we may
all look at the wrong data, because - I think I'm right -
according to Nielsen and IRI, the data will still show at
least until May or June? Isn't it 13 weeks that it shows
it as a temporary price reduction before it actually gets
shown as a base price change?
(Dave Jones): Yeah...
(Andrew Shore): So the industry will still show high levels of promotion
with no real change in base pricing? Is that correct?
(Dave Jones): That's true, so you'd have to further analyze that, yeah.
(Andrew Shore): So again we really shouldn't get confused by the data
until at least the May/June periods, right?
(Dave Jones): You know, I think everybody will be pretty
confused about all the - maybe including us, but - of all
the actions in the marketplace, until I think the first
clean quarter that you're going to see is the October to
December quarter, which is the most important quarter,
and you're going to see a lot of data that's confusing
between now and then, because there's so much going in
terms of realignment, and all three primary participants
are on different time schedules here. You know, Duracell,
most of the last quarter, they affected that in the
marketplace. We affected it in the last quarter in the
very end, the last two or three weeks of the quarter...
Kent Hussey: On a temporary basis.
(Dave Jones): Yeah, on a temporary and it will show on a
temporary basis, and then our other competitor, they're
just in the process of announcing and rolling out their
strategy.
(Andrew Shore): Okay.
(Dave Jones): You know, and then retailers are all handling
this in different ways and on different time schedules
because of their own planogram issues, and when they
historically change planograms, so all of that is going
to create a pretty confusing environment until the fall.
We all believe, I certainly believe, and I think our
competitors do as well, that by the fall we're going to
have a much more, you know, logical, much more
predictable environment.
(Andrew Shore): Okay, great. Thank you very much.
(Dave Jones): Yeah, thanks, (Andrew).
Operator: The next question will come from the line of (Catherine
Imm) with Salomon Smith Barney. Please proceed with your
follow-up question.
(Catherine Imm): Hi. I just have a quick follow-up. In your prepared
remarks, you talked about Europe having a strong
performance. Is that due to market share gains or new
distribution? Any color on your European business, as
well as the category would be great. Thanks.
(Dave Jones): The category in Europe is up slightly, low
single-digits in dollar terms, partly driven by there is,
over the last 52 weeks, a big shift from zinc carbon to
alkaline, a bigger shift than has occurred ever, and so
that's helping stabilize in a poor economic environment,
because certainly Europe has some of the same issues that
the rest of the world does in that respect, but the
battery marketplace has held up well against other
categories, because there's been an accelerated shift
towards alkaline.
Relative to VARTA, VARTA has gained share over the last
year. Our estimate is that VARTA has gained approximately
one share point across all of Europe, and so that's
impacting in a positive way the performance that we're
getting out of Europe, and also which we've - you know,
we tend to talk about the U.S. much more on these calls -
but VARTA launched an entirely new alkaline line last
fall, and that line is a better margin line. It's
generally a higher priced point line at retail, and
that's having favorable impact on our European
performance as well.
(Catherine Imm): And who are you taking market share way from?
(Dave Jones): You know, I couldn't tell you specifically. You
know, Europe has more competitors than just the three
primary competitors here in the U.S. Panasonic has a
bigger business presence, and there are some very small
competitors that exist there, as well, so I couldn't
really pinpoint, you know, who won who lost there.
(Catherine Imm): Okay, thank you.
(Dave Jones): You're welcome.
Operator: The next question will come from the line of (Jim Hoeg)
with Goldman Sachs. Please proceed with your follow-up
question.
(Jim Hoeg): Hi. Just two quick follow-ups. (David), you mentioned a
couple of times some planogram changes that are in the
works. Can you share with us whether or not you were able
to gain or if you lost any shelf space in conjunction
with those?
(Dave Jones): I think our view would be - I'm not going to talk
specifically about any retailer - but our view would be
we at least maintained our shelf space, and probably
slight improved on a composite basis across our accounts
our shelf presence with the new product lineups that
we've proposed.
(Jim Hoeg): Okay, great, and then one last one, and maybe
(Randy) this is for you. It's pretty specific. In terms
of when you break out your reported numbers on a segment
basis, it looks like there's a pretty steep sequential
decline from the first quarter in the corporate expense.
Is that just the synergies and restructuring, and is that
a good run rate moving forward or is there something else
going on that I'm missing?
(Randy Steward): No, there's nothing any unusual, any one-time events or
anything.
(Jim Hoeg): So that would be a decent run rate for the remainder of
the year or maybe even down, as you realize more
synergies.
(Randy Steward): No, I think that's a decent run rate going forward.
(Jim Hoeg): Okay, thank you very much.
(Dave Jones): You're welcome, (Jim).
Operator: Again ladies and gentlemen, to register for a question,
please press the one followed by the four on your
telephone.
Your next question will come from the line of (Ann
Gillin) from Lehman Brothers. Please proceed with your
question.
(Ann Gillin): Thanks. (Dave), it seems like a key difference in terms
of how one looks at your pricing strategy as whether one
thinks about it on a per battery basis or a per pack
basis.
(Dave Jones): Right.
(Ann Gillin): And I'm wondering first if you can share with us
any data that you might have on the consumer in terms of
how you think the consumer is looking at a price point,
whether they're actually going through a per battery
calculation or buying on a per pack.
(Dave Jones): Well, there's a lot of historic data that says
consumers don't buy and calculate the price per unit. You
know, consumers - well, just take you shopping in a
store. You know, you go into a big supermarket and
there's 50,000 to 100,000 items and consumers have to
make purchase decisions very quickly, and as you know
this is an impulse category where most of the purchases
are bought impulsively and consumers look for certain
cues. They look for brands and they look for value cues,
and there's - you know, very few consumers are going to
go, gee, this is a 33% unit cost reduction, but a lot of
consumers, we hope, will say, this is good value compared
to Rayovac's competition, and you know, that value
equation is simple because we're at the same price points
as the competition and they can get more for less. That's
really what goes through a consumer's mind, not
calculating price gaps.
(Ann Gillin): Okay, I guess what I'm just having difficulty
reconciling then is two points. First, you know, at the
shelves of the faster growing retailers, they're frankly
doing the per unit calculation for us, so we don't have
to do it.
(Dave Jones): Right.
(Ann Gillin): And secondly when I kind of look across consumer
staples recognizing where we are in, you know, macro
economics in North America in particular, the value
brands, including your own until the gap narrowed
recently for you, were really the ones taking share.
(Dave Jones): Right. I think on a macro economic basis, that's
true. Value brands and private brands, not only here in
North America, but around the world, you know, have been
generally consistent gainers in share.
(Ann Gillin): So I guess your positioning is to bring you back
to value, and you still think the consumer will not look
at the per battery.
(Dave Jones): Right. I mean the premise of our company is based
on a value-branded company, and you know, for the first
time, at least since I've been here in six years, the
last two quarters have seen our value erode and our value
gap erode, and it's evident in our performance in North
America the result of that, and you know, as we restore
our historical value gap, I think history would tell us
and we would certainly predict that, you know, our
business would perform better.
(Ann Gillin): Okay, just one other question. What is it about
the December quarter aside from the fact that the data
will be a little bit more transparent, the scanner data
we hope, that's going to make that quarter show such an
improvement? You've been saying throughout the call that
you've got two quarters of, you know, kind of a difficult
roll through of all the pricing changes, but by December
it sounds like you're anticipating it will be much
better.
(Dave Jones): One is the absolute price - you know, everybody's
new configurations and pricing configurations will be
there and done and fully implemented and more
predictable, and secondly, our belief is that the
promotional environment will be significantly less than
the promotional environment that has existed in the last
two Christmas periods, as a result of all participants
going to more of an everyday low price, realignment
strategy and significantly cutting back on both
promotional dollars as well as types of promotions.
I mean historically during the Christmas period you've
seen three battery promotions by all participants and
you've seen BOGO ads, buy one get one, and you've seen
price reductions at EDLP accounts, price rollbacks. I
personally think you're going to see very little of that
type of promotion this fall, and the promotions that you
see are going to be value-created promotions in a
different way and not price rollback promotions and not
free battery promotions, and that's a big driver behind
what we believe will restore dollar growth to the
category, because it's been the biggest detriment to
dollar growth over the last five or six quarters.
Operator: Pardon me, Mr. Hussey, this is the conference operator,
and I do show approximately five minutes remaining. We do
have two questions remaining at this time.
Kent Hussey: Why don't we take those last two questions, and then
(Dave) will wrap up the call.
Operator: All right, the next question will come from the line of
(Peter Barry) with Bear Stearns. Please proceed with your
follow-up question.
(Peter Barry): Good morning, gentlemen.
(Dave Jones): Hey, (Peter).
Kent Hussey: Good morning, (Peter).
(Peter Barry): (Dave), as we look at segment margins as they were
reported in this quarter, clearly there's a major
variance between North America and the other two
segments. One question is is there a likelihood that the
margin differences between those three markets can
converge in some fashion over the next couple of years,
but probably more importantly North America is down very
dramatically year-to-year and from historic levels. Can
the new pricing strategy restore that level of
profitability in your view?
(Dave Jones): Yeah, I think if you look at why North America is
down, North America is down principally because of
volume, alkaline category specific and volume specific,
okay? Our belief is that the new programs that we've
articulated here over the last hour will restore a large
part of that top line growth in the business, and it's
pretty much the traditional margins will restore as a
result of that, and in fact, I didn't say specifically on
this call, but the cost of us taking down and realigning
our pricing with these new package configurations, which
in North America is roughly $20 million, okay? We have
through cost efficiencies and through cutbacks in
promotion expense and various retailer incentives, we
have taken $20 million out of our system and so the net
is there will be no negative effect as a result of that
on a bottom line basis in the North American business
going forward. So it's simply a volume game in North
America.
Now the other part of your question though, (Peter), is
in Europe and in Latin America, we do anticipate that our
operating margins will improve. We're seeing them improve
in Europe right now, and we've seen them improve in the
last two quarters and that will continue.
In Latin America, you know, a lot depends on the economy
in Latin America, but we're seeing some positive signs
there. You know, Mexico is a big business for us and we
really think that Mexico has reached it's bottom, and
we're seeing signs of life there, and Venezuela, which is
also a big business for us, you know, now that the
general strike is over, you know, most stores are bare of
products, and so you know, we're going to see our
business improve there as well, and the margins will
follow there.
But I don't think, having said all that, that you're
going to see Europe and Latin American margins get as
high as the North American margins have historically
been, you know, at least over the short-term or over the
next year or two.
(Peter Barry): But the non-North American margin improvement will be
volume-driven as you see it?
(Dave Jones): Well, non-North American will be volume as well
as margin-driven. In Europe in particular our margins
will and are improving as a result of the new alkaline
product launch that occurred last fall.
(Peter Barry): Just for a point of reference, (Dave), last year,
according to my calculations, your operating margin in
North America was almost 20%. That in your view is
achievable once again in the not terribly distant future?
(Dave Jones): Yes, I think high teens are achievable, and we
would predict, you know, as we move into '04 that we
should be able to begin moving towards those historic
margins.
There's nothing structurally. The only thing structurally
done was when we realigned these package configurations,
and you know, if I'm correct when I say that we've
covered all the cost of that, there's nothing else
structurally that would prevent us from achieving
historic margins in the future.
(Peter Barry): Thank you very much.
(Dave Jones): You're welcome.
Operator: The next question will come from the line of (Alice
Longley) with Credit Suisse First Boston. Please proceed
with your follow-up question.
(Alice Longley): Hi. I guess I'm just rounding back to this question that
sort of surprised me on the price gap. Well, what I was
surprised about is your claim that your historic gap has
been about 30%, and that's important for sort of
understanding how sustainable this new situation is going
ahead. I know that in the past you've said that before
the last year or so when pricing got out of line between
the different brands, you've always said the price gap
has been about 15%, and I'm wondering to get the 30%
historically, are you mixing a lot of all different SKUs
and maybe different retail outlets together? Could you
tell us what the historic gap has been in pricing on
given SKUs? In other words, your 8-count pack versus the
other's 8-count pack, and your 12-count packs versus
theirs, 4-count pack, so on a like for like basis in the
same outlets, what has the historic gap in pricing been?
(Dave Jones): Again I don't have any of that data that I could talk
specifically about other than to tell you that probably
the difference in package configurations and among
retailers, our price gap when you add in both everyday
price and promoted price has probably ranged from maybe
20% to 35% depending on package configurations.
(Alice), if you take Nielsen data, all battery sales in
the United States, alkaline battery sales, 2002/2001, the
average price for a Rayovac product versus our
competitors product, the price gap has been 30% per year
2001 and 2002. That's the most important metric when you
look at price gap versus the competition of any metric
that you can come up with.
(Alice Longley): Is that because your business is weighted to those
large...
{Crosstalk}
(Dave Jones): That's a different part of it, and we promote far less
historically than our competitors do. The average Rayovac
product sold on promotion over the course of 12-months
has historically run 20% to 25%, and our competitors have
run sort of 35% to 40%, and that's when you look at
average price gap, which is the only meaningful way to
look at it. That's why that price gap historically is
where it is.
(Alice Longley): Just one final question. Don't you think it's different
when in the future we're going to look at the price gap
of 33% on given SKUs and it's quite different from in the
past where the price gap was more their 8-pack versus
your 18-pack.
(Dave Jones): No, I don't because I think in the past, the big price
gap has been when they go on promotion. When they're not
on promotion, historically because their business has
been more of a high/low business, the price gap has been
huge, and when they go on promotion historically, the
price gap has been very small.
The big fundamental changes you'll see going forward is
far less promotional activity by anyone and much more of
an everyday price gap that exists in the marketplace, or
an everyday pricing that exists in the marketplace, with
the exception of some food retailers and some drug
retailers who live and die on high/low promotional
strategies, and you will still high/low promotions that
occur with our competitors in those accounts.
(Alice Longley): Thank you.
(Dave Jones): You're welcome.
Operator: I'm showing no additional questions at this time. Please
continue.
(Dave Jones): Okay. Well, thanks. We've run over our hour by a few
minutes, but I think it's time worth spent. Thanks for
your time today, and thanks for your continued support of
Rayovac. Have a great day.
Kent Hussey: Operator, will you repeat the replay instructions?
Operator: I sure will. Ladies and gentlemen, there will be a
rebroadcast of today's conference starting today at 11:00
Eastern Time and lasting until 5:00 PM on April 28th.
Your dial-in number will be 1-800-633-8284 or you may
dial 402-977-9140. You will need to enter reservation
number 21137845. That does conclude our conference call
for today. We thank you for your participation and we ask
that you disconnect your lines.
END